Should I sell my rental to pay off my residence?

5 Replies

Hello All-  First time poster and pretty UN-Savvy investor.  Perhaps you can help me?  

I own a modest 3/2 valued at 165k free and clear.  It has always had a great rental history and I've never had a vacancy in the 10 years I've owned it.  It rents for $1150/month.  

My mortgage balance on my residence is ALSO $165K.  The rate is 4.5% and the monthly payment is $1350.  The residence could probably sell for $315k give or take.

My question: Should I sell the rental and pay off the residence? I'd be making 4.5 percent in saved interest, probably 5.5% after all fees and expenses and such. I'd wake up debt free every day and could turn my salary toward the next investment, I could HELOC into my now paid-off residence if I needed to etc etc.

On the flip side, the rental (almost) pays my mortgage, and in 24 years I'd own 2 houses free and clear instead of one.  

Please let me know what you think of these options?  What considerations am I missing?  What are the macro-economic concerns that I need to pay attention to.

Thanks in advance.  Your input is very welcome.

I would never sell a property that makes money to buy a property that costs money. In my opinion, I would finance the rental and buy an additional property (or two). You'll make more than the 4.5% interest that youd save by paying off your primary, and probably cash flow enough to cover your whole mortgage, which is basically the idea of paying it off anyway

@Brock W. The question I would ask is how hard are you working being a landlord? If you sold the property right now, you'd basically breakeven from a cash-flow standpoint. You'd have no more mortgage payment, but no more rental income either. Which although your current mortgage payment is slightly higher than your rental income, it is probably a wash because of the selling costs associated with unloading your rental. So in essence, you have a low interest rate loan (which will be valuable to you when interest rates climb) and like you said, in 24 years, the property will have paid for itself. If being a landlord isn't too bad, you're basically working for a free house. The one thing that I would consider is would it be more beneficial from a tax standpoint to have the loan on your rental property instead of your primary residence. I can see benefits to both, so might be worth asking your CPA. But I vote to keep the rental!

As someone who has done what you are asking, I can say clearly Don’t Do It! Your rental is a golden egg laying goose. 

In your position I would get a HELOC on your primary residence and go find a distressed property and turn it into a second golden goose.

 The other aspect that is not considered here is that now you have two properties appreciation and you would reduce it to one.

 I was in the same position a few years ago and sold my rental. I dreamt of having no debt. I can tell you that it’s too small of dream. And that being debt free is over rated. It illustrates the fact that I didn’t understand the difference between consumer debt and investment debt. I could have been way ahead of where I am.

 Best of luck! You are setting on a perfect launch pad, light the burners and go for the stars!

Lot's of good advice being given here.  And mostly I would agree to NOT sell the rental.

That being said, the questions I'd consider are:  

1. What stage of life are you in--ready to retire and wind down or looking to expand?

2. If you've owned the rental for so long, and assuming you've depreciated it over that time, remember about recapture of depreciation if/when you sell.  Big bite.

3.  If you are concerned about the debt on your primary, consider doing a 15 year cash out refi on the rental.  Use some to pay down your primary if it will make you feel better/more secure, and use the rest to acquire an additional unit or three.

4.  Think about a 1031 tax-free exchange using your rental to leverage yourself up into a much larger cash flow situation which could pay for itself, any mortgage you finance it with, and your own residence.  No tax bite when done properly.

You are in a great position with lots of options.  Choose wisely and best of luck!