Pay Off Rental Property in 12 Months or Buy A 2nd Property Now?

Question

Hi All - so my wife and I own a vacation rental property on the beach that is 100% self-sufficient and pays for itself out of it's own bank account (that I opened just for that property and any other we acquire).  We built that account up to a $10k buffer in the first year by double paying the mortgage using our own money.  Now that we have that buffer (and have had it for a few years) we don't pay for anything for the property as it all comes out of that account.  So this is the IDEAL rental property that we even get to stay in for a month out of the year.

My question is what to do now.  It's been a few years since we bought a property so I am getting a huge itch that I have to scratch.  I am trying to decide between buying another property or paying off our current property.

My wife and I do well and we think we can pay off the property in 12 months if we buckle down. We paid off $60k of student loans in 12 months 4 years ago and we make quite a bit more money now than we did then.

So the BIG QUESTION: PAY OFF THE PROPERTY AND HAVE A $140K ASSET 12 MONTHS FROM NOW OR BUY ANOTHER PROPERTY NOW AND LET OUR CURRENT PROPERTY CONTINUE TO DO ITS THING?  Two financed or one paid off.  What's the better situation? I am leaning towards paying off the property but wanted to get some expert opinions

Chase Cline · Answer

@Travis Rasmussen thanks for the reply!

I am a superhost as well!  Great job getting that and keep up the good work!

Yea, my risk tolerance isn't super low, but I don't want to stretch myself too thin and end up a "successful to homeless" story either if something should happen.

Great point on the extra income of the property as that's a huge part of it, it's not much. With the mortgage, HOA, etc. a couple hundred bucks average per month over the year (with the majority coming in summer as we are on the beach). That's why I'm in a rush to pay it off so I can actually see the fruits of my labor come to fruition and get nice cash flow for future properties. Paying it off would definitely be the more conservative approach, but I know it would be a HUGE domino effect for the future as I can then leverage that income to pay off the next, and the next, etc. But my biggest thing these days is not waiting 30 years to be wealthy lol so it's tough!

I guess really I can't go wrong either way. I'm not one to sit around and not take action either so I probably WILL buy another one, but it won't be too planned. Can't say no to a good deal if one comes through the woodworks!

Thanks again for the input and ill get back on here when we make the "official" decision!

Good luck with your rentals!

Chase Cline · Answer

@Travis Rasmussen I just couldn't wait any longer! After a few years of not acquiring another property I feel like I'm slacking off so I had to pull the trigger lol. The plan is to get it set up and paying for itself like the other and then using whatever extra cashflow on the new one to help pay the first one off quicker.  Hopefully everything goes as planned!

Adam Johnson · Answer

Hi Chase

I also am curious to know what made you decide to purchase another property over paying off the one you currently have.  For myself I would have to compare the cashflow that I could make off of the property that I currently own vs. the potential cashflow (within reason) that I could make off of an additional property given the amount of money that I would be willing to invest, which in this case would be the payoff amount of the current property or close to that amount.  This combined with the risk factors of losing potential rent on something that I would have to come out of pocket to pay the mortgage on and other factors would influence my overall decision but ultimately cash flow would determine my decision.

Joe M. · Answer

Hey Chase, sounds like you are more comfortable with paying it off...do that :)

Something to be said about owning an asset outright

Travis Rasmussen · Answer

@Chase Cline

Lol!!

What got you to go that way?

Chase Cline · Answer

@Travis Rasmussen by the way, ended up buying another one this week! Just couldn't wait lol.

Travis Rasmussen · Answer

@Chase Cline

Superhost here with 2 properties I own just for STR.

First off, congrats on doing so well! You are kicking butt and taking names. I love to see that if you wanted to, you could pay off the property in 12 months.

With that in mind, I would say everyone has their own "risk tolerance", mine is pretty low, but not at 0. I personally am leveraged as far as I want to be with the properties we have and plan to pay off a property before we purchase our next one.

How much are you making in extra income a month from this rental (you don't actually need to say, rhetorical question), because if you are making bank, it might be worth it to purchase one more, follow the same process you did with your first and make it a priority to see how fast you can pay off two of them with the extra income. Can you do it in 5? 2?

Don't take this as "keep buying because it produces more income" though, even though I borrow from the bank, I still want a good buffer in case something were to go wrong. If your risk tolerance is saying "pay it off" I would say go with your gut feeling. Yeah, you can make more (and I would probably purchase another if I was in your position) but there is something about following your gut I will never deny.

Good luck! I would love to hear what you decide to go with.