Sell or Keep rental?

3 Replies

Would you sell or keep or refinance the property? 

Home is worth around 95,000 and its a single twin and real estate has been pretty hot for sellers. I owe nothing and really could use the money to pay down my primary resident if I were to sell it. Right now I cash flow $770 a month if everything goes well but If took the money I could lower my mortgage payment by $450 (pay off land loan for primary resident) and a big chunk of my LOC that I owe and that is guaranteed so its like im really only cash flowing $320 since I always take that money to help pay for my mortgage. What are your thoughts. I would have like a $55,000 capital gain if I were to sell it but only make around $25,000 a year.

Thanks

Jimmy:

Throwing away $320 by selling and paying off your mortgage doesn't seem that good an idea.  Having a paid-off rent property also makes you a target for lawsuits.  Neither of those make sense to me.

I would refinance.

But, my concern is that you are focused on eliminating debt.  Refinancing your rent property to pay down your primary mortgage is a really bad idea.   Let me explain.   The interest rate on your rent property should be higher than your primary residence.  So, in this scenario you pay closing costs for the benefit of paying more interest (in total) than you otherwise would pay.  I repeat, bad idea.  Refinancing to pay off our primary mortgage has no upside.

Refinance to buy another rent property.

Let's do some math.  Let's say you get a 50% loan and go buy another property just like this one.   At 5% your interest payments on your rental are now $2,375 per year which takes your cash flow down from $770 to about $570 per month.  But remember that now you have two of these properties.  That means your total cash flow has increased from $770 to $1,140, which is $370 per month better!

But wait, there is more.   

Depreciation on your current rent property I estimate at about $250 per month.  That means you are paying income tax on $770-$250 = $520 per month.  But, in the scenario with two rent properties you would pay income tax on $1,140 - $250 - $250 = $640 per month.  So your income went up $370 but the government treats it like your income only went up $120.   

Oh, but wait, there is more.

You can do even better if you use accelerated depreciation.  You can also do better if you get a bigger loan and buy a third rent property. Also, over time, your tenants are paying down all these mortgages so you are banking equity every month.  I could go on and on, but hopefully you get the idea.

Originally posted by @Greg Scott :

Jimmy:

Throwing away $320 by selling and paying off your mortgage doesn't seem that good an idea.  Having a paid-off rent property also makes you a target for lawsuits.  Neither of those make sense to me.

I would refinance.

But, my concern is that you are focused on eliminating debt.  Refinancing your rent property to pay down your primary mortgage is a really bad idea.   Let me explain.   The interest rate on your rent property should be higher than your primary residence.  So, in this scenario you pay closing costs for the benefit of paying more interest (in total) than you otherwise would pay.  I repeat, bad idea.  Refinancing to pay off our primary mortgage has no upside.

Refinance to buy another rent property.

Let's do some math.  Let's say you get a 50% loan and go buy another property just like this one.   At 5% your interest payments on your rental are now $2,375 per year which takes your cash flow down from $770 to about $570 per month.  But remember that now you have two of these properties.  That means your total cash flow has increased from $770 to $1,140, which is $370 per month better!

But wait, there is more.   

Depreciation on your current rent property I estimate at about $250 per month.  That means you are paying income tax on $770-$250 = $520 per month.  But, in the scenario with two rent properties you would pay income tax on $1,140 - $250 - $250 = $640 per month.  So your income went up $370 but the government treats it like your income only went up $120.   

Oh, but wait, there is more.

You can do even better if you use accelerated depreciation.  You can also do better if you get a bigger loan and buy a third rent property. Also, over time, your tenants are paying down all these mortgages so you are banking equity every month.  I could go on and on, but hopefully you get the idea.

thanks for the detailed response. I get what your trying to say. Where I am at now im not really looking to buy more properties. I have a few and its enough for me so just debating on what do to. I have been a landlord for 10 years and its something I really dont want to do the rest of my life.

@Jimmy S.   We've always considered investment properties as assets intended to throw off cash.  Totally separate than a personal home, unless you're renting out part of your home.   To that end if we own a  free & clear investment property we only sell the property if we have another investment in mind that would throw off even more cash & if the property qualifies for a 1031 exchange to delay capital gains.  The purchase of the 2nd property would have to make up for the cash flow lost from selling the first property and add more cash flow to our bank account.  If we're unable to use a 1031 exchange we would refinance the free and clear property to purchase the next property.  

Regarding paying down the mortgage on the home we live in using the cash flow from our properties.  I don't think there's anything wrong with that, but it's not our first motivation.  @Greg Scott has also given you some good advice.