What should I do , Payoff commerical mortgage and make 15% ROI or

Question

Ive posted multiple threads because i have so many different variables in my investment portfolio . Currently I have multiple investment propeties , 5+ that are cash flowing . One property is due to mature in 7 months ( Dec 2020 ) This particular property ive had for 3 years and initially purchased with a 10 year note @ 3.95 % . when it matures , ill owe roughly 475,000 . My question is , since im having a hard time finding decent deals , should i pay off that mortgage when it matures and save the $6200 mortgage payment every month . That would put me at 15 % Roi . I cashflow 2k with the property already . What would you do , Pay off the loan and just profit that every month or refinance the property into a 20 year note , maybe higher rate and lower ltv ( 65% ) , pull out 240+ in equity ( it appraised at 1,100,000 last year ) and use that with current reserves and wait for another deal ? Im leaning towards pulling out equity and hoping i find a good deal but all deals im seeing are only making a 5-6 % CoC which from what people say isn't far off from what average is ( 8-10 % ) . I would rather just pay the loan off and cash flow that extra $ 6200 . Your thoughts ?

Mike B. · Answer

@Michael J Scanlon

You have a valid point . My concern isn’t so much net worth , I know to a lot of people that’s their end all be all . My priority is to mitigate risk and yield good cash flow .your right , if I refi and pull that 200+ and use that and the 475k on 2 deals or 3or however many , then yes , my net worth goes up , depreciation along with principal pay down are also important . One problem I have is if I were to inject the money into a couple deals that only produce 5-6 coc , there is very little room for error and then your breaking even if something does happen , vs netting 6200 with less risk . I understand your point though , it really does boil down to the numbers and what each person is comfortable with . If There were deals that would yield 10% + , it wouldn’t even be a question .

Michael J Scanlon · Answer

It's all math here. If you pull out the equity, buy another place even at 5-6% CoC, what is your total return rather than just your ROI. It sounds nice to have a 15% ROI but your ROE goes down. Your ROE goes up massively when you pull the equity and your total ROI, rather than % ROI, may go up. Even if your total monthly cash flow is the same across two buildings rather than one, your net worth return on investment goes up massively because you're paying down two mortgages rather than one and appreciating two buildings.

What should I do , Payoff commerical mortgage and make 15% ROI or

2 Replies