I have 2 identical condos that are on a 15 year commercial loan at 4.25%. I have had them 4 years and have a combined balance of about $97k left. My ARM is coming up in 1 year as well. It appears my HOA is going to be restricting rentals so I wanted to get the input of other investors if it is worth paying off the remaining loan balance before I sell them 10-12 months from now when both tenants lease ends or just keep them financed?
Numbers for 2 Condos Combined:
Gross Rents - $2100
P&I Payment - $950
Market Value - $210k
If I were to pay off the loans I would be saving about $950 of P&I over 10-12 months before selling so my cash on cash return on the pay off of $97k would be about 10%-12%. Am I calculating everything correctly? I am also assuming there are going to be some fees involved with the ARM refinancing that I will be due for in about 10-12 months if I keep the loans.
What are your thoughts? Thank you for your input.
You're thinking about this the wrong way, @Satyam Mistry . Your ROI is not 10-12%, for 2 reasons:
- The principal isn't a return on your $97k. It's an expense, which you're paying up front instead of in installments.
- By taking that $97k out of play, you'll save about $4300 of interest over the next year. That's a 4.4% return, which stinks. But it actually gets worse because you can't invest that $97k. If you put that into another property, which could reasonably have a 10-12% CoC ROI and 20%+ annualized return, you're losing $15k+ by paying off the mortgage early.
Run a Net Present Value calculation and see what the numbers say. Use a discount rate that reasonably estimates what you think other investments would return.
Finally, with everything happening, why would you reduce your cash position when your rate is already pretty darn low?
@Jaysen Medhurst Thank you for your reply Jaysen. Yes, I realized shortly after posting that I made a silly mistake in calculating the principle as a saving when even if I was to keep the property financed I would be capturing that principle through rent. I decided to keep them financed. Appreciate it and best wishes.