CoCR on a paid off property?

Question

A year and a half ago I bought a house in cash to avoid a +7% interest rate on my mortgage.  I'm moving and am going to rent it out when I leave this summer.

I'm wondering do I cash out refinance and go get another SFR/invest elsewhere?  Or do I just delay getting a mortgage longer?

The CoCR math shows that getting a mortgage is about .5% BETTER CoCR. However, my big question is how do I account for the money I'm saving by not paying any interest? My interest payment on a mortgage is over $1000 a month, how do I include these savings in my CoCR or overall investing strategy?

Greg Scott · Answer

Thank you for your service.

I recommend using different math.  Do the calculation for return on equity.

When you first make an investment, cash-on-cash makes sense because that is your equity in the deal.  Afterward, return on equity makes more sense.

Ko Kashiwagi · Answer

Hi Ian,

Yes, rates may come down, but in that case you can refinance and get a better rate. If you buy now and rates have come down in 1-2 years, your property value would have also likely appreciated as values rise when rates come down in general.

In regards to your point in cash flow – I agree if immediate cash flow is what you care about the most. Indeed you would have to put more time into searching and managing properties and it would not make sense if you do not have the time for it. Nonetheless, I don't think it would hurt to start searching and making offers if you find spare time. Perhaps you can make slightly aggressive offers that would make a really good deal.

In the short run, holding is easier and better. In the long run, I don't think you would regret buying more. Every long time investors have told me they wished they bought more when they were younger.

Ko Kashiwagi · Answer

Hi Ian,

What would be the goal of delaying the mortgage? And what kind of mortgage would you use on the next property? If you are looking to scale your portfolio, it would make sense to use leverage and increase your return on equity. Given the property you would move out of will cash flow, doing a refinance would allow you to obtain cash in hand while generating cash on the rental.

Ian Verzoni · Answer

Thanks Ko I appreciate the insight!

CoCR on a paid off property?

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