What would you do in my situation?

Question

Purchased a home in 2019 for $219,000 at 4%, with taxes and insurance my monthly payment is $1600. My wife and I built a new house and decided to rent out our old one for $2600. The remaining balance on the mortgage is $174,000 and the house is now worth around $325,000 based of comps done by my real estate agent. I'd like to start building out a portfolio, but I am a pretty risk averse person and new to this venture. How should I go about this in the current environment? Should I put the $1000 in cash flow back in to the mortgage? What would you do in this situation?

G. Brian Davis · Answer

You're in a pretty nice position, honestly.

A 4% mortgage and roughly $1,000/month in cash flow isn't something I'd be in a hurry to pay off. If your goal is to build a portfolio, I'd probably focus first on building reserves and thinking about what the next acquisition might look like. One thing I've learned is that flexibility has value. Once you send extra money to the mortgage, it's much harder to get it back out if an opportunity comes along. Personally, I'd spend some time building cash reserves, watching the market, and getting clear on your long-term strategy before making any big moves.

Bill B. · Answer

You should sell soon. Or at least close on the sale BEFORE you’ve been out of the house for 3 years or that $100k will become taxable. That’s a $30k? $50k? Mistake. You’d have to make that $30-50k AFTER TAXES just to break even with putting the cash in your mattress. If you sell and invest the money you’ll never catch up as a rental.

Let’s pretend you think this is the dream rental in the dream location. You should still sell and buy the house across the street. MAYBE, it costs you 2% higher rate (call it $4-5k/yr in extra interest). 1) that’s tax deductible, so it’s really only $3k. 2) You saved that let’s say 39k in taxes. So if rates never go back down, it will still take more than 13 years before it worse than keeping your current property. Again, that’s assuming you earn ZERO on that saved money. Earn 5%, that’s $2k/yr, suddenly it take 39 years to be a worse decision.

Garrett Crosby · Answer

The tax point Bill raised is worth pausing on. If you lived in the home for 2 of the last 5 years, you qualify for the primary residence exclusion — $500K of gain if married filing jointly. The clock started when you moved out, so you have until 2 years after that date before you lose it on the gains you've built. In your case you're sitting on roughly $150K in equity, and if you sell inside that window those gains are tax-free. If you wait too long, they're not. That's a real number worth running through a CPA before you decide to hold long-term.

That said, if you decide to keep it, I'd agree with the others — don't pay down the 4% mortgage. That cheap fixed debt is being serviced by your tenant, not you. The $1,000/month surplus should be building toward your next acquisition, not disappearing into principal that doesn't give you any liquidity back.

First step I'd take: talk to a CPA about the exclusion timeline, then decide hold vs sell based on that. If you hold, open a separate savings account and start stacking that $1K/month as your deal fund. Feel free to reach out if you want to work through the numbers.

Bo Smith · Answer

You're in a good spot here. You've got about $150K in equity and positive cash flow. Most people would throw that extra grand at the mortgage but that's not the move if you want to build a portfolio.

If that property is stable and performing well as a rental, keep it. Don't refi it, don't liquidate it. That's your foundation. It's covering its own carrying costs and generating cash. Now use that $1000 a month to build a second property, either a flip or another rental depending on your market and risk tolerance.

The real gains in real estate come from leverage and time in the market. Your risk aversion is actually an asset here -- it keeps you from overpaying and overleveraging. But it can also kill growth if you're too conservative. The sweet spot is: keep your strong performers, reinvest the cash flow into new deals, and build slowly.

Are you looking to flip or hold long-term rentals? That changes the strategy on what to do with that $1000 monthly surplus.

Bo Smith · Answer

Don't pay down the mortgage. You're at 4% and the cash flow is working. If you've got k/month available, you're at 2k/year. In five years, that's 0k sitting in principal reduction that did nothing but lower your leverage. Instead, capture that k/month and redeploy it toward deal #2.

Here's why: you've got a 50k cushion in equity. That's your dry powder. Your leverage is light enough that you can safely do it. The real play is to buy two more rentals in the 00-250k range that both cash flow 00-1000/month. Now you've got ,800-2000/month instead of ,000. You're not risk-averse after you do the first deal -- you're just cautious. Those are different things. Cautious means strong underwriting and conservative estimates. Risk-averse means leaving money on the table.

You don't need a ton of liquid capital if you're patient. Your existing property is doing the work. Pull comps from your area and start looking for deals that make sense -- off-market preferred, but list-side works too if the numbers are right. How's your area's rent growth looking? And are you open to multifamily, or single-family only?

Theresa Harris · Answer

You have about $100K in equity. At the moment that shouldn't be taxed if you sell. If you are truly able to get $1000 cash flow each month-figure out how much you'd make after 5 years renting it (factoring in repairs, vacancies, etc) vs selling it (assume prices stay the same) and putting that money in a high yield savings account.

If you didn't have so much equity in it and rates were still low, I'd definitely say keep it as a rental. With interest rates being high, it costs more to borrow BUT you also get more on your savings. Your cash flow is high and you'd make up the money 'lost' to taxes, but it will take a while as you are also taxed on the rental income so it might take 5 years to break even.

Rod Hanks · Answer

You’re in a great spot—this is exactly how a lot of solid portfolios start.

If it were me, I would not rush to pay down that 4% mortgage. That’s cheap, fixed debt, and your tenant is covering it while giving you ~$1,000/month in cash flow. That’s a strong asset working for you.

Instead, I’d focus on stacking cash and staying conservative since you’re risk-averse. Build up reserves first (6+ months per property), then start setting that $1,000/month aside for your next deal. Over time, that becomes your down payment fund without you having to stretch.

You’ve also got equity (~$150K). I wouldn’t tap it immediately, but it’s there as an option later (HELOC or cash-out refi) once you’re more comfortable and if a solid deal comes along.

Big picture—don’t overcomplicate it. Hold this property, keep the low-rate debt, build reserves, and let the cash flow position you for your next purchase. That’s the safest way to grow without losing sleep.

What would you do in my situation?

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