Never pay off a rental, keep pulling money out of it to reinvest for a higher return. Having cash dead and buried in a rental reduces the return on the property by shifting it to a return on the equity.
I would leverage the cash to purchase additional unit(s). An overly-simplified way of thinking about it for me (but a good place to start) would be: I will see an approximate "return" of 4.75%, ignoring taxation effects, by paying the mortgage off...if I instead leverage the cash to acquire additional units, will I see a return high enough to justify the additional "risk" of taking on more units and/or more debt?
Ryan Cameron I'll throw another wrench in the spokes. What if you cash out re-fi the property (assuming it will still CF positive) and put that money with the $20,000 and buy 2 more property's or a multi family. At a young age and favorable market hands down this is what I would do. I would leverage the existing property enough so it still would CF positive and leave a little room on the payment so if rents fell a bit you would still be ok. A guy might need to use a commercial loan so he didn't need a bunch of cash reserves (6 months of payments or 2% of the remaining balance or something). At a young age that would give you 3 times the growth that one paid for property would. Income is way more usable than equity. Just my .02. RR
@Ryan Cameron commercial loans typically are based more on the ability of the property to pay off the debt and not so much on the borrowers ability to pay the debt. Thus they don't care if the borrower doesn't have large cash reserves. They run a little higher interest, and usually are amortized for a little shorter period. They don't have a limit of 10 loans either. Most mature in 7-10 years and need to be refinanced at that time. RR
Never pay off a rental, keep pulling money out of it to reinvest for a higher return. Having cash dead and buried in a rental reduces the return on the property by shifting it to a return on the equity.
I'm in EXACTLY the same situation right now in trying to decide if I pay one of our mortgages down or just use the cash to re-invest in a new property to generate more income. Being personally very debt-aversive it's a hard decision to make for me, but if I put my emotions aside it makes better sense to leverage the cash at this point if I can find a property with a cap rate that beats the interest rate on my loan. Since my loan rate is low like yours (<5%) I think I can do that pretty easily....so that's what I've decided. I'm only a couple years into investing, but after binge-listening to BP podcasts for the last 18 months it's clear there is a fine line between being over leveraged and putting your money to work for you. One think I like to look at also is how much cash I need to throw into a mortgage to get me to the 1/2 way point on the amortization schedule...once you cross the 1/2 way point then the monthly payment is paying down more principal than interest. I hate paying interest, so if I can feasibly get to that point then I feel like I'm paying myself back more than the bank every month. I'm sure our financial geniuses in the group would tell me I'm ridiculous, but these are the things I've been thinking about while I try to make the same decision. I was raised by a CPA/CFP and "debt is bad" was beat into my subconscious from a very young age...so I have to lean on the numbers a lot. Not sure if that helps at all lol.
Not knowing anything else, I would leverage the money. building equity and getting cashflow in another property is always better than just sitting on one paid off house.
@Megan Aldridge I am very anti-debt too, but this debt is easily managed. I think I know the right answer (Acquire another property), but I thought I'd start this conversation anyway. Your reply was super helpful and I thank you for it. It is good to hear people in similar situations (Positive situations)
@Ryan Cameron@Thomas S. is absolutely correct. Keep your rental mortgaged to the place you can keep them rented and cash flow a little. Every bit of extra equity in them is costing you money. You do my want equity it pays nothing. RR
Definitely reinvest if you have additional liquidity to do so. Paying off things too early, though it feels good, does not really produce the financial freedom one is building upon.
I am going to be the contrarian and say I would pay off the debt. The way I look at it paying off the loan is guaranteeing yourself about a 4% return on the money (approx 0.75% for tax savings and the fact that loans end). Not the greatest, but with low interest rates and a sellers market, not the worst either. Plus I hate debt and $20k may not be much to get a new deal with right now. After you paid of the debt see if you can get a open line of credit or HELOC on the equity incase a deal does come up.