Pay off mortgage or refi to buy more property

6 Replies

I have a rental property on a 15 yr mortgage with only 5 yrs left. Should I refi and take money out to buy another property or pay off the mortgage as soon as possible. Rate is 5.25%, mortgage is $1800 pm, it rents for $2500 pm. We are in our 40's, live in CA and have 4 rental properties. I'm torn between piece of mind having a house paid off, and the advantages of buying another property while the market is down.

A lot more info needed before anyone should give you input. Stategy? Risk level? How many more years working? Security of job/s? That is just a start. Then, when you look at your crystal ball for 5 years from now, what do you see? Rich

Would adding another rental property greatly increase your monthly cash flow or would it put you deeper in the hole? You will have to make a decision as to what you want to do. Asking others to make this decision will not work,

@Jules H I think this question will depend on your individual situation as pointed out by other members. One criteria that you should keep in mind before making your decision is if you can utilize the capital from the refi and earn a rate of return greater than the cost of capital (debt cost plus net cash flow reduction associated with the additional debt payment increase).

There are some good comments made in this thread. Since you already have four rental properties, you are not new to the finance game. In the time it takes to pay off your mortgage, property values and interest rates are bound to raise and the potential for super high returns on your investment maybe all but lost. If your investment strategy is calling for purchasing more rental properties, then my advice is to do that now before prices begin to increase.

Of course, make sure you project your cash flow and yield rates for both scenarios over let's say a 5 year period to make sure that you will come out ahead. But I bet the numbers will come out better with a refinance and purchase.

I think you should pay it off... If you want to refi another home to purchase another that would be the way to go. You would get a good deal because of the asset so close to being paid off. You are a great risk for a bank.

It's a numbers game.

Leverage = risk; what is your risk tolerance?
Leverage can amplify your returns or losses.

IMO, you want your money to be working for you. Equity is is generally dead money. If you refi to 30 years at 3.75% (loan constant around 5.5%), then take cash out to buy another income producing asset. Based on the above example, that asset should earn more then 5.5% plus a risk premium to make it worth while for you to do so. Or you could possibly take that money and work with a hard money broker to loan your money and make 9-12% interest. Is making 3.5%+ on the spread a worthwhile risk premium?

Also, make sure you consider all your assets in your portfolio and determine if it's within your overall risk tolerance. IE, stocks, bonds, money market, real estate, life insurance, etc. Take a wholistic approach. If buy taking on additional risk, you can't sleep at night then its not worth it.

I'm 36 and had some of the same concerns you do. This place had really helped me to put together a game plan. Good luck!

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