Pay off mortgage or refi to buy more property

7 posts by 7 users

No avatar medium Jules H
San Jose, CA
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Jules H

from San Jose, California

Sep 13 '12, 04:20 PM

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.

Medium 1399292835 avatar venomousviper Rich Weese
Real Estate Investor from sioux falls, SD
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Rich Weese Donor

Real Estate Investor from sioux falls, South Dakota

Sep 13 '12, 04:42 PM
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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

Medium 1399313897 avatar realtyman Dale Osborn
Mobile Home Investor from Spanaway, WA
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Dale Osborn

Mobile Home Investor from Spanaway, Washington

Sep 13 '12, 07:10 PM

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,

Medium 1399550197 avatar aduggal Ankit Duggal
Investor from Clifton , NJ
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Ankit Duggal

Investor from Clifton , New Jersey

Sep 13 '12, 07:21 PM

@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).

Medium 1399650984 avatar foreclosurehome John Stevenson
Foreclosure Specialist from Miami Beach, FL
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John Stevenson

Foreclosure Specialist from Miami Beach, Florida

Sep 26 '12, 06:37 PM

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.

Medium 1399653703 avatar angelfinanceinc Angela D.
Real Estate Investor from Union City, GA
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Angela D.

Real Estate Investor from Union City, Georgia

Sep 26 '12, 06:47 PM

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.

Medium 1399653984 avatar exekious Fred Maul
Sanford, NC
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Fred Maul

from Sanford, North Carolina

Oct 01 '12, 09:03 AM

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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