Payoff Rental or Buy Another?

Question

Finance (and tax) wise, is it better to pay off my rental property within a year OR buy a new rental property within a year?

Things to consider (if they matter at all):

I just inherited $100,000.

I have a very young family & childcare is essentially a mortgage payment. So, income is important for the next 4 years.

I have another rental property that is fully paid off so I will net about $1,600/mo on it once I move out next month.

Below are the scenarios:

CURRENT RENTAL PROPERTY

Owe: $158,000

Interest Rate: 4.375%

Monthly Mortgage: $1,070 [$578 goes to interest, $323 to principal, $169 to escrow]

Monthly Rent: $1,650

Cash Flow +$510/mo

I can pay this off in under a year.

-OR-

BUY NEW RENTAL PROPERTY

Prices are high in my area so I may need to only focus on a condos for less renovation.

Purchase price, max $225,000, likely around $125/mo HOA

20% down @ 4.75% rate OR 25% down @ 3.625% rate – so I’ll go w/ the 25% down

Mortgage payment ~$1,025/mo

Down payment $63,000

Rental Income ~$1,300/mo

Likely I’ll make less than $300/mo

To me… paying off my rental property makes the most sense. But the majority of online advice I am seeing is to purchase another property.

Any advice is greatly appreciated!

Joe Villeneuve · Answer

Buy anther.  AS long as you have positive CF, your tenant is paying the property off for you.  You don't gain anything when you use your money to pay it off.  All you're doing is adding more cost to the property.  Don't confuse the property's total cost (principle and interest) as being equal to your cost.  They're not...unless you pay 100% cash and have no leverage.

Zachary Ray · Answer

It is up to what you want long term. Leveraging wouldn't be bad in this situation. You should be able to keep a decent amount left in reserves as well which is great.