Seeking debt reduction advice

[Troy Froistad]

Hello,

I'm looking for a little advice on which debt I should reduce. I have $30,000 I've decided I want to put down on the principal of one of two rental properties I currently have mortgaged. I'm curious to hear which of the two properties you all think I should put the money into. 

Property #1 is a 5 unit with a commercial loan, amortized for 25 years with a 5 year balloon. Current rate is 5.75%. I'm three years into the balloon. Remaining mortgage is $171,000.

Property #2 is a single family, conventional fixed rate mortgage. It is amortized for 30 years at 6%. Remaining mortgage is $107,000.

You may also ask, why not buy another property with this money? That's a great question. One reason is that I am retiring from the military and my income will be changing significantly. I feel reducing debt is a safe bet.

Thanks,

Troy

[John Clark]

Quote from @Troy Froistad:

Hello,

I'm looking for a little advice on which debt I should reduce. I have $30,000 I've decided I want to put down on the principal of one of two rental properties I currently have mortgaged. I'm curious to hear which of the two properties you all think I should put the money into. 

Property #1 is a 5 unit with a commercial loan, amortized for 25 years with a 5 year balloon. Current rate is 5.75%. I'm three years into the balloon. Remaining mortgage is $171,000.

Property #2 is a single family, conventional fixed rate mortgage. It is amortized for 30 years at 6%. Remaining mortgage is $107,000.

You may also ask, why not buy another property with this money? That's a great question. One reason is that I am retiring from the military and my income will be changing significantly. I feel reducing debt is a safe bet.

Thanks,

Troy

Which property will be easier to sell for a good price on short notice? Which property had higher appreciation rate? How do the appreciation rates on these two properties compare to alternative investments? What will your need for reserves be generally, and for each property?


There is no answer, there are simply alternatives.

[Theresa Harris]

If you are changing careers and your income will go down significantly (you said change, I implied decreasing), why not keep the money as a back up/emergency fund in case you need it?

[Clayton Silva]

Quote from @Troy Froistad:

Hello,

I'm looking for a little advice on which debt I should reduce. I have $30,000 I've decided I want to put down on the principal of one of two rental properties I currently have mortgaged. I'm curious to hear which of the two properties you all think I should put the money into. 

Property #1 is a 5 unit with a commercial loan, amortized for 25 years with a 5 year balloon. Current rate is 5.75%. I'm three years into the balloon. Remaining mortgage is $171,000.

Property #2 is a single family, conventional fixed rate mortgage. It is amortized for 30 years at 6%. Remaining mortgage is $107,000.

You may also ask, why not buy another property with this money? That's a great question. One reason is that I am retiring from the military and my income will be changing significantly. I feel reducing debt is a safe bet.

Thanks,

Troy

 When it comes to debt reduction, I would always recommend either starting with the lowest loan balance or the highest monthly payment debt.  Getting the highest payment out of the way always allows the most breathing room.  Getting the lowest balance out of the way is usually the quickest way to start snowballing extra payments into other debts you want to clean up.  Hope this helps!

[Kevin Sobilo]

Quote from @Troy Froistad:

Hello,

I'm looking for a little advice on which debt I should reduce. I have $30,000 I've decided I want to put down on the principal of one of two rental properties I currently have mortgaged. I'm curious to hear which of the two properties you all think I should put the money into. 

Property #1 is a 5 unit with a commercial loan, amortized for 25 years with a 5 year balloon. Current rate is 5.75%. I'm three years into the balloon. Remaining mortgage is $171,000.

Property #2 is a single family, conventional fixed rate mortgage. It is amortized for 30 years at 6%. Remaining mortgage is $107,000.

You may also ask, why not buy another property with this money? That's a great question. One reason is that I am retiring from the military and my income will be changing significantly. I feel reducing debt is a safe bet.

Thanks,

Troy

@Troy Froistad, a few thoughts:

1. Paying down principal doesn't reduce your risk of losing the house. Your payment will still be the same so if rental income suffers you still end up having to sell or take whatever other action.

2. Putting the money into principal INCREASES your risk in 2 ways. First, you are at risk of the market. If property values go down that money you just paid in is disappearing! Second, the more equity you have more more your properties are a potential target in litigation. If you have little equity and get sued, it isn't worth them taking the house from you, but if you pay down that mortgage you literally have your ASSets hanging out! lol

3. You talk about financial security in retirement, but if you put this money into the house it is not accessible to you if a need arises. That is NOT financial security.

What I would probably do is put the money in a safe secure predictable investment like a CD. Today you can probably get around 5% on a CD. When you factor in the tax deduction you get on the mortgage interest, this 5% rate on a CD closes matches what you would save on interest by paying down the mortgage. So, money wise you are around even, BUT you keep your money available to you if the need arises and also you don't put your money at risk of the market etc.

[Troy Froistad]

I had not considered property appreciation. You are right about options but there being no clear answer.

[Troy Froistad]

Thanks for the insight. I definitely have some things to consider.

[Gregory Schwartz]

@Troy Froistad sounds like you have a nice portfolio here. And you built it up while on active duty, that's awesome! 

My first question is do you have appropriate reserves for these properties? For a portfolio of that size, I'd want 10-15k in a savings account specifically for my rental portfolio, IE separate from your personal emergancy account. I am assuming you have 6 months of living expenses in a personal emergency account. I put my reserves in high-yield savings accounts. 

Once both these accounts are funded and you still have money to pay down the principal I would think about the following:

1. Which one has a higher loan-to-value (LTV)? I like to have at least 30-40% equity meaning my LTV is 60-70% across my portfolio, this means I can easily sell without being underwater in just about any market. Put the money in the property with the higher LTV.

2. Which account would it be easier to get a line of credit on if you wanted to access your equity? My guess is the commercial loan but talk to your bank. This acts as a secondary emergency/reserve account. It can also be helpful if / when you decide you want to grow your portfolio again. 

Hope this helps, good luck!