Debt Paydown with Rental Property Refinance

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Debt Paydown with Rental Property Refinance

Jason VermeulenPro Member
Clarks Summit, PA · Member since 2017 · 4 posts · 4 votes

Hi there, a finance question, I have been asking myself the past couple weeks that Im curious to get some more thoughtful input on.

I currently own a rental property valued at approx $400,000 and owe $180,000 on a 20 year variable rate commercial loan at 6% interest. The rate will change in 1 year and I have 16 years left on the loan. My current mortgage is $1480 a month.

I also have approximate $50,000 in both car loans and a home improvement loan for my personal residence. The rates vary but they are between 6 and 8.5% and have 3 to 7 years left on the loans. Currently my monthly payments total $1400.

I have been talking with a lender about a cash out refinance in my rental property. The cash out would get me a 30 year fixed rate mortgage at 7.25% and that includes buying 2 points so closing costs around $10,000 if I pull out $50,000. This monthly payment would be approximate $1700.


And a final item for consideration. Im looking at building a personal residence on a plot of land i own in about 2 years. So im not interested in buying another rental right now, and i would like to build up more cash reserves and have zero debt(outside of business) before building.

So im thinking of using the refinance to paydown my debt. I know in the long run this will be more expensive, but I can build significantly more cash up in the short term($1000 a month). What are your thoughts on this approach? I am also a fan of driving a lot of simplification in my personal finances.


Or do I wait and do the refinance before I build and pay off all the debt that is left and pull out additional cash needed for build? And of course pay off more debt with monthly cash flow?

Or any other thoughts?

Thanks in advance!

Jason

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  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    9mo

    @Jason Vermeulen, I think there are a couple advantages to what you propose:

    1. Interest on your personal debt (car and home improvement loans) are not tax deductible while the interest on your investment property is. So, a bunch of interest you would have paid on those personal debts will not become deductible with the refi. 

    2. Your adjustable interest rate is likely adjusting HIGHER anyways next year so since you will be losing that nicer rate its an opportune time to consider these actions. 

    One thing to consider. Although it feels good paying points to buy down the interest rate, did you calculate the payback period on that. Many people buy down the rate but never hold the loan long enough to get that money back in interest saved and they never even realize it!

    One other strategic thought. The equity we have in have in investment real estate is "lazy money" to me. Its hard/expensive to access and its sitting there as a risk in the event we get sued. 

    Have you considered SELLING that investment property. You might be able to accomplish everything you want (and more) by selling depending on the details. 

    For example, if your current basis is $230k, you might sell for $400k, pay off the mortgage and have $50k TAX FREE money to pay off your personal debt. The remaining $170k could be rolled into a NEW investment property you purchase with a 1031 exchange (to avoid/defer capital gains tax). 

    So, you might end up paying off your debt, and also restart the depreciation cycle with a new property. With the new purchase, you may even do a cost segregation study and super charge your depreciation deductions for an added benefit!

    And if you need an agent to help you lmk! I happen to be in your market! lol

    1Reply
  • Jason VermeulenPro Member
    OP
    Clarks Summit, PA · Member since 2017 · 4 posts · 4 votes
    9mo

    @Kevin Sobilo 

    I appreciate your input!

    I havent thought about the tax advantages but that is a good point!


    Ill also have to do the math on the points to get a better picture.


    On the selling side, i actually bought this property from my wifes grandfather for a great deal. So I dont think I want to sell it immediately as I told him I would care for his property well. I also still have a lot of room for rent increases with some of my legacy tenants and therefore property value increases.

    Its an 8 unit that makes $5750 a month, that is think I can get to $7000 a month in the next year or 2.

    Thanks!

    Jason

    1Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    8mo

    @Jason Vermeulen, I really like Kevin’s answer above, and he’s right about the interest being tax-deductible on the rental side. That’s an important piece that often gets overlooked.

    If your main goal is simply to pay off personal debt, I’m not sure refinancing the rental just to wipe out that debt is automatically worth it. Debt itself isn’t inherently bad, especially when you factor in the time value of money and the difference between deductible, income-producing debt and non-deductible personal debt.

    That said, if part of the motivation is removing the variable-rate risk on the rental and locking in certainty with a fixed loan, that could absolutely make sense from a risk-management standpoint. Interest rates changing in a year is a real unknown, and there’s value in predictability.

    Where I’d pause is what you do with the cash-out proceeds. Instead of using that money solely to pay down lower-interest personal debt, another option could be deploying it into something that helps you long-term, whether that’s another rental, stocks, or another investment aligned with your risk tolerance and timeline. Done right, that capital could help grow your net worth and ultimately make it easier to fund the home build on your land later, rather than just reshuffling debt.

    Without knowing all the details of your income, tax situation, cash flow, and risk tolerance, I just wanted to share that perspective. I also completely understand that rentals can be a lot to manage, and not everyone wants to scale. But if scaling is on the table, rental real estate, paired with the right tax strategy, can be a powerful wealth-building tool depending on how it interacts with your current income and overall plan.

    The key is making sure everything is working together: cash flow, taxes, debt structure, and long-term goals, so you’re not just simplifying today, but also getting the most out of your investments over time. Good luck & happy to connect!

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