Pay off, refi, or sell?

Question

Hey folks, this is something I often wonder about my rental properties, and there's probably a different answer for each one. And to make it more complicated, the answer for one might affect the others when looking at the whole portfolio.

Let's say I have a SFR rental with $150K equity, $200k 30yr loan at 7.5%, and it's basically breaking even after expenses and debt service. Every year, there are 3 options for this property: pay off the loan, refinance it (if rates are lower), or sell it.

How do you guys evaluate these decisions? Do people just go by gut feel, or do they just model that individual property in a spreadsheet, or do you use something else?

Ametria Chaney · Answer

Erik, I would model all three the way Devin and Ashish suggest, rather than deciding on the monthly payment alone. A break-even property at 7.5% is not really breaking even once a vacancy, a repair, or a turnover comes up, so start with the real cash flow after reserves. Then ask what the $150,000 of equity could do elsewhere, and what you would net after selling costs and taxes if you sold. Paying it off can make sense if you want simplicity and lower risk, and refinancing only helps if the new payment and closing costs actually improve the picture over the time you plan to hold. Selling makes the most sense when the property no longer fits your goals and the equity can work harder somewhere else. A local agent can give you a realistic sale price, and your CPA can help with the tax side.

Caleb Brown · Answer

Depends on many factors. Personal finance wise if that property is putting a strain then it'd be worth selling. Breaking even most likely means you are negative when repairs and other maintenance items come up. If that area is appreciating then you can ride it out and let time do it's magic. Refi doesn't seem to make sense with those numbers so it'd be deciding between a hold or sell.

Ashish Acharya · Answer

Erik, I’d model all three rather than making the decision based on the monthly payment alone.

One thing I’d add is an after-tax view of the $150K of equity currently tied up in the property.

Paying off the loan gives you a guaranteed reduction in interest expense, but it also puts more capital into an asset that is already roughly breaking even. Refinancing could improve the cash flow, but I’d include the closing costs and new loan terms in the comparison.

Selling is where I’d definitely bring the tax side into the model. Depending on the property's adjusted basis and depreciation history, the sale could create capital gains and depreciation-related taxes, so the amount you actually have available to reinvest may be considerably different from the gross equity.

I'd compare the three options based on after-tax return on equity, cash flow, debt reduction, and what the released capital could earn elsewhere.

The interesting question to me is what that $150K can do if you don't leave it trapped in this particular property.

Are you mainly trying to maximize cash flow from this property, or are you looking at which option gives your entire portfolio the best return over the next 5–10 years?

Feel free to DM me. I’d be happy to share a few resources that might be helpful for you.

Devin Peterson · Answer

Erik, I wouldn't decide this on gut feel, because the three options aren't the same question.

Paying the loan off is a return-on-equity check. After the $200k loan is gone, what does that $150k of equity actually earn you in cash flow on this house, and is that better than putting the same money into another deal? A rental that only breaks even at 7.5% often looks fine until you count what the equity could do somewhere else.

A refinance only helps if the new payment, after closing costs, actually improves the cash flow, or you have a real use for the cash you pull out. If the new rate isn't meaningfully under 7.5%, you're mostly just restarting the loan.

Selling is the one I'd pick when you'd rather move the equity than keep a property that stays break-even.

There's also a middle option if you want some of the equity without replacing the first mortgage. A cash-out refi pays off the 7.5% loan and starts a new one. A HELOC sits in second position behind it, and on a rental that can be a DSCR HELOC, which is underwritten on the property's rent rather than your personal income. The rate on those usually floats. I'd run all three in a spreadsheet with today's payment, a higher rate, and the cost to close, and see which one still works if this house stays break-even for another year.

Pay off, refi, or sell?

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