I have a rental property with a 4.75% interest rate. My plan is to pay it off over the next 3 or 4 years and enjoy the increased cash flow. I am 60 and retired.
However, I have heard it is unwise to have a fully paid off apartment building in this litigious society. A fully paid off building would be very attractive to a lawyer whereas a property with a heavy mortgage would not be attractive.
Your ideas, suggestions?
I think it all depends on your tax savings that the interest is giving you, what is the balance of the loan, how many more years of mortgage you have and how else you could invest that cash that you intend to add towards the mortgage. Also, buy how much will your cash flow increase? Remember you'll still have some expenses besides the mortgage.
If it's a better way to invest that cash, I will not pay off the mortgage. Can you invest that cash to buy another property for extra cash flow?
It is amortized over 30 years but needs to be paid off in 2019 or be refinanced.
The cash flow would increase from $8000 to $10,500 per month (net).
At this point, I do not want to purchase additional properties.
I am more worried by the increased attractiveness of a fully paid off building to a lawyer.
@Jeff J. I think another thing you should consider is your own peace of mind. I like the idea of paying down debt because it limits risk and at the end of the day you own the building and can do what you want with it. I am a big believer in Dave Ramsey's way of thinking and I would recommend his books. So that is all to say I think if you worry about the building at night or the possibility of being under water on your mortgage scares you, I would pay it off. Consider all the effects including and beyond financial.
Hope this helps.
If (1) the property cash flows and (2) you have plans of acquiring additional property, I would keep the leverage on the property and use the capital to acquire additional investments. Considering that you are retired, if you can live comfortably off of this property and would like to lower your risk, you could consider paying the loan off. I wouldn't be concerned with the legal risk. Just make sure you have a reputable property manager managing it, have insurance that covers the property manager and any other agents, and you're conducting good business and treating your residents well.
60 and retired... Kill the debt and enjoy the cash flow.
If you don't intend to buy another property, then the best is to pay off the property, as I don't know a better way of investing than Real Estate.
Jeff is right too, I like Dave Ramsey, and I am actually one of his ELP in Chicago area. I like the snowballing way of paying off debt and there is nothing better than having peace of mind.
An unencumbered property can be a risk. When an attorney is considering litigation they will often determine how much their 'victim' has in assets. If they see you $500k rental wholly owned free and clear they'd be more inclined to proceed even without up-front fees. However if they see your property encumbered with a $450k note the situation is completely different.
A HELOC on your rental could be one way discourage a lawsuit. Even if the line is unused it will still show the full line amount encumbering the property.
Trusts can be useful to as well to keep ownership private and separate during an asset search to determine your net worth.
Umbrella insurance is another tool.
It's a pretty common concern and there are effective ways to address it.
The building is in an LLC and I do have a 1 million Umbrella (plan to increase this as I pay it off to 2-3mill?)). The HELOC sounds like a good idea.
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