Pay off rentals early OR Pay down Primary house?

84 Replies

I have a duplex that I owe $135,000 on that currently generates me $1000 per month in passive income.  My primary house has a mortgage of $329,000.  I recently sold our old primary house and I have around $200,000.  I am trying to figure out if I should use some of the money to pay off the duplex and use the rest of the money to pay down our primary house.  

I realize there are tax benefits and deductions for rental houses.  However, it would be nice to bring in closer to $2000 per month in passive income.  If I brought that in as passive income I would plan on tax deferring as much as I can from my job (Teacher) to keep my overall taxes down and also get me in a better position for retirement.  I am 37 but really do not want to teach another 30 years... so any advice would be greatly appreciated. 

What are your thoughts?  Good idea?  Terrible idea?  Please let me know your thoughts.  

Well the common wisdom and I am sure every other reply will be to use the 200k and go buy more rentals with max leverage..

At your age and as long as you want to continue to bring in income so you can qualify for loans borrowing money is most likely the best way to scale up.

As you get older like me you get debt adverse and I would be paying off all fixed debt as fast as I could.  But that's a very minority view on this site.

1k/m for a duplex is great income. So I wouldn't be bothered to put it towards that. So now your options really are to pay off your home or buy more rentals. So if you want to keep scaling up your number of rentals then obviously thats the better choice. But if you are looking for less work and easier income then paying of your home is a better option, at least in the short term. You can always save the money you get from a reduced mortgage to eventually get back to buying more rentals. You just wont be as far ahead later on in life. But not everyone wants 100 units to manage or even have to ability to. 

Personally I would actually do both. I would put 100k towards by house and then refi for a reduced mortgage (as long as the rate change isn't huge). Then I would take that 100k and buy another duplex or even a larger MF depending on how much time and effort I could afford to give REI with still keeping my day job.

I've never regretted paying off a rental mortgage, but they were all above 6%, seller-financed and/or adjustable commercial loans with calls. More risk, high rates.  

Fiixed rates in the 4s don't get me too excited to accelerate.  Most can earn more than that safely pretty easily.  What are your rates?   

@Jay Hinrichs

I don't really want to buy rentals in cheaper out of state housing markets. In my housing market it seems they are so incredibly overpriced that there's no money to be had with renting them out. I am not an expert by any means but from what I'm seeing I would have to assume a lot of debt and risk in order to Simply make a hundred or $200 per month I really I really do not want to get burned when the market turns down and have overpaid on very expensive houses. Maybe I am too much of a worrier?

Originally posted by @Brett Palmer:

@Jay Hinrichs

I don't really want to buy rentals in cheaper out of state housing markets. In my housing market it seems they are so incredibly overpriced that there's no money to be had with renting them out. I am not an expert by any means but from what I'm seeing I would have to assume a lot of debt and risk in order to Simply make a hundred or $200 per month I really I really do not want to get burned when the market turns down and have overpaid on very expensive houses. Maybe I am too much of a worrier?

 or a realist.. I am with you I cant see the allure to borrowing 100k to make 200 a month if everything goes right.. seems to me there are many other small business you can do that would make you 5 to 10X the same income.. to me it only works if your going to scale it to a meanful number and your going to make it your lifes work..  For instance I was looking at a POD franchise today.. its not POD but same system.. 750k invested through cash and loan and the business will make on average about 300k NET a year.. show me a rental that will do that.. But then again keep in mind your running a business.. and the allure to rental real estate is many feel that there is no work involved. or very little. and that really depends those I know with large portfolios they work a full week just like any other worker bee

@Steve Vaughan

4.75. Actually one possible thought I have is to refinance that house to 5.1% but take out a lot of equity so I can use that with my other money to try to pay off my primary house sooner. Any thoughts on that?

@Jay Hinrichs

my biggest concern is that homes that sold in 2006 for 300,000 sold in 2010 for a hundred and twenty five thousand and now are selling for 350 to 400,000. I just don't want to overpay an aftermarket tank just for a very modest rental income. Your idea of looking into pods is a good one! It seems like that is a very growing industry how much people move around

I should probably keep my eyes open too different investment opportunities as well as rental

Originally posted by @Brett Palmer:

@Jay Hinrichs

my biggest concern is that homes that sold in 2006 for 300,000 sold in 2010 for a hundred and twenty five thousand and now are selling for 350 to 400,000. I just don't want to overpay an aftermarket tank just for a very modest rental income. Your idea of looking into pods is a good one! It seems like that is a very growing industry how much people move around

I should probably keep my eyes open too different investment opportunities as well as rental

Keep in Mind what happened in the past or during 07 to 2010 was if not one of the biggest melt downs in history and probably wont be repeated in our lifetime .. cant say never but I would not let the worry that your 350k house is going to go down 70% in value keep you from doing things.. and the folks that lost money are only the ones that sold in the trough.. just like the stock market when the worry warts dump their stock at the first sign of a down turn.. Dow got down to about 6k form what 15 to 18k in 08 and where is it now ?

so those that dumped stock at 6k got wiped.. those that bought have made a killing.. as long as you have good non callable financing which by the way HELOC's are not good non callable financing.. you simply don't sell.

now granted there were many markets that even investors got wiped out because the tenants up and moved away and their rentals were vacant for extended periods of time. think PHX AZ  FLA  GA  etc. but not all areas..

not sure were your at.. but sounds like if your props dropped that much you might have been in one of the tougher markets  NV GA FLA AZ Central CA etc. 

I'd pay down the mortgage on your primary residence.  As you said there is a tax benefit to the mortgage on your rental.  Look at your overall numbers, not just the cash flow on the rental.  How much would you save on your mortgage remembering to factor in the amount you save in interest?  Also look to see if there is a penalty to paying down your mortgage.  If there is, pay the max you can  and go from there.

If you pay off your home mortgage which is $1K per month (making up numbers) vs paying down your rental mortgage and cash flow $2K instead of $1K, you are no further ahead (or behind) at the end of the month.

Originally posted by @Brett Palmer:

@Steve Vaughan

4.75. Actually one possible thought I have is to refinance that house to 5.1% but take out a lot of equity so I can use that with my other money to try to pay off my primary house sooner. Any thoughts on that?

 Only if you're in a strong homestead exemption state like FL, you've commited fraud and are trying to hide your assets.

Financially that makes no sense to me.  Pay $5k to refi a rental up to a higher rate.  Feels better to have a paid for primary maybe but the math says differently IMO.  

Are both loans at 4.75%?  I'm earning almost half that in a money market. Earning another 2.5% investing shouldn't be too difficult.

I agree with Jay that you should just invest in more rentals. If prices are too high now, you could either hoard the cash and wait for blood in the streets during the next downturn, or dump that cash into your highest-cost (ie, interest rate) mortgage, and then pull a HELOC on that so you can deploy the cash when it IS affordable again. Paying off mortgages is just diluting your return on equity, however. Great for peace of mind, but not great for wealth-building

@Brett Palmer this is why it’s called personal finance. You get to decide what’s most important to YOU. If you could find another investment or two or three to purchase with the $200k and use that income plus the current rental income to accelerate your primary principal pay-down that would be pretty sweet since you are increasing your income which I believe is most important in this season of life. The challenge with sinking all $200k into the primary is a limited return (your interest rate) plus your payment never goes down unless you refi or until you pay it off in full so it won’t impact your cash-flow any time soon, albeit you will save a ton on interest. I kinda like the idea of paying off your rental if you can’t find other investments (ie consider your opportunity cost) to accelerate your income and primary principal pay-down. If you change your mind, you can always get a mortgage or Heloc on the rental later. As I ramble, my basic thought is to use the $200k to increase your income that you can then use to punch your primary principal balance in the face. When that’s gone you can really accelerate your savings/investing rate! Imagine how well you will sleep with your primary paid off in full. Sleep is worth a premium. Just ask @Steve Vaughan

@Brett Palmer I'm in the minority with @Jay Hinrichs on this one.  Debt is a killer to retirement.  So if you're wanting to exit to a change soon then you need to be laser focused on eliminating it.  But the younger you are the more risk you can take.  So find your sweet spot.

1. If you're going to have debt I'd have it on investment properties - they're less of a target for frivolous suits, the finance costs are always deductible, and the slightly higher interest is offset by the security of having less risk personally (meaning your primary).

2. Having a debt free primary was all it took for my wife to smile and turn me loose in the RE candy store the first time around!!  So for us it was security personally and risk professionally.

What's the middle ground??  That's for you to decide.  But here's a middle approach I'm actually using right now.  I'm taking a heloc on my new primary but only to pay off the mortgage on it.  When that is done I will only have a heloc and can dump money into it at will which does three things - 

It cuts down on the interest payments while i still have debt.  Worst case for me is that the money I dump on it is making me 4.2% (actually a better return than a lot of landlords these days) by saving me 4.2% on my heloc interest expense while I wait.

It leaves me with dry powder when the next buying opportunity comes around and since the draw period is 10 years I'm feeling pretty confident that I'll have plenty of dry power ready when the market turns.

And in the meantime it allows me to accelerate once again into a free and clear primary barring any unfortunate "too good to pass up" deal that I'll need to ply my wife with flowers  and maybe a little convertible to get her to say yes to.

Kind of like a real savings account that's paying me 4.2% while i decide where to use it.  Seems like this might get you part of the way where you want to go but leave that 200K available just in case...:)

@Dave Foster

I like your strategy Dave but trying to fully understand it. So pay off primary with heloc and then focus on paying off heloc quick to free up money to purchase when things go south?

@Brett Palmer you're not struggling too hard - nailed it!!  You either end up with a paid off house but available credit to pull the trigger on to purchase something.  Or you build the available credit while saving interest on every dollar . you chunk onto the pay off and still have that equity available by draw.

I hate paying mortgages down early because if I pay the loan down by a dollar that dollar is gone until I fully pay off the loan or refi.  But helocs are cheap  to take out and with a heloc I can pay down that loan as fast as I can knowing that I can always access it if needed.  You put the $200K down on the loan and your worst case is you're saving around 4.5 - 5% interest while you wait for a buying opportunity.

Full disclosure though - while a heloc at prime or prime minus a little can be had fairly easy that's a floating rate.  And prime at 5.5 now means retail rates of 6.5 - 7 sooner rather than later (theres a trailing effect) So some folks will say that your 4.7 on your primary is awfully good compared to what you'll be able to get later.  And that's true.  But I'm no guru and can't make living predicting what will be.  I can only respond to what is.

Me personally would payoff the rental, keep $20 k for a down payment in case a good property comes up and put the rest on the primary. I would then get a no fee 10 year loan on the primary and add a heloc for if a property comes up. I would then use the $2 k in cashflow to pay off your 10 year loan in 6 and then do a new heloc and use your now $4kish cashflow and heloc to buy more properties and repeat.

Originally posted by @Brian Gerlach :

@Brett Palmer this is why it’s called personal finance. You get to decide what’s most important to YOU. If you could find another investment or two or three to purchase with the $200k and use that income plus the current rental income to accelerate your primary principal pay-down that would be pretty sweet since you are increasing your income which I believe is most important in this season of life. The challenge with sinking all $200k into the primary is a limited return (your interest rate) plus your payment never goes down unless you refi or until you pay it off in full so it won’t impact your cash-flow any time soon, albeit you will save a ton on interest. I kinda like the idea of paying off your rental if you can’t find other investments (ie consider your opportunity cost) to accelerate your income and primary principal pay-down. If you change your mind, you can always get a mortgage or Heloc on the rental later. As I ramble, my basic thought is to use the $200k to increase your income that you can then use to punch your primary principal balance in the face. When that’s gone you can really accelerate your savings/investing rate! Imagine how well you will sleep with your primary paid off in full. Sleep is worth a premium. Just ask @Steve Vaughan

Recasting is a strategy rarely discussed on BP.  Its not for everyone, but worth checking the numbers.  And your payment does go down, meaning it impacts your CF. 


Run the numbers and see how they work in regards to your long term goal.

@Brett Palmer

Great job on investing.  Nice problem to have what to do with 200K.  You have received some great advice.  Clearly you have a goal and developing your strategy to get there is important.  Here is a little twist for the 200K.

If you became a private lender and invested in other projects you can be passive with it and get a great return.  In my area a typical private lender gets a 12% rate on there money and in some cases add 2 points.  If you invested your money for 12 months that’s a return of 24K plus 4K in points 28K.  You could open a Self Directed Retirement Fund and defer taxes or Roth it.  Talk with a CPA for advice.  If you pay off the duplex and receive the additional $1000 per month, that’s 12K more annually.

I think being the bank is way better then borrowing from the bank.  That is my long term strategy.

Good Luck.

@Brett Palmer

If you made me choose, I’d pay down the primary. I’m making an assumption you do not itemize your tax deductions. You can write off the interest on the duplex loan.

Obviously knowing the terms of the loans, your income, risk tolerance, age etc... would help to make educated decision. It’s all situational.

@Brett Palmer Taking the current market conditions into perspective, I'd definitely pay down the mortgage on the primary residence. Though as a teacher, you wouldn't have to worry too much about job security if there were to be a market downturn. 

However, the idea of reducing your leverage on your primary residence can allow you to stack some capital from your W2 job either for a raining day or for a day when you find another great Duplex that can spit out another $1,000/month. Whichever one comes first, you'd be quasi-ready to make the move. 

Remember, CashFLow is king!

Goodluck and this is definitely a great problem to have. Ponder on it as you leverage all the advice you get from here. 

@Craig Jeppesen

That is similar to what i was thinking. With 1 slight difference. Our new house has a huge unfinished basement with 15' tall walls. I am considering paying off rentals to increase cash flow and getting non owner occupied heloc on them to still have access to funds and then putting around 50K into finishing our basement as an ADU or air bnb rental. If I rent it out i could easily rent it for $1000+ per month and then have another rental source of income to use in paying down primary (i.e. 3k per month).

@Matthew McNeil

I recasted a couple years ago with 70k to bring down payment. Lost access to those funds until i opened up heloc in which i was able to pull out 80k which i used as down payment on our new primary. Bonus is my monthly payment went down a lot for 3 years when i took a break from flipping (Did a 1.5 year flip that burnt me out and my wife needed me to take a break ;-) ). I believe house payment went down around $300 per month if remembering right...

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