pay off primary residence vs pay cash for rental propert

Saint Charles, MO · Member since 2016 · 5 posts · 1 vote

I am recently married and we plan to sell my wife's home. The equity would be enough to either pay cash for a rental property or pay off the mortgage on our primary residence. Not sure which is the smartest move. What are the pros and cons?

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John PowellPro Member

Real Estate Agent · Kennesaw, GA · Member since 2015 · 307 posts · 153 votes

I would either be debt free or not. Getting debt free then turning around and getting a HELOC on the same property is not a good plan unless the primary has a very high payment compared to what you would be taking out on the HELOC. Even then I'd just pay off your house three use that cash flow to build up cash quicker to buy a debt free rental. The more rentals you have the more problems you have. Debt reduces cash flow and increases headaches by allowing you to get more properties.

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Herman Herrera
Real Estate Broker · New York, NY · Member since 2016 · 30 posts · 22 votes
9y
Hi John. I was recently in your exact position and I decided to pay off my mortgage. My thinking on this... 1. Piece of mind. No matter what happens, I know longer pay a $3,300 per month note. I have a family and being an entrepreneur exposes me to a life of profits, as well as losses. Not having to worry about a mortgage payment is priceless for me. 2. The interest savings over the next 28yrs of mortgage payments totaled just under $500k which helped level the loss of the mortgage interest tax deduction. 3. Market exposure and vacancy rates on a rental property can put a major dent in my plans. My market is seriously lacking inventory which is driving up prices. ROI is hovering around 5% with no vacancies. FOR ME...it made sense to pay off my mortgage. But taking into account everything I posted as well as your market....it may or may not make sense for you. Good luck John!
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John Hosey
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Saint Charles, MO · Member since 2016 · 5 posts · 1 vote
9y
Thanks Herman. Those are my thoughts exactly but I wasn't sure if I was missing something. We plan to then do a HELOC to purchase our first rental property. Then hopefully refinance and put the loan on the rental property and repeat the process as we acquire more properties.
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Matt H.
Real Estate Broker · CA · Member since 2016 · 243 posts · 226 votes
9y
What is the current rate/term on your primary? How old are you and how much longer to you plan on working? Questions that might help you decide if you are on the fence. No right or wrong answer just boils down to your strategy. But if your loan on your current primary is awesome and you have a few working years left then I might consider being more aggressive. I like to borrow however. I always get a real nice 80 ltv on my primary right before I plan to move and rent it out. My last house, now a rental sits at 2.15% interest only. Can't beat that.
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John Hosey
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Saint Charles, MO · Member since 2016 · 5 posts · 1 vote
9y
The rate is 3.75 and I have 20 years left. I am 61 and semi retired. Being debt free at this point is very enticing and at this age we'd like to minimize risk.
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John PowellPro Member
Real Estate Agent · Kennesaw, GA · Member since 2015 · 307 posts · 153 votes
9y
I would either be debt free or not. Getting debt free then turning around and getting a HELOC on the same property is not a good plan unless the primary has a very high payment compared to what you would be taking out on the HELOC. Even then I'd just pay off your house three use that cash flow to build up cash quicker to buy a debt free rental. The more rentals you have the more problems you have. Debt reduces cash flow and increases headaches by allowing you to get more properties.
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John Hosey
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Saint Charles, MO · Member since 2016 · 5 posts · 1 vote
9y
Good points John. Thanks
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
3.75? Pay cash for the rental. You're going to have more exposure on the HELOC.
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John Hosey
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Saint Charles, MO · Member since 2016 · 5 posts · 1 vote
9y
How long before I could just get a mortgage on the rental after buying it with the HELOC? If it's a short period before I could get the exposure off my home it seems to make sense.
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