Pay Off My Condo? Or use it as leverage?

Question

Hey everyone,

I currently have a 1 bedroom in Laguna Beach, CA that I live in. It's a great location with an ocean view and perfect for rentals. I've been living in it for five years and am starting to think it's time to rent it out because the mortgage is very high. Here is where I'm confused. Should I rent it out and just slowly pay down the mortgage and use the house as leverage for other properties? OR should I try and rent it out, but make extra payments to get rid of the interest on the home so I can cash flow more? The house will help me acquire other properties for sure, BUT if I pay the interest down I could lower my monthly mortgage and cash flow more immediately off the rental. The house alone if paid off could cash 3-5k a month. Currently, the mortgage is around 2500 so I would make very little profit just renting it out. Any help is greatly appreciated!

Costin I. · Answer

It depends. Which one has higher interest rate? Which one can you pay faster? Or can you deploy those extra payments into something else that will give a better ROI than the mortgage interest rate, plus taxes and inflation? Depends on your options, goals (short and long term), risk tolerance, etc.

Based on the little info provided, I would pay the house faster - less risk, better sleep, and sooner free of debt on primary residence. Then you can look into getting a HELOC you can use to make cash offers on other investment properties under ARV, that you can rehab and refinance into long term fixed financing (basic BRRRR strategy with yourself as HML).

Jeff Dippel · Answer

Hey Jo-Ann,

I'm 32 years old with no children and make over 100k a year in salary. My main goal in life is to create enough passive income so I can retire from my job early with a fair amount of passive income. I do not want to be super rich. I just want enough to eventually pay for a family, travel and work a less stressful job. That's why I thought it might be beneficial to pay the house off quick. I currently make enough money to save from my paycheck for other investments and pay off the loan faster. Ideally, I would love this house to be making me money sooner rather than later. That's why I was interested in paying it off faster, because I want to have a steady income of money coming in. Does that help? Obviously I can do short term rentals, which I am going to, but I will still be paying the $2500 a month mortgage which drains from all my earnings.

Jo-Ann Lapin · Answer

So hard to recommend when we all dont know your whole financial situation . The rent I am sure would higher crating nice cash flow and allowing you to move to a larger living situation for your self.

Tom O. · Answer

Thomas S. Not sure I understand. If you pay faster, you owe less and pay less interest. You build equity faster that you can use to buy something else and, once the payment is gone, you have higher cash flow, cash in your pocket. You are saving money by paying less in interest. I don't think it's that bad an idea, especially if you're older like me and may not live to see the end of the 30 year mortgage.

Thomas S. · Answer

Paying down a mortgage on a rental DOES NOT INCRESE CASH FLOW it buys cash flow with your own money. This is the most expensive cash flow you could possibly ever have.

It is not investing it is cash hoarding. To calculate the cost to you to generate your artificial cash flow deduct $833 for every 100K of paid off property value from your rental income monthly.

Stone Jin · Answer

If you have a really desirable property why not try to short term rent it.  I'm sure you can get way more cashflow then just renting it out monthly.   If you do go down that path, just know the risks and understand that it will be more work.