What would you do? Pay house off or buy another?

[Johnny Self]

Hello Everyone,

In the next few months, I'll be in a unique position where I can potentially pay off my house. Let me provide some context to help you understand my situation.

My Goal

My ultimate goal has always been to generate passive income through rental properties. My initial goal is to earn enough passive income to cover all my bills, which amount to approximately $3,500 per month. Once I achieve this, I'll consider it a success, and any additional investments will be a bonus. I haven't set specific targets beyond this initial goal, but I may aim to increase my passive income to $5,000 or $10,000 per month in the future.

Current Properties

I currently have two properties:

• The Loft:
  • This property is rented out long-term and generates around $300 per month in passive income after HOA and management fees.
  • The loft has approximately $100,000 in equity.
• The House:
  • This is a brand-new build (2024) that I'm currently occupying through house hacking.
  • I invested $70,000 in the property, which means I have $70,000 in equity.
  • My plan is to convert this property into an Airbnb or long-term rental within the next two years.
  • Short-term rental comps suggest I can earn around $3,500-$4,000 per month, while long-term rental comps indicate I can earn around $3,000-$3,300 per month.

Seeking Advice

Given my upcoming financial situation, I'm seeking advice on the best course of action. In the next few months, I'll have:

• $260,000 in savings
• $100,000 in equity in the loft
• $355,000 outstanding on the house

Should I sell the loft, use the equity, and combine it with my savings to pay off the house? This would allow me to rent out the house for $3,300+ per month, generating significant passive income. I've heard that it's not about the number of properties you own, but rather the amount of passive income you generate.

What would you do in my situation?

[Johnny Self]

Imporant to note:

The loft has a 3.25% interest rate, but I have no desire to live there again. And seeing that it is a 1bedroom, I'm at the max rent cap currently. HOA and management eat most of my profits...

The house has a 7.25% interest rate.

[Mike Anderson]

For me i'd sell the loft take the profits, but not go all in on paying of the house. You want to stay liquid, although 7.25% rate is higher than i'd like to carry, but with the way things are going right now. It's sell, take the 100k profit, your at 360k in the bank, VTSAX or money market and chill for a bit, see how this market/economy thing plays out, rates have to come down no one can afford at these rates, then maybe look to refi and get the rate under 5%.

Also something to think about..... On average over the last 5 to 6 years i' made about 14 or so percent just in S&P index funds... 360k at 14% is 50,400$ or 4200 a month over your number. There are many ways to become financially independent. 

[Theresa Harris]

With the 7.25% interest rates, can you make more than that investing the money elsewhere that fits with your risk tolerance?  If it was me, I'd probably pay down the house with the higher interest rates.  Do you have room in your debt to income ratio to buy another property and if so, would it cash flow?  

[Mae Galang]

Few questions:

1. Do you have another source of income? How are you affording health insurance?

2. What other assets/investments do you own? (checking, HYSA, HSAs, 401k, Roth IRA, crypto, etc?)

Agree with comment above about selling loft but not using profits (nor savings) to pay off the house. I wouldn't pay off the house. I also agree with putting some $ in the stock market. The S&P 500 is up 14% YTD. Bitcoin ETFs are up 38%. 

If you were to put savings in the S&P 500 -- in 30 years, it will be worth over $3M. This is calculating a return rate of 8% (inflation taken into account).

I might be a little bit more risk averse. What is the vacancy rate of your properties? Have you had to spend a large amount of money for huge repairs / capital expenditures?