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Should I pay off my rental house?
Old 05-23-2015, 12:50 PM   #1
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Should I pay off my rental house?

I recently sold my primary home and netted ~$90k from the sale. I still owe ~$130k on my rental home. I know the most common feedback is to not pay off a home early, but I'm wondering whether it makes sense for me. Here are my details:

Mortgage type: 30 year traditional
Interest rate: 5%
Remaining time on mortgage: ~26 years
The remaining money would come from spare savings - wouldn't affect retirement savings, emergency fund, etc
I am currently putting aside ~40% of my income for retirement
I am debt averse but want to use my brain, not my heart, in financial decisions
I don't know how long I'll keep the house. Maybe another year, maybe twenty.

If I don't use the money to pay off the house, what's a good way to dollar cost average it into the market??

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Old 05-24-2015, 12:04 AM   #2
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The way I would look at this is to consider the rental property as a fixed income investment. That is assuming it is bringing in a fairly constant income and the cash flow is positive or at least breaking even. (Otherwise it isn't a good investment).

The mortgage interest rate of 5% would effectively be somewhat lower after tax deductions. Let's say it's 4%. Paying down the principal would be equivalent to investing in a fixed income security with an after tax return of 4%. If that makes sense for your asset allocation, I would do it.

I have two rental property mortgages at just over 4%, which far exceeds any return I could find on a fixed income investment at the present time. So this year I put some excess cash against the principal of the mortgage with the higher interest rate, and cut two years off the amortization period. Both mortgages are 5 year fixed and will be up for renewal in 2017. I expect to get a lower interest rate at that time. I would keep the payments as they are and take a shorter amortization, but if I get an interest rate of 2-3%, it might not make sense to pay down further principal.

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Old 05-24-2015, 12:33 AM   #3
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Can you renegotiate the rate down a bit ? if you lump sum a little onto it ?
If you can, then this swings the argument more toward some alternative investments like stocks outside retirement accounts.
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Old 05-24-2015, 12:36 AM   #4
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Funny you mention that. I had been paying down the mortgage with an extra $600/month and considering that my low risk investment, since I am 100% stocks with my investments. The house is cash flow positive by $345/mo, not counting maintenance.

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Old 05-24-2015, 07:48 AM   #5
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I'd have to look into refinancing. I've never really considered it.

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Old 05-24-2015, 07:21 PM   #6
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I'm a believer in being debt free so I'd pay off as much as you can.
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Old 05-24-2015, 08:51 PM   #7
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Refinance your residence for what terms suit you and take those proceeds and pay off your rental. The rate is much lower for your personal residence than an investment property. Use the interest deduction to reduce your taxable income from your rental, especially if it one of the few deductions you can use on your state return.
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Old 05-25-2015, 05:59 AM   #8
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Originally Posted by Talltodd View Post
I'm a believer in being debt free so I'd pay off as much as you can.

+1- if it were me I would work toward being 100 percent debt free. It's liberating!

On Refinancing - may be tricky. On one hand you may be currently in an investor rate mortgage, higher than owner occupied rate. On the other hand you said u sold your primary residence and if you just have this one property remaining, you might make a case that it is to be owner occupied eventually and get that more favorable interest rate on it.

5 percent is a little high for owner occupied 30 year confirming and you can probably get down around 4 percent. Assuming no points or closing cost to refi The one point difference on 130k loan is about $1.3k per year in savings.

Again, if it were me I would just pay it off and be done.

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