Have 3 houses and am thinking about paying 1 off early

[Risingsunbob]

I have 3 houses (2 are rentals) all with mortgages and I am planning on retiring in Late 2013 from the Military. I probably could be FIRE but I’ll address that in another post. One of my self-imposed requirements to retire was to have 6 months of rent for each house in accounts to cover any months when the house was not rented out and to cover any repairs. Starting next month I’ll have the required amount for one of my houses and in late summer I will have the other amount. I currently have $ 800 a month ($ 400 for each house) going into the accounts. As it stands now, one of my rentals will be fully paid for in OCT 2016. Next month I was thinking about taking the $ 400 and applying it towards principal on the one that is scheduled to be paid off in OCT 2016. Once the other account gets filled I will direct those funds towards the same rental principal. If I do that, in Late 2013 I figure that I would have around 20-25 K left on the house and then I was thinking about taking the remaining amount out of my non-retirement account to pay it off, which then would generate more income for me.

Here are my financials:
PRI House : 5% 30 years (27 left) 378K remain 2500 mortgage/1250 Bi weekly

Rental 1: 5.375% 15 years (4 ½ left) 43K Just under 1K/485 Bi weekly (receive 1170/month after property management fees). I plan on keeping this house as a rental.

Rental 2: 4.625% 15 years (14 left) 120K Just under 1400/month (receive 1833/month after property management fees) I just refinanced this house last year and turned a $ 500/month debt into a $ 400 month income). I plan on selling this one once the market recovers.

105K in Non retirement accounts
50K in stocks
95K in Roth IRA’s
157K in Regular IRA’s/TSP

My question is what do you think about taking the extra $ and applying it to rental 1 and then when I retire taking the rest out of my non –retirement account to pay it off completely.

Thanks

Bob

 

[JDARNELL]

Congrats on your upcoming retirement. You will like being in the “check of the month club.” I assume you are going to TAP (can go 2 yrs out) and planning on going back 6-9 Mo out? Check out the-military-guide.com and get yourself educated on all the logistics of retiring from AD.

Here is my opinion about transition.
It is stressful and exciting! CASHFLOW IS KING! Do the heavy lifting now while you still have time so you are not piling stuff on as the big day approaches. I tracked expenses very close the last year I was in to know what the shortfall would be (if I had one) between retirement income and Uncle Sam’s P-nut butter money. If you do have a shortfall try and set 18-24 months of the shortfall aside. IMO this gives you enough time to figure out what you want to do if required. I aggressively paid down debt and restructured to reduce my monthly requirements. I also made sure I had access to long term credit.
Assuming you are not upside down on your primary house look at refinancing to a lower rate and stretch back out to 30. You will have to decide what you are willing to do on closing costs. A friend of mine just got a quote of 3.75% on a 30. This would really cut your payment. You can always pay extra.
On first rental assuming you have 30% equity PenFed will do a 10 yr balloon at 4.125%. With the interest rate spread between your current rental rate of 5.375% and the fact that you have 14 yrs left I think I would roll the dice on a significant rate increase in 10 yrs and refi now. You can run the amortization schedule to see the impact. My assumption you understand the potential interest rate and can see if coming well in advance to make a course correction at that time. Not so sure I would mess with the other rental if you are going to sell it.

JDARNELL

 

[HpRyder]

PRI House : 5% 30 years (27 left) 378K remain 2500 mortgage/1250 Bi weekly

Refi this at todays 3.875 or better rates for 30 yrs. Take 43K cash out & pay off Rental 1

Rental 1: 5.375% 15 years (4 ½ left) 43K

With only 4.5 yrs left you paying mostly principal not interest so the sch e deduction on 43K is small. I don't think any lender is going to refi this 43K at a reasonable cost. So either take 43K cash out of the OO house or after a straight no cash out refi, get a HELOC, pay off the 43K, then use the extra $ to pay off the HELOC.

Rental 2: 4.625% 15 years (14 left) 120K

I wouldn't touch this one, just keep it until you sell it. 4.625% is a good rental rate in todays market. But just to be sure check around to see if a refi is possible at a substantial lower rate.

 

[JDARNELL]

With only 4.5 yrs left you paying mostly principal not interest so the sch e deduction on 43K is small. I don't think any lender is going to refi this 43K at a reasonable cost. So either take 43K cash out of the OO house or after a straight no cash out refi, get a HELOC, pay off the 43K, then use the extra $ to pay off the HELOC.

Good point on the HELOC. You could refi your primary, take out a small fixed rate HELOC and knock the 43K out quick. This way your cash flow requirements in the out years would be 43K ammoritized over 30 yrs less.

JDARNELL

 

[Risingsunbob]

I tried to refi the primary 3 months ago but the appraisal was too low which didn't provide me the 20% equity. (I think I was low balled on the appraisal since they had to use houses outside of the neighborhood and new constructions which they weren't suppose to). I'll look at trying to refi the primary in a couple more months. I hadn't thought about a HELOC to pay off the 1st rental.

 

[pb4uski]

Once you retire will you have sufficient deductions to itemize and benefit from the home mortgage interest deduction?

If not, I wonder if you would be better off to have the financing on the rental properties where it would be deductible against the rent and take the standard deduction.

If so, then you would refi the rental 1 and use the proceeds to pay off or pay down the primary home mortgage.