Pay off rental property for cash flow or invest in the market

[Love This Community]

Hello,

Happy New Year ER Members! Thought of starting the year with making the good choices and leaning on this group again.

I have a rental property that is valued at 200K (considering broker / RE agent fees at the time of selling, value would be 212K). Outstanding loan amount on this property is $98,000 @ 3.25% 15 year fixed rate. Based on the amortization schedule, it will be paid off by Nov 2027.

yearly property taxes on this property: $3800
yearly HOA: $3600 (300 per month)
yearly mortgage: $18,324 (covered through monthly rent)

yearly rental income: $20400 ($1700 per month). Pretty steady.
Current cash flow: Negative $200

I have been sitting on ~60K cash (think of it as a safety cushion / emergency fund) and expecting some bonus in the next couple of months. If I pay off the remaining balance on mortgage, monthly cash flow will be Positive $1000.

Additional info: We have about $590K in 401k 90% of which is invested in stocks.

Question: Does it make sense to pay off the remaining balance on the mortgage or invest in the market? Thinking about VTSMX, VTIAX or any other recommended mix of index funds. Appreciate your thoughts.

 

[calmloki]

We are long-term multi property landlords. Several ways to think on this. First, 3.25% is crazy cheap money. 8+% was far more normal over many decades. Plus you are writing off your expenditure on interest, which means you have a loss to apply against your other earned income, which means you are effectively only paying ~2.4%. Pay it off and you lose the write-off and add income to pay taxes on.
$60k is a real decent safety cushion.
How about using the $60k as down payment on another rental?
Will say everyone does things differently - we don't own anything we pay HOA on and I don't think we have ever run in the red on rentals.

 

[Luck_Club]

If you are still working, wouldn't change a thing. The losses are applied against your current I assume high income vs lower later retired income.

I paid off a property this past year, and kind of regret it and am thinking about refinancing it to add back the debt.

When I paid it off I thought I was going to stop working, but decided to punt another year down the road. So I don't need the cash flow and it is increasing the income.

 

[OldShooter]

For me, the overriding factor would be to sell if the property was in Illinois. Big tax increases coming and a net outflow of people from the state. (https://www.chicagotribune.com/opin...0191230-qrkr3ud2unedzjva6uw4anwziy-story.html) This cannot be good for real estate cash flow or for real estate values.

 

[Love This Community]

Thank you Calmloki, Luck_Club. I'll keep the mortgage for now and try to deploy the cash elsewhere (index funds). I could use it as a down payment for buying another property however, like OldShooter said, I am in Illinois and not sure if it makes sense to have more (add to that I'm not very handy in case something breaks / need fixing). Our current rental is a condo that we lived in before moving into a single family home.

Thanks Oldshooter. Current tenants are good and I'm sure there'll be a point where continuing to rent may be more cumbersome. At least for now, the rental is contributing towards the P+I on mortgage plus some HOA with minimal time spent on managing the property. If I can continue to rent for another 3-4 years, 40% of the remaining mortgage balance would be paid via rental income.

 

[OldShooter]

... Thanks Oldshooter. Current tenants are good and I'm sure there'll be a point where continuing to rent may be more cumbersome. At least for now, the rental is contributing towards the P+I on mortgage plus some HOA with minimal time spent on managing the property. If I can continue to rent for another 3-4 years, 40% of the remaining mortgage balance would be paid via rental income.

Oh, short term the status quo probably prevails. But as property and other taxes go up, can new tenants afford increasing rent? Also, what will happen to the property value as these tax increases happen? You might find that you've won the cash flow battle short-term but lost the property value war. No way to know.

You might find this interesting: https://en.wikipedia.org/wiki/Endowment_effect