To Pay Off Or Not?


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  • I got many emails with real estate questions. I tell people, please please post your questions on the Community Forum so everyone can see and learn from the answers.

    Here’s the latest question – what would you do?

    This investor has 3 rental properties

    Property 1 is worth $190,000 with a fixed rate 5% mortgage with a $35,000 balance
    Cash flow is $600 a month

    Property 2 is worth $165,000 with a fixed rate 9% mortgage and a $19,000 balance
    Cash flow is $400 a month

    Property 3 is worth $185,000 with a fixed rate mortgage of 4.5% and a $38,000 mortgage balance
    cash flow is $450 a month

    This investor has plenty of cash reserves invested in a variety of ways earning about 12% interest.

    The question is, should they take some of their cash to pay off all the mortgages?

    If so, it would also increase cash flow substantially.

    What would you do and why?

    I would add up all the payoff balances to get a total then figure the increase in cash flow per month divided out to see what the rate of return is on that money

    .
    Lots of unknowns to check out first, such as:

    Are all three properties tenanted as residential, or are any of them commercial?

    Are those cash flow figures NET after mortgage payments and all other expenses, or GROSS?

    How many years of payments are left on each property?

    What are the trending economics in that area? Stable, upward, or downward — and at what rate?

    What part of the country are these properties in, and how much of a loss in value did that region sustain in the LAST financial crash, circa 2008+?

    What are each of the other asset classes that the investor is getting that roughly 12% from? That could tell us what other areas of expertise the investor MIGHT have, AND how stable each asset class is in value — given the near term expectation of a financial crash.

    How often does each of those 12% yielding asset classes need to be rolled over or replaced — when possible?

    Does the investor have the skills to locate such 12% or better deployments of investable cash, or is a 3rd party asset manager being relied upon? If the 3rd party case, is that 12% yield before or after the asset manager’s fee?

    –Dee

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    If he does decide to pay off it probably wouldn’t would not be a bad idea to put Phantom Mortgage in place to protect his liability kind of a dummy mortgage to an entity he controls so it doesn’t look like there’s any equity in the property

    I think Don and Dee have some good thoughts. The interest he is paying on the mortgages is deductible, which may help him with his tax situation. I tend to be more conservative in this economic climate, so I would at least pay off the $19,000.00 mortgage at 9%.. The other two are much lower rates, so if his 12 % return drops, he still may be okay.

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