Pay off primary home mortgage first or rental properties first?

[tink]

We've ruminated over some version of this question for a while and are now ready to start taking specific action. We had contemplated selling one of our rental properties and have decided to stick with it, now that we have that decision affirmed, we want to move toward mortgage debt reduction in some form.

I know paying off a mortgage with a historically low interest rate isn't necessarily the smartest financial move, but there's a strong emotional component here that I need to honor. I work for (and jointly own) a family business and there are some major medical issues happening with a parent that could potentially be putting the business at risk. We have 3 mortgages (primary & two rentals) and a very expensive tuition bill each month. I would like to either eliminate my primary mortgage or the rental properties to reduce expenses/increase cash flow. I'm wondering which makes most financial sense.

I feel we could put $3,000-$4,000 per month extra toward any of the mortgages below. This would be stopping all savings in every area except retirement (401K and IRA) and 529. It would also require major lifestyle changes but we're both feeling very committed to knocking these out in some fashion.

Do we focus all our efforts toward our primary, at 4K extra per month, pay it off by December 2022? Alternatively, we could pay off one rental at a time, starting with Rental #1. We could have that paid off August 2020, move onto rental #2 and have that paid off by December 2021 and then focus on our primary at that time?


Primary:
Balance: $239,749.08
Rate: 3.125%
Maturity date if no extra payments are made: 11/2036
Current payment (PITI): $2,174.68
Current Value: $450,000

Rental #1:
Balance: $88,124.13
Rate: 4.25
Maturity date if no extra payments are made: 10/27
Home value is around $155,000 and rental
Current payment (PITI): 1,348.51
Monthly income on the property: $1300 (we refinanced to a cheaper rate and 10 year, could be income generating if we had a 30 year, but chose not to for various reasons)
Current Value: $155,000

Rental #2:
Balance: $88,262.77
Rate: 3.99
Maturity date if no extra payments are made: 11/31
Current payment (PITI): $1,285.45
Monthly income on the property: $2,100
Current Value: $230,000

[disneysteve]

If your goal is to increase cash flow, you should focus on the loan that you can pay off the quickest, so rental #1. That also happens to be the highest interest rate so it makes the most sense financially as well. Then #2. Then the primary.

The one number you didn't provide is just the PI, not PITI, for each loan. Obviously, when you pay off the mortgage, only the PI goes away so that's how much your cash flow increases by.

A far bigger issue is what you said about the business. Hopefully steps are being taken to protect the business in the event that the sick parent isn't able to continue on.

[Jluke]

This can be a risky move.

Definitely need to know the breakdown of PI vs TI.

If you are going to focus on a rental property with appx 80k balance, I would be inclined to save up over 5-6 months then put about 20k on at a time rather than the 3-4K per month.

Gives you flexibility in case life happens.

[disneysteve]

I would be inclined to save up over 5-6 months then put about 20k on at a time rather than the 3-4K per month.

Gives you flexibility in case life happens.

Great point. And considering that savings accounts are paying 2.2% or more, the gap between that and the mortgage isn't as large so the savings on interest isn't as great. It might not be worth the risk to tie up the money until you're sure you don't need it.

[Scallywag]

If the business could be put at risk (potentially risking your income) I would max out savings and consider selling off the rentals to save up cash in case of likely unemployment in the future.

If you want to hold on to at least one rental property then I would hold on to one which brings in the larger net income after the mortgage was paid off (rent - the total cost of property taxes + maintenance + insurance). I would also start looking for jobs in the meantime and not wait until the shoe falls - that's just my opinion.

[bjl584]

What is your appetite for risk?
Are the rentals in LLC's and not tied to your personal finances?
Assuming positive cash flows and a good rental market, your tenants are paying the notes down on the rentals.
If that doesn't bother you, then focus on the primary mortgage.

[LivingAlmostLarge]

rental 1 and I agree pay off in chunks. In fact why not take the EF depending on size and your business ef for rentals and just pay off the rental now?

[tink]

Thanks for the variety of opinions, all great suggestions.

We decided we don't want to sell. Rental #1 will positively cash flow once we pay it off (and could be now if we had a 30 year mortgage, but we have a 10 year), and rental #2 cash flows well already. It's in a very desired area, excellent schools, etc. so we anticipate there will always be demand for it.

I like the suggestion to pay it off in chunks, by first saving the money. That is the approach we will take.

The business is really a separate post all together. I should probably write a post about it because so many people here would have such great suggestions. I am too emotional to see it all clearly and rationally.

[corn18]

Where's TexasHusker when you need him?

Rental #1: Cash out refi to a 30 year note to get it cash positive. If you can't get it cash positive on a 30 year note with 75% LTV, sell it. It's a dog.
Rental #2: Cash out refi to 80% LTV.
Primary: Leave it alone. Ridiculously awesome rate.

Take all the cash and buy more rentals with max leverage. Make sure they are cash flow positive with a 30 year mortgage.

Rinse. Repeat. Quit your job. Retire.

[riverwed070707]

Where's TexasHusker when you need him?

Rental #1: Cash out refi to a 30 year note to get it cash positive. If you can't get it cash positive on a 30 year note with 75% LTV, sell it. It's a dog.
Rental #2: Cash out refi to 80% LTV.
Primary: Leave it alone. Ridiculously awesome rate.

Take all the cash and buy more rentals with max leverage. Make sure they are cash flow positive with a 30 year mortgage.

Rinse. Repeat. Quit your job. Retire.

YES. I didn't respond because I often feel like an outcast on this forum but personally, I would not pay off any of these. I'd consider paying off my primary if it was financed at 4% or higher. I do finance my rentals on 15 year notes though because it better aligns with the rentals being paid off at the same time as my retirement, thus increasing my cashflow at the right time. My goal isn't to get rich, my goal is to replace my current income with rental income so as long as I hit that number, I don't need more rentals

[james.hendrickson]

YES. I didn't respond because I often feel like an outcast on this forum but personally, I would not pay off any of these. I'd consider paying off my primary if it was financed at 4% or higher. I do finance my rentals on 15 year notes though because it better aligns with the rentals being paid off at the same time as my retirement, thus increasing my cashflow at the right time. My goal isn't to get rich, my goal is to replace my current income with rental income so as long as I hit that number, I don't need more rentals

R - won't it take longer to pay off the primary?

[MooseBucks]

I’m also an advocate for paying off where you live first especially with the potential medical issues.

[riverwed070707]

R - won't it take longer to pay off the primary?

Not sure I understand the question. My primary is financed on a 15 year also, and will eventually be a rental when I'm done living in it.

[LivingAlmostLarge]

that makes sense. I think buying more rentals a better idea. But i also think are these good rentals? Are they dogs?

[~bs]

with the new trump tax cuts, it may be wiser to pay off your primary loan first. the standard deduction was raised, so its unlikely you can use the mortgage interest. whereas you should be able to still deduct the mortgage interest on your rental property.


talk to your accountant. a little professional advice can go along ways.