Paying off a rental house

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coldman
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Paying off a rental house

Post by coldman »

As people have a wide variety of opinions on here they always give food for thought. I have a rental house with about $92,000 left on the mortgage. The rent more than covers the mortgage. One person suggested since I have the money I should consider paying it off. I do get a tax right off on the rental and I get to let the renter make my payments. There are the arguments to let other people make your payments, my money will make more other places than paying off the rental, too much money will be tied up in a piece of property. I am not sure of the pro and cons as far as financials go for paying it off. I have heard there is going to be an extra tax on rental income in 2013 and don't know how that plays into this situation. Please share your thoughts on paying off the rental house.
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market timer
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Re: Paying off a rental house

Post by market timer »

What is the interest rate and term of the mortgage?
Topic Author
coldman
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Re: Paying off a rental house

Post by coldman »

The rate is 5.85%.
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market timer
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Re: Paying off a rental house

Post by market timer »

If you have the means, I'd suggest paying it off. Wouldn't you jump at the chance to buy bonds paying 5.85%?
Topic Author
coldman
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Re: Paying off a rental house

Post by coldman »

Would something like the High yield Tax Exempt be an okay fund to buy into?
sscritic
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Re: Paying off a rental house

Post by sscritic »

coldman wrote:Would something like the High yield Tax Exempt be an okay fund to buy into?
Please share your thoughts on paying off the rental house.
New topic, new thread?

If I paid off a rental house and suddenly had an extra $1500 a month coming in, I wouldn't be buying High yield Tax Exempt with it. That's because I have a plan for how my investments should be structured, and High yield Tax Exempt isn't in it. What does your plan call for?
Topic Author
coldman
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Re: Paying off a rental house

Post by coldman »

My problem is I have too many plans. Vanguard offered me another free financial planning consultation. I should probably take them up on the offer. I would like to find a the best tax efficient portfolio that will also have a reasonable return. Please share your suggestions. Other than the mortgage I have not debt. My 6 month emergency fund is good to go, I am 37 and with money to invest, but the taxable account bit scares me. That is where I am at. Taxable investing seems to be the next step. My 401k and Roth IRA have been maxed out. Please give me some suggestions.
porcupine
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Re: Paying off a rental house

Post by porcupine »

coldman wrote:My problem is I have too many plans. Vanguard offered me another free financial planning consultation. I should probably take them up on the offer. I would like to find a the best tax efficient portfolio that will also have a reasonable return. Please share your suggestions. Other than the mortgage I have not debt. My 6 month emergency fund is good to go, I am 37 and with money to invest, but the taxable account bit scares me. That is where I am at. Taxable investing seems to be the next step. My 401k and Roth IRA have been maxed out. Please give me some suggestions.
You might want to start a new topic. Folks visiting this thread will likely be thinking about your original question.

On to that one, I am assuming that you have either paid off your primary residence or you are renting because the conventional wisdom is to pay off the primary residence first. However, if the disparity in the interest rates is big (i.e., primary is lower), then it might work out to pay off the rental. Also, if you are planning to move out of your primary residence and converting it to a rental as well, it might just be strict comparison of the interest rates. But all those are moot if you already don't have a debt on your primary residence. And if I were you, the 5.85 rate (which would be a low 4.xx or high 3.xx even allowing for after-tax rate) is likely high enough for me to consider paying it off.

- Porcupine
malloc
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Re: Paying off a rental house

Post by malloc »

With an 800 credit score, rates on a cash out refi for an income property are 3.5% , plus/minus a varying amount of money which changes from day to day. As I write this it is with them paying you 2000.

Have you considered a refi?
Grt2bOutdoors
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Re: Paying off a rental house

Post by Grt2bOutdoors »

What is your current tax bracket? I'm surprised no one mentioned this, but if you are in the 200-250 bullseye for next year, the new tax law will ding you an extra 3.8% on unearned income - taxable dividends, taxable interest, *rental income. If you pay off the mortgage, suddenly your pre-tax income goes up - what will be the net effect to your taxes?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
AV8
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Re: Paying off a rental house

Post by AV8 »

I'm in a very similar situation. 100K loan on rental property, seven years into 15 year mortgage, rent covers the mortgage/HOA. Based in large part from readings/discussions on this forum, I've paid down 50K of the mortgage from my taxable account over the last few months. Rate 5.125% - I subscribe to the "no better rate in the bond market" philosophy and currently prefer the bird in the hand v. two in the bush re: equity discussion.

One piece I'm having trouble reconciling in my mind is the many posts I've read stating the "value" of a mortgage when it comes to taxes. I'm cusping on the 25% bracket this year and - given my payoff plan for the rental - will find myself solidly within the 25% bracket next year (if they stay the same). But in no uncertain terms do I see any value in buying quarters for dollars.

Does anyone have a specific example of when a primary/investment mortgage is worth more than the annual interest expense? As I see it, even the cash out refi option noted previously would result in fewer total dollers in my pocket v. full payoff.
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