The rental income is $1,050 per month. It covers the mortgage, and if I work to pay off the second loan, I could probably have the first mortgage paid off in even less than 15 years. The bank also gave me a scenario for a 30-year mortgage, but paying off the loan faster makes me happy inside!
What do you think? Is this a good deal?
There are two schools of thought when it comes to paying down a rental property.
Some investors want to pay off rental properties as quickly as possible because after the property is paid off, they’ll have additional cash flow, which they can use as income or to make repairs on the property or to purchase additional properties.
But if you want more free cash each month now, or if you need additional flexibility with payments, or if you want to have cash on hand to buy other properties, then choosing a longer-term mortgage might be the smarter move. Yes, you’re on the hook for more years, but you’re paying less each month, which allows you to do something else with the cash now, instead of waiting until the loan is paid off. Also, if you’re thinking that you will sell the property before the mortgage is paid off, then taking the longer-term mortgage may make more sense.
The question is: Which scenario is closer to your true short- and long-term goals for the property and your personal finances?
With the 15-year-mortgage scenario, your income from the property will just pay the mortgages, taxes and insurance. That leaves nothing left over for the regular maintenance and upkeep of the property. That cash will have to come directly out of your pocket.
Every time the tenant turns over, you’ll have to at least repaint some or all of the property, shampoo the carpets and make repairs. How much will that cost, and how will you fund that for the next 15 years? In that period, you’ll also have some expensive repairs and replacements, including possibly having to replace the roof, appliances and mechanical systems.
While we’re sure you’ll get more money as rents go up, we’re guessing that the costs to repair these items will rise as well. So you’re doing a heck of a lot of work and spending some (or a lot of) cash out of pocket, all to get the property paid off in 15 years. At that point, you’ll have maybe $1,500 per month in rent (or $18,000 per year, which seems reasonable given inflation).