Story first appeared on usatoday.com.
Q: I'm 59 years old. My retirement savings includes a vacation
rental property worth $500,000 without a mortgage. It takes in $20,000 a
year. I also have three mortgages that total $350,000. One is my
primary residence, and two others take in monthly rent of $1,500, which
is equal to the monthly mortgage. Should I sell the $500,000 property
to pay off the mortgages? Or should I take out a loan on that property
to pay off the mortgages? Any reason not to rely on property for my
A: Congratulations in building a portfolio
of properties that appears to be generating a nice positive cash flow.
As the latest real estate downturn has proved, relying upon any one
asset class is quite risky, and you hopefully have other assets besides
Social Security to support you in retirement.
You do not mention
the interest rates on the mortgages. Most likely your existing
mortgages are a lot higher than the current national average of below
4%, which would suggest refinancing. Assuming you have a high enough
credit score, refinancing the package of investment properties so that
you only have one property with a mortgage would be ideal. Moreover,
the current cheap money environment would most likely lower the total
costs in any case.
Although it's not clear how long you have
owned the vacation rental property, it is generally not an ideal time to
sell. Prices have gone down significantly in many parts of the country
and you may not get a good return on your investment. Cheap money vs.
low selling prices supports the refinancing approach.
properties would then be generating income to pay off the new mortgage.
Your annual rental income of $38,000 ($20,000 plus $18,000) should pay
off all mortgages within 15 years. Obviously the details of your loans,
such as your interest rates, length of mortgages, prepayment penalties
and loan-to-value ratio, will determine the exact payoff time and the
amount you can use to fund your retirement living.
you know, there will always be down time for rental property when it is
vacant as well as unexpected costs for repairs and upkeep. So minimizing
the fixed mortgage expense works in your favor as you approach
retirement. Assuming you are managing the properties, rental property
can provide a nice income as well as a hedge against inflation as most
properties are at a low value today.
If you have not done so,
you might also consider putting the properties inside of a legal entity
(such as a limited liability company, or LLC) to protect yourself in the
event of problems. Providing a legal envelope protects your other
assets in the event a tenant or others sue you for a fall or other
claim. An umbrella insurance policy will help pay for the attorney to
There are many unknown factors, such as your income,
expenses and other issues to consider, so consulting a knowledgeable
financial adviser would be helpful in evaluating your decisions.