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My rental apartment at this point is making me a 5% ROI per year. My bank is currently charging me a 5.87% Interest rate on the mortgage, which means I am putting from my pocket to keep this apartment every year.

Not including my retirement, I want to use my savings to pay out the apartment. At this point my savings are not making more than 2% ROI on their current instruments.

The option of selling the apartment is not available at the moment since there is a bad economic situation in the area, especially the housing market.


UPDATE 1:

After reading through the answers and comments I went ahead and did my calculations again, and I don't think I am doing as well as I thought with this property. I completed two calculations, (1) Rent from Income minus Expenses including mortgage and (2) assuming I paid off my mortgage, Rent from Income minus expenses by cash to pay mortgage

  1. On the first scenario, the calculation came out to be -27.80% ROI a year. Of course I am not counting that this is paying off my principal (which I have no idea how to include in the calculation)

  2. On the second scenario, the calculation came out to be 5.74% ROI a year. That is (Income - expenses / cash investment to pay off debt)

From the first calculation I got that if I reduce my monthly mortgage payment 32% then I will be breaking even, which at that point I can either increase rent. The problem is this damm banks are charging a fortune to refinance my house. 5K is the least expensive quote I have.

  • Personally, I would keep 6 months worth of living expenses in savings. If you have enough after that to pay off the apartment, I would definitely do it. – Kevin Aug 29 '12 at 14:25
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The first question I'm compelled to ask - is a refinance possible? I pay 4-3/8% on my rental, and it was the bank that came to me offer to refi. I reminded them that when I got the first loan with them, I lived there, but it's a rental. Yup, 4-3/8%.

A 1.5% reduction should go a long way to making the rental return better.

Next, I'm curious how exactly you calculated the 5% ROI. Is this after tax? Are you accounting for the principal being paid down every year?

Next, are you funding your 401(k) or other retirement accounts? Is the 401(k) matched by your company?

The choice to take savings and send it to the mortgage is a tough one. I chose to do a similar thing on my home mortgage, paid down a huge chunk, refied to lower my rate, and the result was to drop my interest burden by nearly half. The risk, of course is leaving yourself with too little cash. And that's a risk that only your gut can tell you if it's worth it.

Edit - The rate of return on the house itself is independent of your decision here. You're not looking to buy or sell the house, just comparing the mortgage rate to other rate of return on your cash. Look at it this way, the house return could be zero, or it could be 10%, but you still have a near-6% mortgage, and near 0% return on your cash.

The house ROI would come into play if the question were a different one, a decision to sell it, or invest in a second one.

  • Thanks Joe for your response. Refinancing is possible just a bit of a logistical hassle. I could reduce 1.5 to 2% if I refinance, that will cost me about $5.5K of closing costs. The ROI calculation is rent obtain minus expenses divided by value I paid for Apartment (not including interests). For example if I get 9,000 a year net / 150,000 = 6% ROI. I am not taking in account the principal being paid down. I am funding my 401K 100% to the max limit. Thanks again for helping out on this forum. – Geo Aug 26 '12 at 18:43
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    OK, Geo. Keep looking for a better refi deal. It's worth calling the current holder, and just spending a bit of time looking around. $5K is crazy. Principal paydown improves bottom line, don't ignore it. – JoeTaxpayer Aug 26 '12 at 18:55
  • @Geo, if you are trying to compare your ROI to your interest rate on the mortgage, shouldn't you be taking your net income and dividing it by the current outstanding mortgage amount, as this will give you a direct comparison to see if you are negative or positive cash flow with the property. – Victor Aug 27 '12 at 0:19
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    Another possible option is raising the rent. if you're not living in the apartment, your sole benefit is the rent money, and if you're upside-down on cost-benefits, usually you can increase benefits as well as reduce costs. So, I agree you should look into the refi, but in addition, also consider raising rent to match your ROI to your current interest rate, so if and when you get a rate reduction you can pocket even more of the difference. – KeithS Aug 27 '12 at 16:25
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    Are you calculating ROI on the price the apartment closed at or on the amount of actual dollars you paid? In your example above, if you put only 50k cash into it, then without considering equity, ROI is 9k/50k which is 18 percent. - 6% for mortgage interest (which should be declining as you pay it down) it still leaves 12% net. – Chris Cudmore Aug 27 '12 at 20:34

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