Making higher payments on primary residence mortgage or rental?
You're in the same situation I'm in (bought new house, didn't sell old house, now renting out old house). Assuming that everything is stable, right now I'd do something besides pay down your new mortgage. If you pay down the mortgage at your old house, that mortgage payment will go away faster than if you paid down the one on the new house.  Then, things start to get fun.  You then have a lot more free cash flow available to do whatever you like. I'd tend to do that before searching for other investments.  Then, once you have the free cash flow, you can look for other investments (probably a wise risk) or retire the mortgage on your residence earlier. "I'll assume you live in the US for the start of my answer - Do you maximize your retirement savings at work, at least getting your employer's match in full, if they do this. Do you have any other debt that's at a higher rate?  Is your emergency account funded to your satisfaction? If you lost your job and tenant on the same day, how long before you were in trouble?  The ""pay early"" question seems to hit an emotional nerve with most people. While I start with the above and then segue to ""would you be happy with a long term 5% return?"" there's one major point not to miss - money paid to either mortgage isn't liquid. The idea of owing out no money at all is great, but paying anything less than ""paid in full"" leaves you still owing that monthly payment. You can send $400K against your $500K mortgage, and still owe $3K per month until paid. And if you lose your job, you may not so easily refinance the remaining $100K to a lower payment so easily.  If your goal is to continue with real estate, you don't prepay, you save cash for the next deal. Don't know if that was your intent at some point.  Disclosure - my situation - Maxing out retirement accounts was my priority, then saving for college. Over the years, I had multiple refinances, each of which was a no-cost deal. The first refi saved with a lower rate. The second, was in early 2000s when back interest was so low I took a chunk of cash, paid principal down and went to a 20yr from the original 30. The kid starts college, and we target retirement in 6 years. I am paying the mortgage (now 2 years into a 10yr) to be done the month before the kid flies out. If I were younger, I'd be at the start of a new 30 yr at the recent 4.5% bottom. I think that a cost of near 3% after tax, and inflation soon to near/exceed 3% makes borrowing free, and I can invest conservatively in stocks that will have a dividend yield above this. Jane and I discussed the plan, and agree to retire mortgage free." A lot depends on whether your mortgage payments are interest only or 'repayment' and what the remaining term is on each of the mortgages.  Either way I suspect that the best value for the money you put in will be had by making payments to the larger, newer mortgage.  This is because the quicker you reduce the capital owed the less interest you will pay over the whole term of the mortgage and you've already had the older mortgage for sometime (unless you remortgaged) so the benefit you can get from an arbitrary reduction in the capital is inevitably less than you will get from the same reduction in the capital of the newer mortgage.  Even if the two mortgages are the same age then the benefit of putting money into the one on the new house is greater due to the greater interest charged on it. Pay down the lower balance on the rental property. Generally speaking, you are more likely to need/want to sell the rental house as business conditions change or if you need the money for some other purpose. If you pay down your primary residence first, you are building equity, but that equity isn't as liquid as equity in the rental. Also, in the US, you cannot deduct the interest on a rental property, so the net interest after taxes that you're paying on the rental narrows the gap between the 4.35% loan and the 5% loan. One advantage of paying down your primary residence is that you can refinance it later for 10-15 years when the balance is low. Refinancing a rental is much harder and interest rates are often higher for investors. This also assumes that you can refinance for a lower rate in the nearest future. The question is really which would you rather sell if you suddenly need the money? I have rental properties and i'd rather move myself, than sell the investments (because they are income generating unlike my own home). So in your case i'd pay off primary residence especially since the interest is already higher on it (would be a harder decision if it was lower)
If you are able to buy a 150K home for 50K now that would be a good deal!  However, you can't you have to borrow 100K in order to make this deal happen.  This dramatically increases the risk of any investment, and I would no longer classify it as passive income.   The mortgage on a 150K place would be about 710/month (30 year fixed).  Reasonably I would expect no more than 1200/month in rent, or 14,400.  A good rule of thumb is to assume that half of rental revenue can be counted as profit before debt service.  So in your case 7200, but you would have a mortgage payment of 473/month.  Leaving you a profit of 1524 after debt service.  This is suspiciously like 2K per year.  Things, in the financial world, tend to move toward an equilibrium. The benefit of rental property you can make a lot more than the numbers suggest.  For example the home could increase in value, and you can have fewer than expected repairs.  So you have two ways to profit:  rental revenue and asset appreciation. However, you said that you needed passive income.  What happens if you have a vacancy or the tenant does not pay?  What happens if you have greater than expected repairs?  What happens if you get a fine from the HOA or a special assessment?  Not only will you have dip into your pocket to cover the payment, you might also have to dip into your pocket to cover the actual event! In a way this would be no different than if you borrowed 100K to buy dividend paying stocks.  If the fund/company does not pay out that month you would still have to make the loan payment.  Where does the money come from?  Your pocket.  At least dividend paying companies don't collect money from their shareholders. Yes you can make more money, but you can also lose more.  Leverage is a two edged sword and rental properties can be great if you are financial able to absorb the shocks that are normal with ownership. I used to own a few investment properties, so I'm pretty familiar with this.  As MrChrister mentions, lenders see investment mortgages as higher risk. People who fall into financial trouble are much more likely to let their investment properties go than their personal residence.  Consequently, the interest rates and downpayment requirements are generally higher. Typically a mortgage for an investment property will require 20% down, vs. as low as 3-5% down for a personal residence.  With excellent credit and some shopping around, you could probably do 10% down.  Interest rates are typically about a half-percent higher as well. You'll also find that the more investment properties you have, the harder it becomes to finance new ones.  Banks look at debt-to-income ratios to determine if you are over extended.  Typically banks like to see that your housing payments are less than 20% or so of your income.  However, with rental properties, housing payments generally account for far more than 20% of your rental income.  Other income you have can offset that, but after buying 2-3 houses or so, your DTI generally creeps into the range where lenders are uncomfortable lending to you anymore.  This is why you'll find that many rental properties are bought on land contracts with owner financing rather than with mortgages. "A primary residence can be an admirable investment/retirement vehicle for a number of reasons. The tax savings on the mortgage are negligible compared to these.  A $200,000 mortgage might result in a $2000 annual savings on your taxes -- but a $350,000 house might easily appreciate $20,000 (tax free!) in a good year. Some reasons to not buy a larger house. Getting into or out of a house is tremendously expensive and inconvenient.  It can make some life-changes (including retirement) more difficult. There is no way to ""diversify"" a primary residence.  You have one investment and you are a hostage to its fortunes.  The shopping center down the street goes defunct and its ruins becomes a magnet for criminals and derelicts?  Your next-door neighbor is a lunatic or a pyromaniac?  A big hurricane hits your county?  Ha-ha, now you're screwed.  As they say in the Army, BOHICA: bend over, here it comes again. Even if nothing bad happens, you are paying to ""enjoy"" a bigger house whether you enjoy it or not.  Eating spaghetti from paper plates, sitting on the floor of your enormous, empty dining room, may be romantic when you're 27.  When you're 57, it may be considerably less fun. Speaking for myself, both my salary and my investment income have varied wildly, and often discouragingly, over my life, but my habit of buying and renovating dilapidated homes in chic neighborhoods has brought me six figures a year, year after year after year. tl;dr the mortgage-interest deduction is the smallest of many reasons to invest in residential real-estate, but there are good reasons not to." Getting the first year right for any rental property is key. It is even more complex when you rent a room, or rent via a service like AirBnB. Get professional tax advice. For you the IRS rules are covered in Tax Topic 415 Renting Residential and Vacation Property and IRS pub 527 Residential Rental Property There is a special rule if you use a dwelling unit as a personal   residence and rent it for fewer than 15 days. In this case, do not   report any of the rental income and do not deduct any expenses as   rental expenses. If you reach that reporting threshold the IRS will now expect you to to have to report the income, and address the items such as depreciation. When you go to sell the house you will again have to address depreciation. All of this adds complexity to your tax situation. The best advice is to make sure that in a tax year you don't cross that threshold. When you have a house that is part personal residence, and part rental property some parts of the tax code become complex. You will have to divide all the expenses (mortgage, property tax, insurance) and split it between the two uses. You will also have to take that rental portion of the property and depreciation it. You will need to determine the value of the property before the split and then determine the value of the rental portion at the time of the split. From then on, you will follow the IRS regulations for depreciation of the rental portion until you either convert it back to non-rental or sell the property.  When the property is sold the portion of the sales price will be associated with the rental property, and you will need to determine if the rental property is sold for a profit or a loss. You will also have to recapture the depreciation. It is possible that one portion of the property could show a loss, and the other part of the property a gain depending on house prices over the decades. You can expect that AirBnB will collect tax info and send it to the IRS As a US company, we’re required by US law to collect taxpayer   information from hosts who appear to have US-sourced income. Virginia will piggyback onto the IRS rules. Local law must be researched because they may limit what type of rentals are allowed. Local law could be state, or county/city/town. Even zoning regulations could apply. Also check any documents from your Home Owners Association, they may address running a business or renting a property.  You may need to adjust your insurance policy regarding having tenants. You may also want to look at insurance to protect you if a renter is injured. The simple answer is to get a residential mortgage first, and once you have secured the loan, do whatever you want.  The bank only cares about what risk they are taking on the day of closing and won't care afterwards so long as you pay the mortgage on time. Residential mortgages are going to give you better rates than rentals, generally. If the mortgage is against your primary residence, then the only part that's (probably) deductible is the mortgage interest.  If you pay down your loan principal faster, then all other things being equal you'll get less of a tax deduction, because you'll accrue less interest in the months after you throw a big chunk at the principal (the principal is less, so the interest is less). But don't worry; that's all right!  It's a tax deduction, so your actual tax savings will be only a fraction of the interest you paid, so at the end of the day you'll be saving yourself money. How is the current mortgage payment broken out? I have a mortgage on a rental property with a payment of $775, but $600 is principal. If I were at breakeven on a sale or a bit underwater, I'd be better off just holding still, the tenant paying the loan down over $7000/year.  You question is a good one, but a good answer would require more details. A bank may not agree to a short sale on an investment property, especially since there's a second property to go after. I'm not making a judgement, just saying, it's not a slam-dunk to just short sell it. This is almost exactally what the BK attorneys I work with have always said.  If you have trouble offer a larger down payment. . . . that is the point of the down payment after all.  You do sometimes have better luck with renting from individual people rather than larger corporately owned rentals.    There are options out there.