There’s a great discussion happening on the BiggerPockets Forums about whether it is better to pay off the rental properties you own or take your income and reinvest it in new properties. I’ll share some of the thoughts from the thread, and I encourage you to jump in and continue the discussion, or leave your comments below.
You are best served to apply the appropriate amount of leverage in your RE investments.
While owning free and clear provides more cash flow, it actaul does not. What it does provide is a return on your cash invested and applying l;everage almost always makes your ROI better.
One of the greatest advantages to RE investing is leverage and the second is the tax deductions (depreciation). With leverage, you can control more properties which provide more tax deductions. While owning free and clear offers safetly in not having a mortgage payment, you have a lot of cash tied up in the walls
The great thing about rentals is, assuming they are cashflowing and not a money pit for you, the renter will pay off your mortgage in due time. You can pay down the mortgages until you own them, then cashflow a certain amount per month, or use that cash to leverage another 2-3 properties.
All depending on your goals.
It might help to keep in mind a simple fact: Mathematically, paying down a loan which bears interest at X% is identical, in terms of net economic value, to investing that same amount at X%.
Putting it another way, if you have Y dollars available to employ somewhere, just think of ‘loan paydowns’ as one more investment possibility, among your other options.
Suppose, for example, you could either use your discretionary Y dollars to pay down a 6% loan, or could instead deploy the Y dollars into an 8% investment. Paying down the loan is economically equivalent to investing at 6%, making it (obviously) the inferior choice in this particular fact set.
Without a doubt, you MUST also evaluate other factors. You might, for example, want to de-leverage your personal balance sheet for other reasons (risk; too much leverage; anticipated future financing), and this might override the simple “rate of return” rule of thumb I’ve described.
Nevertheless, it’s a simple, and usually valuable, rule of thumb when evaluating your options.
I like both. Buy more properties AND pay them off. A lot depends on risk level you are comfortable with, current tax situation, age, employment, job security and attitude of spouse. All of these would make a difference in what I would reccommend to you. I have free and clear, but I also have some highly leveraged properties to help offset the income tax consequences.
Again, chime in with your thoughts here or below.
Photo Credit: Jim Linwood