What’s Better Financially: Paying Off Your Home Mortgage or Investing That Money?

by | BiggerPockets.com

“…if your house is your largest investment, you’re in trouble.” —Robert Kiyosaki

My household has finite income.

It turns out this is a common problem. When you have a limited amount of money coming in each paycheck, it can be very easy to have conflicting financial goals.

My wife and I find ourselves in this situation. Here are our top two long-term financial goals:

  1. Achieve financial independence through property investment.
  2. Pay off our personal home.

These two goals create tension, competing for every extra dollar that we can make available. It’s easy to have an “I want it all” attitude, but life has a way of forcing you to prioritize. Which of these goals should get the focus of our attention and money?

I’ve had this discussion numerous times with friends and colleagues. Across the board, the priority for most people is to pay off their home. Other than some retirement account contributions, most people plan to begin investing only after they are mortgage-free.

Is this the best way to approach this problem?


Risk and Reward

I understand the logic. If my home is paid off, then I’ll have more money available to invest. There’s also the risk factor: On the one hand, if I lose my job and my home is not paid off, then I could lose my home. On the other hand, if I lose my job and my home is paid off, then it’s just my investments that will suffer.

Related: Why a 30-Year (NOT 15-Year) Mortgage Gives You a Better Shot at Building Wealth

In a previous article, I explained how my wife and I followed the BRRRR strategy to purchase three rental properties and put all of our investment money back into our bank account. The purpose of the article was to explain how the BRRRR strategy works, regardless of how you obtain the money for your deposit and rehab costs.

However, I received a number of questions asking me about the way we actually obtained our initial deposit.

In our case, we got the money to invest in rental properties by refinancing our personal home. This is often referred to as a Home Equity Line Of Credit or HELOC. By doing this, we actually chose to get further away from the goal of paying off our home in order to purchase rental properties—the exact opposite decision that most people make. As was pointed out to me, this also means that we were paying interest on the money that we used for our deposit, as well as the money that we borrowed from the bank for the mortgage on the rental property. This is true.

But is it a good idea?

The fact that the BRRRR strategy eventually returns your money to you means that you’re only paying interest for a period of time. But even if this wasn’t the case, I would still do it. Why?


The Hidden “Mortgage Tax”

First, let me ask a question: If you have a mortgage on your personal home, is there anything that you can do with the money from your paycheck that doesn’t come with an interest payment attached?

If I have a mortgage on my home and I choose to spend $5 on a coffee, that is $5 that I could have paid toward my home mortgage, right? So really, I am borrowing the money for the coffee and paying interest. That sucks! In fact, this “mortgage tax” applies to everything you spend money on, including food and clothing, piano lessons for your kids, and popcorn at the movies.

It may not seem like much on a $5 coffee. But in reality, all of your paycheck that isn’t going toward paying down your mortgage is being charged interest. This really adds up. 

This line of thinking supports the theory that paying off your home mortgage should be your top priority. I think that this is what drives the majority of people to make this their top priority.

What Are You Planting?

But let me ask another question: If your plan is to grow a forest, would you plant a single tree and wait for it to reach maturity before planting a second tree? Of course not. Plant as many trees as you can effectively water. Right?

Related: Are Extra Mortgage Payments Worth It? A Look at the Numbers

It turns out that there is an exception to the “mortgage tax” rule: Money that earns a higher return than you are being charged on your mortgage is effectively exempt to this hidden tax.

Investments require time to grow. Whether you’re buying properties or investing in the stock market, it takes time to build real wealth. Most people who want to pay off their home before investing seriously simply can’t visualize the financial forest that they haven’t yet planted; they can’t see the forest for the trees.


Meet Adrianna and Dolores

Here’s a little thought experiment that presents one way of thinking about it:

Adrianna’s goal is to achieve financial independence. She sells her home and moves her family into a rental. Taking the equity from the sale of her home, she invests it in assets for the next 10 years. She implements a plan similar to the BRRRR strategy; after 10 years, she has established an annual passive income from her assets equal to the income from her job. Adrianna is now financially independent.

Financial independence means that Adrianna has options. She can buy a house if she chooses and pay the mortgage using passive income. It doesn’t really matter how long it takes to pay it off since she doesn’t have to worry about losing her job—she doesn’t rely on her job for income. She can also choose to continue working, pursue other interests, such as starting her own business, or just put her feet up and relax. Adrianna gained nothing financially from paying rent for 10 years, but she’s now financially free. 

Dolores thinks financial independence would be nice, but can’t imagine where she’d find the money to invest. She takes those same 10 years to pay off her home. After 10 years, she is mortgage-free and decides that it would be good to start investing. She then starts investing in assets. After another 10 years, she has established an annual passive income from her assets equal to the income from her job. Dolores is now financially free.

It took Adrianna 10 years to achieve financial independence, while it took Dolores 20 years to achieve the same goal—everything else being equal.

Pick a Strategy

The exercise shows two ends of the spectrum, given the same two goals: home ownership and financial independence. Obviously, there’s a lot of room to flex in between the two extremes. The correct answer for you might be somewhere in between. But at the end of the day, each dollar you earn can only be applied to one or the other. You must decide what you want to achieve.

In reality, if it is going to take you 20 or more years to pay off your home before you even begin to start investing, it might be worthwhile to reconsider your strategy.

The argument isn’t about math. It is qualitative rather than quantitative in nature. It’s about opportunity cost.

The way I see it, there are four ways to approach the problem:

  1. Don’t own a home at all. Rent a home and invest until you are financially independent.
  2. Buy a home that costs you less than you would pay in rent. You need a place to live, but if you’re paying less than what it would cost you in rent, then you effectively get to own the house for free.
  3. Pay off your home first. Whatever size home you have, pay it off before you invest. This might be effective if you start very young and pay it off very quickly, leaving you many mortgage-free years to invest.
  4. Buy a home for your family. But use this information as a guideline—purchasing more investments is always the higher priority.

Our family is actually using approach #4. We have looked into a number of options, including house hacking (a variant of approach #2). However, we have chosen to have a home in which to raise our family. We do this knowing the risks involved with having a mortgage on our home. And we also do it with an eye always to building our investment portfolio as the higher priority. This is why we have chosen previously to use home equity to invest in property—and why we would do it again to continue to grow our portfolio.


Protect Your Strategy

I’m not telling you which approach is best for you. In my opinion, getting a HELOC to spend the money on just about anything other than a solid investment is a bad idea. If you do decide that a HELOC is the way to kickstart your investment portfolio, remember this: All of the normal rules of budgeting apply. You need to be able to afford to make the additional payments on your home mortgage. And you still need to have 10 percent or more of your net income left over for future investing.

The key to accepting the risk involved with not having your home paid off is to mitigate it. A multi-factor approach can be effective:

  1. Establish an emergency fund. Most financial advisers recommend having an amount of money set aside equal to 3-8 months of expenses. Having such a fund buys you time. In the event that your lose your job, you have several months to pursue any number of solutions. You might sell your home, find a new job, sell an investment property to pay down your home mortgage, etc.
  2. Having various forms of insurance also helps. This may include life insurance if you have a partner or dependents, income protection insurance in case you become unable to work, or medical insurance to ensure that you don’t get financially sunk by illness or injury.
  3. Understand how to get your investment money back. You can reapply it to your home mortgage until you’re ready to invest again.

Whatever strategy you choose, make sure you understand both the risks and the rewards. Take steps to compensate for those risks. Then start planting a forest of wealth for your future.

We’re republishing this article to help out our newer readers.

What’s more important to you? Which strategy are you using?

Let’s discuss in the comments below!

About Author

Brad Lohnes

In 2013 Brad awoke from lifelong financial slumber and took responsibility for his family’s financial future. His primary vehicle for wealth-building is buy-and-hold real estate. He is passionate about financial education and helping others learn the tools they need to take control of their money. Brad believes there is nothing more empowering than self-reliance.


    • Brad Lohnes

      Hi, David. That’s right. I think with real estate the key is to first understand how things work, and then figure out the actual impact. In this case, for us, it’s the recognition that wealth comes from having investments that have time to grow. Cheers.

  1. Jonathan Watson

    I’m in the same boat as you, Brad. We have equity in our home, and are using our heloc to invest.

    I live in Southern CA, so my concern lies with the danger of a downturn, and not having the equity to continue to invest. I just wish I lived somewhere where the equity I have could be used more aggressively in finding multi-family investments. I feel like I really have to continue to find real estate outside of CA.

    • Brad Lohnes

      Hi, Jonathan. A downturn is always a possibility. To me, the issue there is equity. I talk about using equity to continue investing, but you need a certain amount of equity as a buffer. There’s no “correct” amount, since market fluctuations are unpredictable. But I wouldn’t want to ever leave myself with less than 20% equity in a home or rental. That at least gives me some buffer. Then, over time, we will be paying down the mortgage so there will be more equity in the future.

      Also – using equity is a “kickstarter” type of approach. If we are setting aside 10% or more of our income for investing, then eventually we should have enough for another deposit.

  2. Dan Arcaro

    Interesting post ! I thought it was a good idea also to pay down my home mortgage as quickly as possible. As a result, I have alot less cash that i could have invested in other properties. I’d be curious to hear the different strategies of people and also the positives and negatives of an equity line .

    • Brad Lohnes

      Hi, Dan. To be honest, this took awhile for me to get my head around. Paying off the home mortgage is almost instinctual. But I’ve see the positive effect of prioritizing investment.

      If you think about it, when do I want my home to be paid off (other than “yesterday”)? Well, about the same time that I have enough passive income to reach financial independence would be ideal as it would reduce the amount of passive income that I actually need.

      The real threat is waiting another 20+ years to begin investing. I could totally support a strategy of “blitzing” the home mortgage and trying to pay it off in 5 years or so. But there are only so many “springs” for planting. 🙂

    • Great response Dan: Being old school- I always set my mortgages to be short term commitments- because in my personal situation, I was self employed- and if I lost my ability to produce income- ( even for a short time) I could of been in trouble quick. Every investor must address their own financial threshold and not adhere to set patterns other set as guidelines. This is so important because everyones situation is different. If I lose 50 thousand tomorrow morning by noon on a property it does not ruin my portfolio wherein it might destroy another persons world in a heartbeat.

    • Chad Carson

      Agreed, Michael. Risk is the harder part of the equation to quantify. But option #4 of leveraging up your residence has the most risk. Because until your investments are paid off, all of your equity is heavily leveraged and a downturn could wipe it out.

      I was personally fine with taking that chance in my case. But everyone has to make that choice. Brad did a good job of explaining the different options in this article.

      I personally look at all of my wealth building in stages like climbing a mountain. I don’t want to climb non-stop to the peak of the mountain (financial independence). That is exhausting and too risky. Instead, I like to climb for 5-10 years, reach a plateau of equity and income, take a break or change strategy. Then climb again. Your priorities might change at each stage. For me it has been to reduce risk at the cost of growth (like paying off your residence). But that’s ok once you’re higher up the mountain.

      Thanks for the thoughtful article, Brad!

      • Brad Lohnes

        Michael – yes, risk is always part of the equation. That’s why I tried to explain how I am mitigating the risk. Really, the point of the article is that a lot of people don’t consider the risk of NOT investing.

        Chad – that’s a good point. I think that market cycles encourage this “plateau” approach. We are currently on such a plateau. My local market is very hot, which means that the tide is in on equity, but buying is bad. So now we ARE focusing on paying down the home mortgage. But only until we start seeing good deals. Then our strategy will reverse, because, as pointed out in the article, investing is the priority.

        As I mentioned in a comment above, and should have mentioned in the article – I wouldn’t want to leverage below 20% equity to at least provide a bit of a buffer. We actually went to 10% the first time but we were lucky – the market was moving in the right direction. I wouldn’t go that low again. (Changes in local laws prevent it now anyway).

        • Brad Lohnes

          Hi, Victor. I mean that I would prefer to have at least 20% equity in my home. I completely understand that there are options and ways to have less than that and it’s worth discussing with an adviser. The main problem with having lower equity is that if property values decline then it can be difficult to refinance if you want to for any reason. I’m not 100% on the laws in the US, but I know that banks hold loans against collateral – home loans hold the property as collateral. If the market takes a downturn and you end up owing the bank more than the property is worth, then they don’t have sufficient collateral. I know that here in NZ, the bank can call the loan at any time and this is the situation when they might be inclined to do so. The more equity you have, the more resilient you are to market downturns.

      • Hey Brad, good post. I am just getting started in real estate investing. We have a home that has about 60 the 70K, and we really have no cash to invest into flipping houses. Our ultimate goal is to invest in rentals for the passive income, but we have to start with either wholesaling or flipping first. My question is, if we did a HELOC on the home to give us money to do a couple of flips to get started, should I not be worried about losing the home? That is the only thing that has kept me back so far, is the fact that I could lose the home. Everyone tells me don’t worry about that, that whatever you do in life involves risk. And they say jump on it, don’t think about it, the money will be there if you need it, you just have to find it. That doesn’t help for the fact that I am still concerned. What is your thoughts on that? Also, another option would be to sell our home, and use the equity to put toward a flip with a partner. Would that be a better option then doing a HELOC in your opinion? I know we would have to turn around and purchase another home, but we would get a lesser value home which would be hopefully at least a third of what our house is now. I would really be trying to save money on her payments. We haven’t really high payment on a house, so I would be trying to get it down to at least half a lot for paying now, in order to invest the rest.

        • Laura Verderber

          How about you take a hard money loan to do flips? That way you won’t risk your house and still have the equity as a backup. The drawback is that you will pay more money toward interest.

  3. Rainiel De La Nuez

    I really like the approach and the analogy of planting a forest; It makes a lot of sense! I am wondering what you think about the current situation I find myself in today. I recently refinanced my home for a significantly lower interest rate that involved me taking a few steps back in order to go forward again. Long story short, I have the opportunity to pay a good chunk of money back to the loan to decrease the steps taken backwards. However, I also have the opportunity to hold on to that chunk of money and purchase an investment property in the near future. The fear is that in a few years my current home maybe me undervalued and I am left with a higher balance. Your article does give good insight on choosing a path that works for you based on ones goals. But I guess I am wondering what you would do.

    • Brad Lohnes

      Hi, Rainiel. Before saying anything, it’s important to note that I’m not a financial adviser. I’m a private investor, sharing the lessons that I’ve learned along the way both through extensive reading and personal experience. I can’t comment on anyone’s specific finances.

      Given that disclaimer, the correct answer is always: it depends. If you don’t have a lot of equity currently, then you could be exposed to a downturn in property prices. Also, if you’re struggling to cover the mortgage then it would be good to reduce the balance in order to reduce your payments. I personally wouldn’t go below 20% equity. But you could also check what kind of negative swing properties have taken in the past in your area – what kind of worst-case scenario are you trying to mitigate?

      Finally, the point of the article is the principle: if you don’t invest early and often then it’s pretty difficult to build wealth. A lot of people over-extend on their home mortgage which is why they then can’t afford to invest. If this is the situation, then downsizing is an option. 🙂

  4. Jason Trupe

    Great article, thanks for posting! I have recently found myself in this same dilemma. I currently have one investment property and would like to acquire more. For the past year we have been aggressively paying our mortgage down and have knocked several years off the term of the loan. If I were to instead invest that money I could acquire multiple properties in the time it would take to pay off the house. I guess my concern is having finance options limited due to having a mortgage payment.

    • Brad Lohnes

      Hi, Jason. Obviously it depends on your own situation. As I stated above, I’m not a financial adviser, just a private investor. As a general rule, it’s good to build equity in your home and use it to expand your investment portfolio. If you have too little equity, as others have pointed out, you can be exposed.

      But you raise a good point – at some point, having a home mortgage can make it harder to get lending for an investment property. Banks and other lenders might see you as “over-extended” due to the amount of debt that you’re carrying. They might be right. This is always tricky because if your investments are cash-flowing then each one can support itself stand-alone and you’re not nearly as extended as banks like to think. Nevertheless, if you’re in the situation where you can’t get lending, then it might be a good time to reverse the trend and focus on paying down debt on your home.

      At the end of the day, the ideal situation is NO personal debt, including the home. But the question is how to get there without missing out on 20+ years of investment growth.

  5. Peter Mckernan

    Hey Brad,

    Great job with this article! You have talked about two very possible options to build wealth that really excel an investors cashflow, either buy paying off a primary home, or buying multiple properties that cash flow. I believe, that if a person is not going to invest into any type of retirement while working to pay off their home, they should put 15%-20% of their pay away each month to put down on an investment. That investing aspect helps so much while living life because once retirement hits those investments would be throwing off a lot of cashflow with a paid for home!

    • Brad Lohnes

      Hi, Peter. I agree entirely. It’s hard to cover every angle in a single article, but the same principle applies for that extra money that people make available in their budget. If there are good deals to be had, then investing those dollars will be the more productive path long-term.

  6. Patrick McCandless

    Hey Brad,

    Thanks for the article. Are you saying you wouldn’t to go less than 20% equity even on a primary residence? I completely agree when it comes to income properties, but not necessarily primary residences where someone is looking to plant roots for a while. If monthly mortgage payments are still well affordable for someone only putting down 3.5% or 5% on a home they are planning to live in for a long time why not just put the minimum down? Especially at the interest rates we have today. Market dips should have no effect on that owner-occupant as their payment is fixed.

    • Brad Lohnes

      Hi, Patrick. It’s a tricky question. In my comments I was really coming from the point of view that you have built up some equity in your home, and you want to take some out to invest in rental properties. In this case, I wouldn’t want to go too low on equity. I’m not sure of the exact banking laws in the US, but I know that here banks can call in loans early even if you’re making the mortgage payments. They typically only do this if you have very low equity and property values are in decline.

      That said, we did go to 10% the first time, so I can’t say “never”. 🙂 But I personally wouldn’t want to go that low again. I feel like we were lucky that there wasn’t a downturn. (I mean, we “expected” that there wouldn’t be, but we were lucky that we were right.)

      On the flip side, I’d also personally prefer a higher deposit. But I know that people just want to get into property. I think that as long as the payments are really affordable then you’re right. But most people (not ALL people) really tend to push it when they are purchasing a home for themselves, typically getting the nicest home they can “afford”. This leaves things pretty tight.

      • Patrick McCandless

        I’m actually in a situation that is relevant to this article at the moment. My wife and I have been wanderers for a long time, trying out living in different areas as our jobs have allowed us to so we’ve kept an investment property in AZ while renting our own primary residence wherever we’ve gone. We now have a newborn and are ready to stay put in an area that has been a second home to us forever. Since we know this is where we want to be for the long haul and interest rates are so low I’m much more inclined to put down only 5% on a home for our family so we have more to contribute toward a 20%+ down payment on an investment property that is more vulnerable when it comes to market downturns.

  7. Rodney Marcantel

    Great article. Good read. No one strategy is best as everyone’s financial situation is usually different. Case in point is mine. I don’t have a full-time job. I’m a full-time real estate investor. I have funds to invest (1/4 of a million) and use that to fund down payment on rehab properties and cover the rehab costs and carrying costs. I use hard money to fund the rest (80% of home’s LTV). I also own 2 properties free and clear – my personal residence (brand new build 2016 and 3027 sq.ft.) and a rental property earning a net $1,300 monthly and valued at $250K. I tried to get a HELOC 2 years ago for investment purposes but didn’t show enough income to debt (debt being very low) to justify qualifying. So I converted a 403-B retirement account to a self-directed IRA and use that to invest. Advantage is all the money earned on a flip is tax free unless I take some out on occasion. But because our actual income is low, we are taxed very low and continue to build our IRA fund until we can begin removing the funds at retirement age (which is 13 years away).

    • Brad Lohnes

      Hi, Rodney. Thanks for your feedback. Glad you enjoyed the article. You’re exactly right that everybody’s situation is different. The value that I get from sites like this are the ideas and seeing how I can work those into my own strategy. In turn, I like to share ideas through my posts so that others can consider them for their own strategies. Good luck with your strategy!

  8. Michael Greenberg

    Hi Brad – great stuff here and I am personally struggling with this right now. One other consideration is the tax consequences/benefits of a mortgage vs. paying off your mortgage. I’m now studying this scenario as it corresponds to investment properties and my own home. Any thoughts as it correlates to Uncle Sam and how much does it weigh upon your decisions. Good thing he’s just our Uncle and not our Father 🙂 Thanks

    • Brad Lohnes

      Hi, Michael. I don’t currently live in the US so I don’t really want to comment on tax specifics. 🙂 For me, something needs to make sense outside of the tax benefits for me to go ahead with it. For example, I know that there is the tax deduction on home mortgage in the US (we don’t have this deduction in NZ). So, if it made more sense to pay off the mortgage then I’d do that, regardless of the tax benefit of not doing that. You are still paying interest to the bank, it’s just that the effect of this is a bit blunted by the tax break. That said, it’s obviously worth including in the numbers if you’re going to sit down and do the math. The math is important. I just wanted to present a non-math case for investing. I think that one thing people often don’t consider is that markets, including the property market, go in cycles, and usually (obviously not always) go up over time. But it happens in cycles rather than continuously. If you wait 20+ years to buy investment properties, you’re likely to miss out on a couple of cycles / upswings in the market which is a lot of wealth to pass up.

  9. Evan Thomas

    Great article! I like the tree/forest metaphor. It’s just like how I was taught arbitrage in school. I’ve been trying to convince my friend that if he can find an investment property that gives him a 5% return he should do that instead of paying off his 4.5% student loans quicker. Then he can pay off his student loans and still have 0.5% left over for whatever he wants (like another investment property). And that’s a measly 5% return. At 10% he could handle his student loan payments and possibly some of his rent/mortgage. I just sent him a link to this article. Thank you!

    • Brad Lohnes

      Hi, Evan. Glad you liked the article! I’m generally not a huge fan of “gaming the system” for a slight margin of interest. But in the case of property, as I mentioned in a comment above, it tends to swing upwards in cycles – maybe every decade or so (I’d have to look at the US market history to be more specific with US markets). Anyway, the point is, regardless of edges in interest rates, there’s the basic fact that if you don’t have any property you can’t benefit from the wealth gains that come from those market upswings. There are only a few in each person’s lifetime so waiting too long can be costly. Cheers!

    • Brad Lohnes

      Hi, Julie. Thanks for reading and glad you liked it! 🙂 Yes, real estate investing has a depth to it that keeps it very interesting. I found it was important to get an overview of what’s available first and then narrow my focus. Some things jump out at you. The issue of “what to do with my own living situation” doesn’t go away until you resolve it to your satisfaction. 🙂

  10. Nate Reed

    I’m wrestling with this now. I opened a HELOC for some additional liquidity (mainly for investing, but also to have some additional emergency funds). Unfortunately, after I opened it, I realized I didn’t get the best deal. The longest term available for a draw is 10 years, with a high interest rate (5.865%). I think I can get a longer term (30 years) through a local credit union, but it’s called a “Home Equity Loan” (not a HELOC). Should I try to find cheaper money or just stick with the HELOC and plan on paying it back? The thing I like about the HELOC is we could just treat it like a savings account: tap it for funds to invest, but continually pay it back.

    • Gary Wyatt

      Hey Nate. I am just getting started myself in investing. I am trying to decide whether to get a HELOC, refi, or sell. I didn’t know that there is a 10 year option for a HELOC. Interesting. I am not professional, but if it were me, I guess it would depend on how much you would have to pay in order to refinance, and if would be worth paying all that extra money. Would you spend more than that in interest if you kept the Home Equity Loan? I think that would help make my decision.

      The thing I like about a HELOC, is you can pay off early right? Then I could get another one when I find another home to flip.

      We have about 70K equity in our home. The reason I would be thinking about selling is that for one, our payments are outrageous because we got way too big of a house when we bought. So we would be downsizing, and hopefully we save a lot on our payments, then we can re-invest, and immediately use the equity to invest toward a flip. Another reason, is that, again, we have huge house, and I think we may be having a correction in the real estate market, and we may get stuck with the house losing value.

  11. Irene Mecholsky

    I like that article a lot, particularly the part about steps an investor can take to mitigate the risk associated with job loss. However, I would add that when calculating the emergency fund it is a good idea to include mortgage payments on your investment properties as a monthly expense, in the event that a job loss or income interruption coincides (as in the last market downturn) with high numbers of tenants being unable to pay their rent.
    I completely agree with the advice to maintain 20% equity in your private residence. In the event of a market downturn your mortgage payments stay the same, but if you have little to no equity your ability to sell your home may be lost. This carries not only the risk of losing the home if you lose your job, but may impose an opportunity cost even for those who remain employed.
    Great article!

  12. Gary Wyatt

    I didn’t realize that this post was made back in 2016. So I am going to re-ask this as a regular post, not just posting for Brad, the author of this original post.

    I am just getting started in real estate investing. We have a home that has about 60 the 70K, and we really have no cash to invest into flipping houses.

    Our ultimate goal is to invest in rentals for the passive income, but we have to start with either wholesaling or flipping first. My question is, if we did a HELOC on the home to give us money to do a couple of flips to get started, should I not be worried about losing the home? That is the only thing that has kept me back so far, is the fact that I could lose the home. Everyone tells me don’t worry about that, that whatever you do in life involves risk. And they say jump on it, don’t think about it, the money will be there if you need it, you just have to find it. That doesn’t help for the fact that I am still concerned. What is anyone’s thoughts on that?

    Also, another option would be to sell our home, and use the equity to put toward a flip with a partner. Would that be a better option then doing a HELOC in your opinion? I know we would have to turn around and purchase another home, but we would get a lesser value home which would be hopefully at least a third of what our house is now. I would really be trying to save money on her payments. We haven’t really high payment on a house, so I would be trying to get it down to at least half a lot for paying now, in order to invest the rest.

    If anyone has any feedback, that would be awesome. Thank you in advance

  13. Great article Brad. I wrestled with the same question a few years ago. I opted to start planting my forest first before pay down. Three years later and four cash flowing properties, I have decided to spend the next few years paying down my personal mortgage before I go back to acquiring more rentals. I guess there’s no right or wrong, as long as you’re moving the ball down the field! Happy investing out there!

  14. Kevin Polite

    Timely article. I’ve been contemplating this, however, I don’t want to grow my current portfolio much higher, so I’ve been paying more on my mortgage. Every situation is different, but I look at having no mortgage as “income” that’s money I could be investing. I don’t think it’s an either or because I was paying down my mortgage and investing with more going toward investing and using my positive cash flow for investing as well.

  15. Bryan Drury

    Gary Wyatt, It’s difficult to address your situation without knowing more information. Looks like you have several situations to answer.Im going to assume you are relatively new to REI, and don’t have a lot of cash reseves, a large house and or payments. I will say loud and clear that if deals go south and you lose money on them and your house is mortgaged to the hilt, and you don’t have access to cash you could lose the house depending on your banker and the loans encumbering the house. I’ve seen that happen and it’s not pretty. Utililizing a HELOC may be a good idea if everything falls into place, and you make money on the flip project. If you lose money, how are you going to cash flow the loss. We utilize a HELOC on our primary residence as a funding source for projects and it has worked well. We are experienced investors and have cash reserves to cover losses. Plus have good paying W-2 jobs. But, we are going to lose money on a flip that closes next week. Could you handle that situation, without losing your personal house???
    A better choice may be to do a live-in flip on a smaller house that you will occupy. Or work 2 jobs and save up some cash because these house projects are cash intensive, either yours or OPM.Get some experience by helping out a seasoned investor for free if necessary. Just be careful, but do get started in a less risky way.There are lots of ways to get started without betting the whole ranch.Good luck.

  16. Shawn C.

    One the things my father taught me is once you triple your investment to where you can take one third of your investments and pay off your mortgage you should. The reasoning behind this is, even if your business tanks at least your home is paid off and all you have to come up with yearly is the property taxes and insurance. If needed, you can come up with that money just by working at a fast food establishment. You will also have the other two thirds to invest with and continue to grow your wealth.

  17. donna gesualdi on

    Hi, I stumbled on your blog looking for confirmation we are doing the right thing purchasing a home we want to actually retire in. We currently own our own townhome in a nice beach town in Florida. The rental market is very good. We have the reserves to put 20% down on the new property and leave 50K in the bank for emergencies. We feel the home values will continue to rise in the next few years as well. The new homes mortgage will be right about the same price as our monthly rental property will bring in. The plan is to redirect what we normally put away into retirement accounts and add at least $1000 ( more if possible, but this depends on any unforeseen expenses on each property) each month to pay off the new mortgage sooner. After 10 years, reevaluate and possibly sell the rental, pay off the mortgage, bank the extra cash and be mortgage free again. Dumb idea?

  18. Kevin Polite

    I wonder with the new tax rules has it changed now with leaning toward paying off your mortgage. With the increased standard deduction and the reduced state and property deduction capped at $10,000 it would seem to favor paying in off.
    Also, I look at not having a mortgage as “income” or money used toward further investing or peace of mind money.

  19. Matt Nusbaum

    Great article Brad! I run across this conversation quite often. I am “Adrianna” in your example as I have bought a home and then later sold it. I am utilizing strategy #1 you have highlighted – “Don’t own a home at all. Rent a home and invest until you are financially independent.”

    I think there are many advantages of renting until you are financially free. Could this change as my family grows?
    Perhaps, but I likely won’t make the change to homeownership until we have hit financial freedom. At the end of the day there’s more than one way to reach success. It’s a matter of what plan works for you and what you commit to.

  20. Phl Olinger

    I love these articles and I always feel like a counter point person. The tree in the forest analogy isn’t a great one because it uses a linear approach supposing a single tree and using time to plant a second tree. For this reason, I want to add what I feel is better logic for cash buying. The analogy is better suited to use apple or peach or orange trees. So any fruit producing tree (i.e. the money you make when you pay off your mortgage means all those apples are yours).
    So the all cash person typically spends time while watching the one tree mature, to find ways to make said tree bloom and produce the most fruit possible (squeezing money out of their budget, they have looked at themselves and their personal spending and exploited their inefficient habits) This it tends to lead to a tree with say 5 more apples per year.
    If you extrapolate that out to the second house it likely gets paid off in something like 7-9 years. (because they focused on their single tree first) So now they have 2 highly efficient fruit producing trees that are paid for in cash. So they leave the fruit forest with their harvest and in 5-6 years they can buy another. This process can repeat itself over and over and ultimately I believe that these investors end up at the same place.
    In your above scenario you point out that you can efficiently manage and water 10 trees. Those trees come with 30 year mortgages most likely and so your investments in total take 40 years to mature. If you think of them as fruit trees, you run a risk of flooding, flash freezes, and the bank is not going to stop asking for the money. This gives you an accurate representation of risk. So if you are having trouble deciding wether to pay off your home or buy rentals, I would say this is a good calculation to use. Your rental purchases at the bare minimum need meet this one standard Rental income >(homes mortgage payment – (taxes+insurance)). Otherwise you are just going into debt to go into debt to be a landlord. Thus if you can’t find rental deals to be more than your mortgage payment – escrow, it seems pretty pointless. This usually is 2-4 deals.

  21. Ben Le Fort

    Thanks for the article. My wife and I are doing a bit of everything. We have a good amount of equity in both our primary and investment property (thanks to a hot market in Ontario). My wife and I both have an above median income so we have some surplus money to use. I’m starting to invest heavily in Vanguard Index funds in my RRSP (Which I believe is similar to a Roth account in the U.S?) and using the tax refund to invest into more Vanuard funds under my TFSA (I believe similar to a Roth IRA?). While my wife is less comfortable with that idea so she is using her surplus funds to pay down the mortgage quicker. We like to say I have the “Offence” covered and she has the “Defence” covered. If things keep progressing this way we should have both mortgages paid and a solid stream of passive income within 10-15 years.

  22. John Murray

    Like any financial strategy home ownership should be an asset. The buy low and sell high is the hallmark of any financial gain. It is an investment just like any other, it should be profit driven not emotionally driven. The home of your dreams may become the nightmare of your life. Pleasant dreams!

  23. Lewis Christman

    If you buy right and with the right partner and situation you can pay off a home in 7 1/2 years. Step 1 buy a home just on your income that does not cost more than 25% of your NET take home pay (and yes invest in your 401K as well). Step 2 and this is the key – if your partner makes similar income then they would qualify for the same mortgage so they could afford the same payment. Take their payment and put it all on red (principal of your mortgage). You payment goes towards principal, interest, taxes and insurance – theirs goes all on principal. In 7 1/2 years you have a free and clear home. Now you could rent that one out and do it all again or if rentals are not your path then sell and upgrade to the next home (with the same mortgage steps).

  24. Robert shen

    I think its all about timing and where you are in life..For me when I was younger 20-30.. I aquired 4 rental units. So using the analogy I planted 4 trees.. Now that I’m married and have kids I just purchased my primary residence.. and plan to to a blitz and pay it off in like 5- 7 years. Using my income and my rental cash flow.. in 5-7 years I’ll have some pretty strong roots with those trees I’ll work on aquiring more..

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