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Posted about 8 years ago

Do i keep my Mortgage Or Pay it off?

Normal 1458591369 Mortgage Payment

 

                           Do I make more money paying off my mortgage?

                                                              Or,

                         Keeping the mortgage on my investment properties?

                                                    By: Patrick Liska

The answer to that question is, it depends. Do you want to have just enough properties to make enough income and be debt free, or are your plans to hold multiple properties and expand your wealth and not have to work for someone else. Some Investors wonder if they make more money if they pay off their mortgage in full and not carry any debt, let’s take a look at a comparison.

Let’s say we buy a Single Family Home for $200,000 with $150,000 mortgage @ 5 % for 20 years, our gross income is $2500 / month with a NOI of $1400/ month and you are in the 25% tax bracket, married file jointly. Now you came into $150,000, would you pay off the mortgage or keep the mortgage?

Normal 1458592692 Mortgage Chart

As you can see from the chart you will make more money monthly if you pay your mortgage off and have NO loan payments; however you do now have full equity in the house and can be a prime target for law suits. Do not forget, that’s all you have each month, where as if you did not pay the mortgage down, at the end of the month you will have $150,360. If you used that money as down payments to buy more houses, 4 in all, let’s assume all the same, you just added another $1442.24 of income for a total of $1802.80 per month, for a total of $ 674.26 more per month than paying down your mortgage.

 One other thing you can calculate is how much interest you earn for your investment ( cash on cash ) with paying down the mortgage, the $200,000 in this example, you would be earning 6.7% return on your money for the year. If you have the mortgage and the amount of cash you invested was $50,000, your interest would be 8.6% for the year, so you would be earning more interest on the lower amount of money you have invested in the property.

Using that example you could see that having your tenants rent cover all your costs for the borrowed money, your tax burden is less and you still have a lot of money to use. If you invest your money into more properties the income potential will be greater making you more over time. Even though I do not believe in Investing on appreciation, what if all these properties were in the same area and the values went up 10%, what would you rather have, one property at $200,000 or five properties at $200,000? You just added $100,000 to your net worth, sounds like couple more houses to me.

 I did not go into Depreciation, because that would be the same if you paid the mortgage off or had a loan. and this was a very straight forward example of how you can grow your income all on borrowed Money from your Lender. Every investment is different but for this example i am using that all the houses are the same.

 Everyone has their own investment style, which one makes you more comfortable? one is slow and steady, the other is multiplying by diversifying.


Comments (6)

  1. how does having your house paid off suddenly make you a target for lawsuits?  You have insurance to cover that and you can also take out a home equity line of credit to protect your equity or you could also quit claim it out of your name into an entity you control. 


    1. Robert, thank you for commenting. You become target for lawsuits if you pay off your house because people can find out that there is equity in the house and all the sudden they have an accident or something on your property and try to sue you, you become a target. By removing equity from the house, which you had even mentioned how to, if a lawyer or anyone looks into the property, they will see there is not much value there to go after you. Depending on your insurance, you may not have enough coverage, if not then what? , they go after more. If the house is in an LLC, then usually that's as far as they can go ( if they can't tie the house to you personally) so if you take equity out then there is not much for them to get from you.


  2. great read  ... I am a new budding investor and was always confused as I had read about someone that payed full down on one property before buying the next one .. Thanks 


    1. Dave,

      just Like with Ryan, sorry i haven't replied sooner, i am glad the article has helped you, and thank you for the reply


  3. Awesome read! Going to share this with my investing partner because we are always having debates about paying down our mortgage or using the income to buy our next property.


    1. Ryan, Sorry I hadn't replied earlier, thank you for the comment, was wondering what your partner thought of the article? Hope it helped