Pay down debt or keep cash flow?

Question

I have an offer on a multi that has a $3000 monthly net.  I could take the offer and use the money to eliminate $1700 monthly debt service on 2 other buildings and own them free and clear.  Do I take the offer for the sake of having debt free buildings?

Joe Splitrock · Answer

@Bruce D. Bolton based on the limited details you provided, I would say no. You are loosing "$3000 monthly net" and avoiding $1700 monthly debt service, so you will reduce monthly cash flow by roughly $1300.

That being said, there are many factors that play into this decision, including:

- Is the multi property you would be selling a desirable long term asset? In other words, will it have strong appreciation? Is it easy to rent? Does it have low cost on repairs? Is it easy to manage? If it is a dog, maybe selling is the right choice. If it is desirable, you may not want to let go.

- How much debt is left on all the buildings? If they are going to be paid off in 4 years, it is totally different than if they all have 30 years left. Holding on a little longer will net you more monthly cash flow in many cases.

- Stage of life is also a factor. I see the grey beard, which means wisdom of course;) Later in life, you may choose to have paid off assets that support your life style, where in your earlier investing years you may leverage more for growth. This comes down to several questions. How much do you need, how long before you retire, etc. Only you can answer that.

Jon Kelly · Answer

@Bruce D. Bolton Paying off debt early usually comes down to a personal choice. Does it give you "peace of mind" to own it free and clear? Or, are you comfortable with some leverage and using that money to earn more?

The financially sound way to think about this is to compare the cost of your debt vs. the potential return on another investment. If your loan is ~4% then why pay it off early? Why not take that money and buy another investment property and earn 10%+?

Debt isn't a bad thing as long as you put it to use. If you use it to overspend on new cars, vacations, etc. you may run into issues.