Pay minimum or extra on mortgage?

Question

Hi, I am new to rei and was wondering if it's better to pay extra on a mortgage or just pay minimum to receive the tax benefit and extra cash flow? I guess what I was thinking is if I'm getting (for easy numbers) $1000/month in rent and mortgage is $500 should i take some or all of the extra cash flow and pay more on mortgage or not? Thanks!

Marcus Auerbach · Answer

Math tells you to not use cash to pay off your principal. You can pay an extra $50 if it makes you feel better, but logic does not support that. We have been conditioned to pay of debt as quickly as possible, and so your instinct is to apply personal financing to your RE investing.

Your dollars are worth more today than they are in 30 years. Every dollar that you don't invest today, means many dollars you wont have in 10 or 20 years. Generally speaking your cash on cash return is going to be much higher than your interest rates. That tells you how to deploy your money

When you have been doing this for a while and your portfolio starts to have a lot of equity you realize that your return on equity is getting increasingly worse. Your extra cash payments are just part of this "problem".

Also, appreciation and inflation dwarf the impact of your cash payments. I invest in Milwaukee which is known as a "cash flow market" and even here we have seen 41% appreciation since 2019. I am glad for every dollar I spent on property and not on principal.

If you don't want to buy more property, pay monthly into an S&P500 index fund.

And if you really want to pay something off, go for the property with the lowest balance (not the highest rate) and seek to pay it off in full quickly, which will at least contribute to your cash flow.

Andrew Freed · Answer

@Keith Sehi - No, you can take the difference and invest it in a higher cash flowing asset than what the mortgage rate is, e.g. the mortgage rate is 6% but you can invest it in more real estate producing a 8-10% return. If you're in the wealth building phase, it's a no-brainer to arbitrage the extra money and allocate that towards an asset with a higher return than the mortgage paydown.

Joe Villeneuve · Answer

Let the tenant pay the mortgage for you.  When you add your cash to the mortgage payment, all you're doing is paying extra for the property.  Your cost is only the cash you spend.  Since the rent is paying the mortgage for you, that's not a cost to you.

Theresa Harris · Answer

What are your goals and what are the interest rates?  If you plan on buying more properties and your DTI ratio is fine, then I'd use that money to save for your next down payment.  If your mortgage rates are high and you don't plan on buying anything else and can get a better returned on that money, then pay it down.  Given how low interest rates have been for the last 10+ years most people have low interest rate mortgages and could invest that money else where to get a better return on their money.

John Morgan · Answer

@Keith Sehi

Never pay extra for principal. I used to and regret it. Since then, I’ve learned the power of leverage and scaled up to increase my cash flow by 6x’s what I was making back then with just a few rentals and trying to get them all paid off. Dumbest thing I’ve ever done investing in RE. Lol

Allan C. · Answer

@Keith Sehi never pay extra on your mortgage, especially if you are near the beginning of your investment career. If you don’t have an immediate property acquisition opportunity, then place your cash in a high yield savings account.

The opportunity cost of your dead equity (ie: principle pay down) is likely going to cost you more than you get back.

Adam Martin · Answer

I think there is no defined right and wrong answer here however I look at is as where are you at in your real estate cycle. Currently I'm still in the growth phase so I save and invest every dollar from the rentals into buying more as well as took several cash out refinances to continue to grow.  There will be a point though where I feel like I have enough which will be around 10-12, I currently have 6.  At this point yes I may be able to grow more wealth by continuing to buy but my goal will be to slow down and make sure I have the cashflow to live comfortably and quit my 9-5.  Part of this goal is to pay down some of the higher interest debt to lower my risk and increase cashflow.  Sure I could have already had that cash but that extra cushion will help me sleep better and that is what I'm going for.  I have several mortgages in the 3's though and I just don't see myself paying those off until the tenant does for me, that money is too cheap to pay off early.  I plan to hold until I die so my final stage will be making sure everything is paid off and my kids inherit the houses mortgage free and at that point I'm dead so they can do what they want with them and it really makes no difference to me.

Chris Seveney · Answer

It Depends. What is your interest rate and what are you doing with that money?

If your interest rate is 3% and you can ivnest in a CD or something else for 5.5% then why pay down a 3% loan when the money can make you 5.5%. Invest it in 5.5% and take the dividends to pay down the mortgage.

If its 7% then it may be worth paying it down BUT remember this money is illiquid and there is a price for liquidity. It depends on how much free cash you have for other things like more real estate. So to truly answer this question it depends on your own situation, cash flow and use of proceeds. Look at it that way and try to see what works best.

Pay minimum or extra on mortgage?

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