I would love to get some feedback from you all. I have the opportunity to pay off my house or invest it in real estate(buy&hold sf&mutli). I would love to know everyone's thoughts on this.
Hi @Casey Bradford , what is the interest rate you are paying on your house? If you can get a better return by investing the money, then it makes more sense to do that.
However, you also need to consider your circumstances. How secure is your job? Will you have enough cash saved to carry you through an illness, do a major repair on your home, replace a car, send the kids to college, etc? To me, one of the biggest disadvantages of real estate as an investment is that it is not very liquid. If liquidity isn't a big concern for you, then you can just see where you'll get the most bang for those bucks and put your money there.
@Casey Bradford I've been debating this, too. Many folks would agree with @Leigh Ann Smith that pulling cash out of your residence (either by refinancing or not paying it off) and reinvesting that money elsewhere is a good use of funds. I'm not convinced. IMHO a residence is just another doo-dad like a boat or car. Conventional wisdom is that doo-dads should be paid for with cash.
Further I think your future plans come into consideration. If your goal is to quit working and live off your investments (what many folks call "financial freedom") then having a free and clear residence significantly reduces the income requirements you need to live. I think any "retirement" plan that involves living in a mortgaged house or paying rent is much harder to achieve than having a free and clear place to live.
I'm curious what other folks think.
Jon Holdman, Flying Phoenix LLC
@Leigh Ann Smith My rate is currently 4.5%. I keep bouncing back and fourth on paying off or investing.
Tonights battle! Kiyosaki vs Ramsey!
There isn't a right or wrong answer. There are so many factors that go into this decision. Leverage is powerful tool but requires a lot of responsibility. Personally, I like keeping a mortgage if you are young, gainfully employed (W-2) and have the plans/discipline to NOT refinance!
I would say that before paying off any extra principal or making any investments I would pay off any other debts, put away some in an emergency fund and make my annual IRA contribution.
Lol @Bryce Till exactly! Paying off would be a huge breath of fresh air for me as that would be one less bill to pay and extra $$ to use to invest with. Then on the other hand I could use the leverage to do some serious investing.
I would rather invest the extra cash rather than pay off the mortgage. At a rate of 4.5%, I feel it would be to your advantage to invest the extra. Overall, your financial picture will be much stronger with time using this approach. What you need to do is look at your financial statement, your income, debt, assets, and liabilities. You will see that with income properties, your net worth will grow much faster than paying down debt. Start crunching the numbers, break it down, and you'd be surprise.
Also, as an added bonus, with rates still low it is a great time to be a borrower. Most of us if not all will agree that the rates have no where to go but up.
I hope this helps & gives you another angle to consider.
Basic question...How much money are you talking about?
If you can invest & consistently get at least few percents higher than your mortgage rate, then I think it makes sense to do the refi.
If you are not sure, you can paid off the house & get a HELOC, so you will still have money available when you need it.
Give ''Total Money Makeover'' by Dave Ramsey a read if you haven't already. This question comes down to risk. If you want the risk you will get a better return. There is no question that you can make more than 5% on pretty much anything if you keep your money working instead of paying off your home. However, as @Jon Holdman said, when you don't have the house payment you don't need as much money to live comfortably. For me personally, I have a 15 year fixed on my primary home, 30 year fixed on my rentals and at this point I don't plan on paying any extra on either of them, however that decision changes weekly.
I agree with @Jon Holdman , Pay off the doo dad, its not an asset.
If I'm not mistaken; Dave Ramsey, Suzie Orman, & Robert Kyosaki recommend paying off your personal residence and building an emergency fund..
I would pay off house, then open a HELOC or get a conditional approval for cash out refi so that if a deal came along you could jump on it, and if there isn't a good deal, you sleep easy at night without any debt over your head.
@Casey Bradford , I should qualify my previous advice by saying that my husband and I are paying ahead on our home mortgage. We are 56 years old, so for us it makes sense to get the house paid off so that we'll have it free and clear for retirement. In our real estate investing, we do not plan to use our home as collateral for any loans.
When we were younger (in a previous house), we paid ahead on our mortgage too aggressively, and at one point found that we were way too "cash poor". Also, that was during the 90's, and that money would have earned a lot more in the stock market than what we saved in interest, but there's no way we could have known that would happen!
@Matt Laird , I'm a newbie and have heard this thing about your home not being an asset a couple of times now, but I don't get it. Care to fill me in?
@Casey Bradford sorry to hijack your tread..
@Leigh Ann Smith If you were to loose your ability to earn an income, your home would not provide a penny of passive income.. Now granted you may see appreciation (depending on the market), and tax savings, Assets do not create a negative cash flow, So it must be a liability on your balance sheet. If your primary residence is a duplex, or you rent out a room with a positive cash flow, I would then call it an asset..
There is more to this than can be quantified with a math equation. This is a home. There is no way to explain the feeling of freedom and security that comes from owning your home outright. How much that is worth to you depends on many factors such as your age, how secure your income is, and how likely you are to want to move.
For me and my family, the choice is pay it off. We paid off our own mortgage about 3 years ago, and paid off the mortgage on our business property about 2 years ago. We are completely debt-free, and would like to stay that way, but are not absolutely opposed to borrowing for a rental property if necessary.
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