I'll try to make this as short as possible, but I've got a question I can use some help with. I've got an extra $900/mo or so right now that I'm saving to buy my first rental. My plan was to "snowball" the profit from the first rental into that $900/mo to buy a second, and so on. I have a full time job, so I'm not looking to get into real estate full time, but it's something that I've been looking at getting into as kind of a side hustle for a while. I was playing with a calculator online the other day and applied the extra $900/mo to the mortgage on my primary residence and if I did that, it would save me about 17 yrs on my mortgage (I'm about 2 years into that mortgage) and save me over $125k. My question is do I put the extra $900/mo towards rentals or pay my house off then save for rentals? I'm aware of the theory that if I can get a better return than my mortgage rate (4.3%), then I should invest. But on the other hand, $125 saved on interest isn't a small number and having the security of a paid off house would be nice. I keep going back and forth on what to do. Any thoughts? Thanks!

Should I pay off my mortgage or buy rentals?

Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes

9y

Save the money for a year or two and start looking for a "fat pitch." If you don't find something compelling, you can put the money against your principal at any time. If you have a good interest rate it is kind of a shame to payoff early, but living mortgage free is a worthy goal.

0 Reply

Phil T.

OP

Battle Ground, WA · Member since 2015 · 67 posts · 14 votes

9y

I assume by "fat pitch" you mean a REALLY REALLY good deal?

0 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

Invest the money, you will make more than you save. Paying off a home is highly overrated.

Paying off a mortgage is where cash goes to die.

1 Reply

Nam NguyenPro Member

Investor · Chantilly, VA · Member since 2017 · 71 posts · 19 votes

9y

Why is it a place for cash to die?

0 Reply

Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

9y

Don't pay off your house. Buy more rentals and let your money work for you. If you can use the money to buy more rentals and are diligent about it you will make much, much more than the $125k you will save on your home mortgage, plus when you are ready to retire you will have 5, 10, 20 etc properties that you own that can cash flow and support you or that you can sell. You will be miles ahead!

2 Reply

Jeff Wallace

Rental Property Investor · The Woodlands, TX · Member since 2014 · 345 posts · 288 votes

9y

My paid off Mortgage doesn't FEEL overrated --- it feels really, really nice - Financially speaking, the numbers play out where it is more beneficial to leverage as much as possible --- but, there are more factors to consider than just the numbers

11 Reply

Paige Marie

Real Estate Agent · Baltimore, MD · Member since 2017 · 36 posts · 36 votes

9y

Great Question @Phil T. ! I'm new to investing as well, still waiting on my first deal. My plan is to flip and eventually build a rental portfolio for passive income. As I think about the future, the same question crossed my mind. I understand the argument you stand to make more than what you're saving, but at the same time, I think @Jeff Wallace hit the nail on the head. Has to feel damn good not to have a mortgage payment! I look at it like the immediate goal is to acquire rental properties which will cover our living expenses. Pay the mortgage off, that's less expense, fewer rentals, less headache. But what do I know. I'm still undecided, lol. Good Luck!

1 Reply

Cary O.

Rental Property Investor · Dallas/Fort Worth, TX · Member since 2017 · 64 posts · 59 votes

9y

According to Kiyosaki in "Rich Dad, Poor Dad", your primary home is a liability - not an asset - as it usually consumes the largest portion of your income. He strongly recommends putting your money to work by acquiring income producing assets (i.e., rental properties). Rental investments increase your assets and income. You need assets to build wealth. Using leverage, you can create more money to acquire more real estate. Most real estate investors would tell you that they wish they had started investing sooner, so if you can, invest first.

4 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

9y

Hmmm. Interesting responses so far.

So I don't agree that paying off your house is a waste, because technically a mortgage on your primary home is a liability (as mentioned). You are paying the interest on it out of pocket, so you are losing. Your house would have to appreciate to astronomical levels to make up for what you pay in interest (and other expenses on it).

The best thing you can do is not have a mortgage on a primary home, but use mortgages to maximize returns on rental properties. Bad debt vs good debt.

The trick there is that the rental property needs to have positive cash flow from the rental income to cover the expenses. Not just any old rental property will do.

But since you already have the mortgage on your primary and working a bit backwards (vs someone trying to decide on buying a primary or a rental and with a mortgage, etc.)...

I would evaluate it based on how much cash flow you project getting from said rental property. WA doesn't typically cash flow much, so need to be careful there, but like if you were buying in the Midwest (a lot of west coasters do) and you were getting some decent level of cash flow per month, you could buy that rental property and use the income from that to pay down the mortgage on your primary home in exactly the way you were saying you would do it with that $900/month. It may not be $900 (especially not if you are financing), but it would still be something. Then you are also bringing in the tax benefits and potential appreciation on the property in addition to the cash flow. So, two birds with one stone. But it completely depends on the property you are talking about buying and the numbers on it.

8 Reply

Adam M.

Lawrence, KS · Member since 2017 · 175 posts · 51 votes

9y

Basic finance. If you can earn an return higher than cost of capital then you invest it. I get that there is some mental benefits to paying off your mortgage but you could be investing it and have someone else pay off your mortgage.

2 Reply

Jeffery Waicak

Investor · Massillon, OH · Member since 2015 · 266 posts · 156 votes

9y

I would suggest that you save the 900 a month for a few months, or more. You will want some for a down payment, and some for reserves.

While you are doing that, self educate, self educate, self educate. I think most here will tell you to buy a rental and I agree, but if you're very risk adverse, early repayment a great thing too. That's why you need to make this decision.

You're in a great spot though! $900 extra a month. That's a chunk of cash. But you're on an investor forum. We think you should invest. Go to a debt free forum, they'll say pay off the home. Go to a corvette forum, they'll say buy a corvette. All will make compelling arguments, you need to decide what's best for you. On second thought, don't even go to the corvette forum...yet

The basic investing argument is that you will be able to do better than the rate on your mortgage, that in 15 to 20 years with inflation, your payment is lower anyway. In 15 to 20 years, your rents will have increased based on inflation. They'll be bumps in the road but at the end of it you'll have solid cash flow. I agree with this

The payoff argument is that it's guaranteed to be paid off, the tenants won't always pay like they should, roofs need replaced, water heaters, tenant turns, etc. I agree with this.

I will say, I've met many older people that worked hard, had paid off homes that were struggling. I have met a few older people that had 10 to 15 rentals. They weren't struggling

12 Reply

Andy Kurtz

Investor · Plainville, MA · Member since 2016 · 25 posts · 9 votes

9y

Depending on how you mortgaged your home, you may be able to have your cake and eat it too. A few years back, we refi'd from a 30 to a 15, and with some luck (i.e.: market appreciation), we found ourselves at a 60LTV. So we pulled out a HELOC to 85LTV with a small local bank, and are using that HELOC to close on a 6-unit next month. Took us a few years to get here, but it's a plan we were comfortable with.

3 Reply

Steve K.

Denver, CO · Member since 2017 · 265 posts · 234 votes

9y

@Phil T.

I learned BRRRR method of acquiring rentals 18 months ago; wish I'd learned it 30 years ago. An ideal rental (not achievable in all markets) can achieve 10% to 20% ROI. If you're comfortable with leverage/debt, it grows your wealth faster than paying off the 4.3% mortgage. Get inspired by some recent successes:

Here on BP: , and did in 5, 2.5 years and 7 years, respectively, buy using

For buy and hold rentals, there is a continuum of perspectives. I know of one widow in Denver who put her life savings into a $225k rental duplex...paid cash, no loan/leverage. Has just one property and is thrilled that it cash flows and there is no mortgage payment. Thrilled that it has doubled in value in 7-8 years (Denver appreciation has been great) and she's averse to debt. She is truly a real estate investor....but on the conservative (not comfortable with debt) end of the continuum.

Others could have taken that same precious capital and invested it in 4 similar properties, with 25% down payments and 75% loans/leverage, and controlled $900k in property that doubled to $1.8M by now. They'd be wealthier, because they used 75% leverage. Admittedly, if a nationwide recession hit, and property values and/or rent dipped 15 or 20%, this person is subject to loosing 15-20% of $900k in properties, rather than the widow's 20% of $225k.

Then, if you use the BRRRRR method, the cash-out refinancing, once you have enough equity (usually through remodeling the property, but sometimes through market appreciation) allows you to ideally grow a portfolio of rentals with 100% financing....and zero of your precious equity left in the property.....I know of a BRRRR investor that turned $80k cash into 30 rental properties worth about $8million ($5million in loans, $3million in his equity) in 5 years....granted, he bought at the bottom of the 2006-08 recession and benefited....but much of it was the buy at a discount and remodel profit.

Then decide if the risk/reward is right for you.

You can say "look what I did with low leverage" (slower)....or "look what I did with maximum leverage" (faster). Good luck!

3 Reply

Rich Weese

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

9y

@Steve K. Risk vs reward

I agree that is one thing to consider, but SO many more. Here are a quick few:

1. Age

2. Risk tolerance of investor and ANY significant other.

3. Liklihood of current job income stream continuing.

4. Income tax level currently?

5. short term strategy?

6. Long term strategy?

7. Any SS or pension to help you when you get older?

8. What is your belief on future inflation?

9. WHEN do you feel next crash is coming?

10. Will you still be ok if Int. rates hit a "whopping" six percent?

11. Etc, etc, etc.

I also like to have the investor consider the following:

Of the 4 benefits of owning real estate, where do you expect to make your biggest profit in next 20 years?

A-cash flow

B- principal pay off

C- appreciation

D- depreciation and other tax benefits, like 1031 exchanges.

I used to really chart these 4 benefits and it caused me to write a complete chapter on 2 of the 4, C&D.

I also learned a couple other things: Your home is about the only thing you get to declare interest paid and about the ONLY place you can avoid capital gains every couple years and make a killing...

Good luck digesting the above.

4 Reply

Steve K.

Denver, CO · Member since 2017 · 265 posts · 234 votes

9y

@Rich Weese , nice list and all valid points. I used to have an 8% mortgage and if average mutual fund returns were also 8%, I was sold that I wanted to pay down my mortgage first.....it sounded more secure....and it didn't cost that much.

I've rethunk it!

In light of all the possible risks (your list), I don't want my precious capital paying down my 2.625% APR mortgage, when I can make 10-20% acquiring a rental. Thus, the reward is worth the risk to me.

If REI's are able to move every 2+ years in your primary residence, more people should consider the non-taxable gain....as you say "make a killing". To me, that house has to appreciate to have a gain worth protecting. I think your list of A to D is missing the "profit on renovating", which is exciting to me and part of the BRRRR strategy. Why don't you have an "E"? How can you make moving every 2 years worth it (a killing) if there isn't 30% fixer upper profit to extract tax-efficiently in "E"?

There are other threads active now debating if/when there could be another "crash"....The 2007 recession was mostly about fraudulent mortgage practices (i.e. The Big Short)....I don't think a forthcoming "crash/correction" is as imminent as some feel. I'm looking at 30-yr charts of housing indexes, coinciding with my experience over my adult life....I like the odds of REI better than the stock market.

good luck

1 Reply

Account Closed

Rental Property Investor · Miami, FL · Member since 2016 · 72 posts · 26 votes

9y

@Rich Weese A- today, C-further down the road, while enjoying B and D along the journey

0 Reply

Rich Weese

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

9y

@Steve K.

I'm in London just starting 3 week Cruise. Time limited. Will reply later Tonight or REALLY early in the morning when wifey is sleeping and I have more time.

Rich.

0 Reply

Rich Weese

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

9y

I just include the profit in renovating appreciation as a natural occurrence to an astute investor.

I'm pretty sure I have a thread on BP about making the cash every 2. I picked a growing area with lots available and serious up tick in value. I built a brand new home on a construction loan and then went for a refi loan when complete. I would do COFI arm loan with negative amortization. There was enough funds to pay the construction loan, AND my loan for 2 years. Free living for 2 years and then equity on sale. It was usually in excess of 150K profit, tax free. I'd then do it again, same neighborhood.

Time will tell on the crash. I'll continue to play for both possibilities. I love RE also, but I plan for the worst and hope for the best.

0 Reply

Jimmy MoncriefPro Member

Chattanooga, TN · Member since 2010 · 319 posts · 100 votes

9y

Ca$H is KING! Save the money if you are in growth stage!

Podcast Guest on Show #55

0 Reply

Rich Weese

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

9y

Cash is KING, but the king gets smaller every day with inflationary action.

1 Reply

Irene Mecholsky

College Park, MD · Member since 2016 · 3 posts · 1 vote

9y

This is a personal decision, which means what you really need to know is: "Are there any factors I'm not taking into consideration here?" A lot of good stuff has already been pointed out, but here are some additional points to consider.

Suppose you use the money to pay down your mortgage for a couple of years, then decide to refinance or get a HELOC to buy a rental property.

1) Will you be able to easily pull the cash out of your house if you "store" it in the mortgage? (depends on your credit, type of employment, regularity of income, as well as credit availability)

2) Is the interest rate on your house adjustable? How much higher/lower do you think the rates two years from now will be?

3) How does the cost of re-acquiring that capital (origination fees, etc) compare to the interest saved over those couple of years?

4) Do you currently pay PMI on your home that you could eliminate by paying it down a bit? How does that affect the cost comparison in 3?

1 Reply

Chad C.

Rental Property Investor · Denver, CO · Member since 2017 · 25 posts · 16 votes

9y

Love the ideas here, I am a huge proponent of the home as a liability rather than an asset, but like many others I agree that if your cash can perform better for you than your mortgage costs, it might be worth investing.

Keep in mind that your mortgage may deceive you, what looks like 4% on paper will likely cost you 25% or more of the original loan to borrow for 15-30 years. Very few investments will earn you better than 25% ROI, so something to consider. I like steadily paying more than my mortgage to upset the amortization while setting aside another chunk for investments.

1 Reply

Adam M.

Lawrence, KS · Member since 2017 · 175 posts · 51 votes

9y

@Chad C. I don't believe you know what you are talking about. A 4% mortgage on 100k costs ~$172k which does mean you are paying 72% more than the original amount. But if you were to take that money and earn even 5% for 30 years on it you would make $193k gross, netting you ~$21k. As long as you can earn higher returns then your cost of capital you should invest it.

1 Reply

Adam M.

Lawrence, KS · Member since 2017 · 175 posts · 51 votes

9y

Also ROI should be annualized in order make apples to apples comparison of investments.

0 Reply

Phil T.

OP

Battle Ground, WA · Member since 2015 · 67 posts · 14 votes

9y

Lots of stuff to think about. Thanks for all of the input!

0 Reply

Should I pay off my mortgage or buy rentals?

Should I pay off my mortgage or buy rentals?

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