Invest in RE or pay off personal mortgage

18 Replies

My spouse and I are debating whether to invest in a rental property(s) or pay down mortgage. Maybe do a little of both? I’m all for buying rental property, which my spouse is as well but he’s wondering if the current market lends itself towards paying down our mortgage and waiting for a better market. His business partner is a CPA and recommends tackling the mortgage.  I’d love to hear what seasoned investors would recommend. 

@Kristie Hurst Now is almost always the right time to invest. It is just a matter of finding a great deal. 

Hi Kristie! I'm by no means a seasoned investors so please take my advice with a grain of salt. I've also asked same question before and I've decided to not pay into my mortgage. The reason being that when I compare the interest on my mortgage to how much I can earn with a rental property, I still come out ahead with a rental property, assuming the return on the rental property is more than the interest on your mortgage. For example, say your mortgage has an interest of 4% and the rental property will give you a 7% return after all the expenses have been deducted. You are better off investing in the rental property because it will give you 3% extra. But in the end, you really just need to compare the two numbers and see which one will give your more return for your money.

Hope this helps!

If you open a HELOC you can have it both ways to some extent. Pay on mortgage while you look for an investment property, use the HELOC if you don’t have liquid funds to close. Use the cash flow from investment property to accelerate payment of loans against primary residence. Always maintain emergency fund for life’s and landlord’s surprises.

If you're on top of your mortgage then I would say go after the rental property.   (Assuming you have cash to drop into the rental prop) Buying an investment will eventually give you back the cash plus you'll own the asset.  

Say you pay down your mortgage $50k - your monthly payment will likely still be the same, but the term will now be shorter and you'll save a bunch of money on interest.

If you pay down your mortgage by 50k, you probably won't be making a mistake, and you might actually end up getting a savings of a comparable amount over the life of your mortgage compared to the ROI on a investment property.

But if you buy the right deal, you might be able to cashflow the thing and end up getting the same benefit while putting the net cashflow towards an extra principle payment on your monthly mortgage. At the end of the term of your mortgage, you own not only your personal residence, but also the investment property. 

Blair Poelman, Broker in Utah (#9299425)

One can do both. For flipping you may still come out ahead today. If it is for income there is no bad time one can purchase at peak $ you wait for the next peak so long cash flow is OK.

Paying off your mortgage is not an investment.

It doesn’t produce cashflow, doesn’t provide a return of any sort and doesn’t provide any tax advantages. On top of what already paying off your mortgage that is.

It’s not a bad idea at all but it just depends on what your goals are. Want to build passive income and a nest egg for later? Probably not the best use of money.

Jordan Moorhead, Real Estate Agent in MN (#40542303)

This is any easy one.  Just follow the money path...and keep it moving forward.

1 - Buy the rental porperty first

2 -Use the cash flow from the rental property to pay off the home mortgage

3 - Aftertherental property is done paying off you own home's mortgage, use that same cash flow to pay off/for something else.

Using your money to pay off you mortgage is a waste of your money since you only get one use out of it.

Using it for a rental property, and your money keeps working for you...including, doing the "one time" option of paying off your own home.

Paying down debt is never a dumb idea. It's the easiest risk-free, tax-free ROI you can get. The ROI is just low so there may be better uses for your money.

I remember 11 or 12 years ago when a good rate was 6.5%+. Much more tempting to accelerate then.  What is your rate @Kristie Hurst ?

I paid off 11 rentals last year and have a fat 'opportunity fund' but still have a primary mortgage.  Why?  Because it's fixed at 3.375%!  No way I'm losing the chance to re-invest at 12%+ for a guaranteed 3.375%. 

The mortgages I paid off were commercial loans that were bothering me or had rates above 6%.  A couple were also seller-financed mortgages that had legacy risk, i.e. the sellers were old and I didn't want to have to go through probate and explain the thing to heirs if they passed.

Is your loan a high rate? Bothering you for your financials every year?  Adjustable, callable or seller-financed with old people?  If not, I'd pile up the cash for an opportunity.  You can always use the pile to pay down your mortgage later if nothing turns up!

Hi @Kristie Hurst .  I agree with what Joe said above with letting your money work for you.  My opinion is that buying the rental property will produce cash flow, and you can use that extra cash flow to start paying down your mortgage if you are really wanting to pay down your mortgage.  Then, you will have a tenant paying off the other 80% of your mortgage for you.  That was similar to the plan i had when i first started, but once i got a little cash flow, that plan changed, and i pay the minimum on my mortgage to keep reinvesting :).  

I appreciate everyone’s replies and think i should take my question a little further. We are in a position to invest right now but neither of us feels comfortable enough with our knowledge of finding a good deal to pull the trigger. Besides Turnkey, which we’re not completely opposed to, what other ways of RE investing would you recommend? Basically we want to invest but need some guidance. 

If you’re still paying PMI, then pay down enough to get rid of that. (Check to see if you need to request it too — sometimes no more PMI charges doesn’t happen automatically.)

Other than that, chances are the interest on your mortgage is so low, you’d get a better return on many other investments. And certainly don’t let the tax tail wag the dog.

Best wishes on successful investing!

@Kristie Hurst My personal perspective on this is - invest now, but invest wisely (buy for cash flow and never for appreciation). 

There is a lot of talk of a market correction coming but here we are 2018 and still no end of the world market crash. 

So, my point is why wait for a proverbial recession when you can buy something right now that can start making you money today. 

As for paying down the mortgage, I really struggle with the idea of having capital sitting and not being deployed to work harder for us. When we pay off our mortgage, the banks use that money to invest anyways, so why not invest that money ourselves today instead of worry about paying off the mortgage, so that we can give our kids a house they might never want anyways. 

Hope this helps. Good luck and buy your rental property :)

Thanks! - Ola 

Endless debate.....been discussed on BP a million times. Since this is an investment website I would estimate that 75% of people will say to keep your low interest fixed mortgage and use the $$ to buy investments. Which is reasonable and has some solid logic to it....

Go to a Dave Ramsey site and the opposite will be true....

I recently paid off my own home....had pretty low fixed rate....tons of equity. Was it the best way to use my $$? Probably not...... but the RISK is very low. Could I have used that cash and made 5-15% off it? Maybe....or I could have lost it all if I made a bad investment. I personally like the feeling of owning my home and not having that debt over me if something bad happens in my life.

I have 3 SFR rentals that have loans and I have zero plans to pay them off any quicker

So now I took a HELOC out on my personal home and can use that equity for quick cash purchases if something comes up.....and I'm stocking the cash away that is no longer going to my mortgage and interest, and I'm going to use that cash to invest.

It comes down to your risk tolerance and goals.....to win big you have to take more risk but be comfortable that if that risk kicks you in the teeth, you can handle it....

Hey Kristie! My two cents would be to run the numbers on both scenarios. If you can get a rental property that yields returns higher than the interest you are paying on the mortgage, buy the rental property. If the rental returns are less than the mortgage interest, pay down the mortgage.

I'd say the only answer should be- whichever brings you in more money ;)

@Kristie Hurst

I was in the same situation about 18 months ago.  I determined to take the safe route and start adding $800 per month into my mortgage to get it paid in 10 years so i could then become a real estate investor.  I made this mistake for about 6 months.  I think that it is very tempting to get the mortgage paid off because when you look at how much you will be paying in interest over the life of the loan it is sickening.

What is more sickening is the difference of how much more money you could potentially have at the end of the 10, 15, or 30 years if you took your extra money and put it into solid investments. For me it was in the millions.

My thought process now, rather than getting my mortgage paid off to feel the burden of debt lifted, is - I would love to have the money to be able to pay off my mortgage today, but chose not too because I have my own 'money machine' that will continue to crank out cash.

Once you get the mortgage paid off you are enjoying money that you don't have to pay.  I would rather enjoy money that I actually have and can put to work.

Overall it was a simple math decision for me.  I calculated out all the scenarios and it was an obvious choice.  

Once I stopped putting in my extra mortgage payments,  I actually tapped some equity and invested $70k dollars into 4 different deals.  My mortgage payment went up by $199/month (although it did start the 30 yrs over again).  My investments after expenses will net $1200/ month

For calculation purposes, even if i never contributed additional $$ to my current cashflows at a conservative 10% annual, compounded annually, This extra $200 per month will have made just under $2 million in 30 years (Taxes not included)

The key is, which i am still trying to figure out, is find a system and investments that work.  I am still a newbie but have seen proof of concept.  If you have the right system in place it is only a simple math equation.

Good Luck

Originally posted by @Kristie Hurst :

I appreciate everyone’s replies and think i should take my question a little further. We are in a position to invest right now but neither of us feels comfortable enough with our knowledge of finding a good deal to pull the trigger. Besides Turnkey, which we’re not completely opposed to, what other ways of RE investing would you recommend? Basically we want to invest but need some guidance. 

 Then invest in your  knowledge

I agree with @Joe Villeneuve - spend a few months learning (it never hurts). 

My path would be to stick the funds you have for investment in a brokerage account in low-cost index funds. Put any excess payments you would be making to the mortgage into that and let it grow. While it does, take 1-3 months to educate yourself. Listen to the bigger pockets podcast, go to open houses, and start analyzing deals. You're in St. Louis, which will likely be a good cash-flow market, so no need to go elsewhere. Once you've analyzed 100+ deals you'll know your market cold and you'll be able to recognize a screaming deal when it hits the market. 

Personally I'd focus on finding a small multi (1-4 units) for a house hack, or buy a HUD home undermarket to live in as an owner-occupier. Live there for a year, sell for the tax free gains, repeat. But there are as many strategies as there are investors!

This crowd here is going to in general be wired more towards the 'constant invest' mindset.

It's mostly investors, business minded people, etc to generalize.  Nothing wrong with that and it's a great community - however I'll give you an anecdote/personal testimonial that should support the pay down the mortgage side of things:

My first house I bought for 163k in the Raleigh NC area in 2009.  It appreciated over the roughly 7 years I owned it and I sold it for 195k after aggressively paying down the mortgage.  I did that because I didn't know the world of investing and in hindsight, I'm very grateful for the timing of starting to buy, which was in a different market (Des Moines IA).

There were tons of good and more plentiful deals back in 2010-2014/2015 in this market.  My wife and I didn't have a master plan but my background lended to getting going and ultimately that same house in the Raleigh NC area when selling was a huge contributor to our year 2015 - as the roughly 85k in equity in that Raleigh NC area house we put towards 2 rental properties that have done well.  Had I or we tried to do what some are advising here (invest, use cash flow to pay down things faster) I would not have made some other life decisions that looking back have been good.  For instance, I would not have gone/finished grad school or had the mental room to be geographically mobile, among other things.

Long story short, investing just to invest does not always put you in a better position.  I am of the school of thought to generally go against the grain.  If everyone thinks it's a good thing to get into real estate, be fearful.  The key is to find a way to listen to the right people.  There are voices on the BP community that I think are rightfully communicating some more conservative thinking which I really do think is apt in many current regional markets from my analysis.  Depends on what you have in front of you.

I would advise though to get practice going out and evaluating deals/investments, regardless of your decision of whether to pay down or not.

When capital flows too easily my view on what happens is that investors that don't build value are drawn to a market.  More and more capital flows in, until eventually the smart money flows out (at least in terms of reinvesting etc), and the weak are either wiped out, or in a very non strategic position.

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