Loan Payoff vs offsetting rental income

6 Replies

Hello everyone, this is my first post. I'm recently new to investing using rental properties. I bought my first house two years ago and it has been rented since. I have the ability now to completely pay off the loan. Is it better to pay off the rest of the mortgage or use the interest from the loan to offset the rental income and not pay as much in tax?

Thank you for any help!

Kyle

Welcome Kyle.  We need to know more about this. How much is the loan?  What is the interest rate?  How did you get the funds to pay off the loan?  What are your goals with real estate?  What market are you in?  That being said and knowing what little I know, I would use the funds that you intended to pay off the loan on the original property to buy another property and use the rental income from prop 2 to pay the mortgage of prop 1.  That way you have your cake and eat it too.

Hi Josh, thank you for the reply. The loan is for $139,000 at 5%. I had a significant pay raise the last 2 years and am in a position to pay this off. I bought land last year in which I plan to build 36 townhouses. Currently saving to have enough for the down payment. I should have this in the next year. But I have this loan on a house that is rented and am wondering if I should pay this off and use it as a line of credit. What do you think? 

Let's think about this. 
Question 4:  If you have positive cash flow, where are the source of the funds coming from you are using to pay off the loan now?
Answer 4:  The Tenant...meaning you are NOT the one making the payments on the loan

Question 4:  If you start using your cash to pay off the loan, where are the funds coming from to pay off the loan (not a trick question).
Answer 4:  You.

Question 3:  When do you start making a profit?
Answer 3:  When you have recovered all the cash you've spent from the cash flow.

As important as the numbers are, part of your decision should definitely come down to your personal values. To some people, they might feel more secure by having the property paid off, but others, don't worry as much about the security and are more worried about the ROI. If the numbers lead you to using the extra cash to invest in another property and this also falls within your values, I say go for it! Good luck in whatever you decide on!

Originally posted by @Kyle Kuric :

Hello everyone, this is my first post. I'm recently new to investing using rental properties. I bought my first house two years ago and it has been rented since. I have the ability now to completely pay off the loan. Is it better to pay off the rest of the mortgage or use the interest from the loan to offset the rental income and not pay as much in tax?

Thank you for any help!

Kyle

 Hi Kyle,

Folks approaching their endgame of early retirement will often pay everything off to maximize cashflow.

Folks early on will generally leverage as much as possible to acquire as much as possible without that cashflow going red on them. Sounds like this is closer to where you are.