Pay down mortgage or keep capital liquid

4 Replies

Hey guys, I wondering what you think about the idea of paying off your personal mortgage vs investing while the market is inflated.

I have some money just sitting in the bank making nothing.

I've been saving up to buy my first rental property, however the prices are high because of where we are in the market cycle, and prices are high in my area generally (Chicago western suburbs).

I'm also inexperienced, so starting when the market is down might be a safer first investment to learn on.

Would you advise paying down my mortgage and then using a HELOC, cash out refi, or something of this nature, to help fund investments when the market is down?

I'd also really like to know what everyone thinks about the "velocity banking" strategy, wherein you "pay off your mortgage in 5 to 7 years" with a HELOC. I have watched several videos about this and still don't understand how it works, or even IF it works.

To those of you who think the "velocity banking" strategy does work, I'm curious if YOU think paying down my mortgage, while the market is high, is a good idea, specifically because of the "velocity banking" strategy.

Thanks for your time!

Hey Kirk,

This is a great question and I'll be very interested in hearing what some of the more experienced investors respond here. It may be true that the market is high right now (I'm in the Chicago west suburbs as well). However, if your goal is buy and hold, most people would tell you that as long as you are purchasing wisely, a market down turn should not affect you greatly. If you are trying to flip houses, maybe now is not the perfect time; however there are lots of folks in this area making money flipping houses even right now.

Paying down your house and taking out a HELOC is, indeed, a nice idea. You sort of get the best of both worlds--equity in your home and easy access to this equity. But if your plan is to put this money into your house and then go back to saving money while the market corrects itself, I think you should consider what this will do to your psyche. Most new investors bail on investing because they run out of steam--emotional momentum if you will. If you have money to invest now, my suggestion would be to do it NOW. Think of the boost in will power this would give you after you closed on your first property. Your first deal isn't going to make or break you anyway.

Besides, who knows what the market is going to do? You could be waiting around forever. In 5 years from now, you may be kicking yourself if you waited. Strike while the iron is hot! And I'm telling you this from experience. I started with all kinds of fire back in 2016. But since I didn't take any real action back then, I quickly faded away. Only now, 3 years later, am I taking the action that I should have taken then. Don't make the same mistake.

As far as velocity banking, I have also seen many of the videos and I agree, it's difficult to understand. Wasn't it Warren Buffet who said "Never invest in a deal you don't understand"? He's smarter than I am so ...

Hi @Kirk Perecich - I don't know enough a out Velocity Banking to speak to that subject.

On the other question - should I pay down my mortgage with "some money just sitting in the bank making nothing"?

My polite, but firm answer is no. Absolutely not. For two reasons: 

1) if your current mortgage is a "amortized" loan (meaning you pay a portion of principle and interest every month) - EVEN IF you pay down a large chunk of that mortgage with the money you have in the bank it won't actually save you any money. Your payment is fixed for the life of the loan - it will reduce the amount you have to pay off at the end of the loan, but that doesn't really help you now or save you any money now.

2) if you tie up the money in your current property you are now reliant upon a lender to give you your money back (either via HELOC or cash out refi). Too much red tape and all financing has a cost associate with it not to mention the lead-times associated with loan approvals. AND not have the money on hand could cause you to miss an opportunity because you are not a "cash buyer" and able to move quickly to secure a good property.

IMO keep looking for deals all the time. Don't let the current market (being at a peak) keep you from making a smart buy. There are good deals ALL THE TIME. Yes there may be fewer of them and they may take longer to find, but there are out there. 

Be patient, keep your money in your account and be ready to pounce a solid deal.

Hope this helps!

@Kirk Perecich , depending on where your rate is now on your 1st mortgage, you could look to refinance that (in hopes to reduce the rate), pay the balance down with the funds you have "just sitting in the bank making nothing" (depending on how large of a sum this is, may or may not make sense), and then open a HELOC to create an open/revolving facility to use for future investments. This might make sense if you think you'll be on the sidelines for a couple years. If you can reduce your rate, reduce the debt/balance, and thus reduce your payment and interest paid, you're at least putting your money to work that is sitting in savings and not even keeping up with inflation. The HELOC is good because you don't pay interest on what you're not using....and then can access those funds down the road when you jump in on an investment.

That said, the HELOC is a variable rate...and undoubtedly down the road that rate will go up. So, perhaps when you are ready to invest and/or you see a little dip in the market, you'd also potentially see your cost of funds increase on that HELOC. A more ideal situation would be to cash-out refi now while rates are low, put the entire amount on a fixed rate, and put that money into play on an investment. I'm partial to this second plan of attack. One, I don't advise trying to time the market. As mentioned above, if you buy smart and on a buy/hold, you don't have to worry about getting lucky and timing the market. It's a long game. You then also cash-out equity now at a low, fixed rate now and put that into play with an investment. Your cost of funds remain fixed, and you have a more steady/predictable investment as a result. Food for thought....

@Kirk Perecich I agree fundamentally with the two really good reasons @Ashely Carter gave you.

Here are a few points I like to add to give you an increasingly deeper understanding and ability to make decisions:

  1. The interest on any money in the bank is low as it is and will keep going down. As soon as you like to get more the risk for your funds increases
  2. You want to ask yourself what your strategy really is:
    1. Do you want to build a portfolio of assets that will pay you passive income for the rest of your life (also called buy and hold and aligned with a lot fo what "Rich dad poor dad" teaches?
    2. Do you want to invest to benefit from the appreciation of the asset (which would include strategies like BRRR)
    3. Do you want to manage and own properties only in a reasonable distance of where you live or are you willing to have properties get managed remotely (also called "Turnkey")? That's what I am doing actually about 80 miles west of Chicago
    4. Do you want to have a lot of control over your assets and all the tax considerations, benefits etc. you can get from the tax code or do you see them as part of your retirement planning (possibly early retirement), which would allow you to include your funds currently held victim in traditional retirement accounts like 401K or Roth IRA
    5. Do you need relatively quick access to your money? In real estate access is slow as it takes time to sell an asset and turn it into cash. In your bank account is it very quick but you don’t get much for holding it there. Everything is a balance of risk and reward
    6. Most importantly in my view: Do you have discipline to follow rules that you have learned about and accept long term?

When you say the market valuations are high making you wonder if you should get started or wait or pay down your current mortgage, it sounds to me that you have not yet made up your mind what rules and strategies you want to pursue.

I would be happy to mentor you about that if you like. Feel free to send me a PM and we can setup an initial call.

Just as a teaser regarding this question about rules:

  • Imagine you decide to purchase a property west of Chicago that will be managed by a professional property management team and financed by a nationwide lender. The property costs you between $80K-$120K, meaning you put down (from your funds in the bank) $20K – S30K. Your property performs under the 1% rule and your purchase only happens when a lease deal of 1 year or more is already in place. Ask if you would consider that a good deal?

In case you wonder why I tease you this way: I just bought three properties of this kind this week.

Happy Thanksgiving and let me know if you like my help