Need advice on paying off mortgage and being debt-free

Buying & Selling Real Estate
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Need advice on paying off mortgage and being debt-free

Chootar Laal
Boston, MA · Member since 2011 · 23 posts · 0 votes

Sorry if this is in the wrong area of the forum, mods.

So I have a 2-family investment property (financed via bank) and a single-family home (primary residence) in the same city. Here are the expenses and rent rolls that I owe monthly. I am seriously thinking about selling the 2-family property because I realize the appreciation will help me pay off the single-family home in full or ~95% of it. In the end the balance will be about the same as I currently end up with. I realize if I sell I dont take advantage of the appreciation in the future the property may get me but being debt-free is very appealing to me currently, its just a mind-set I'm craving.

Just need some help with the model below. Is there something else I am overlooking? Any other expenses etc?

-INVESTMENT property

monthly rent: $5200

monthly water/sewer, property taxes, insurance: ~$540

monthly mortgage and HELOC: $2925

.

.

-PRIMARY residence

monthly mortgage : $1800

Any suggestions?

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Jason Hull
Investor · Fort Worth, TX · Member since 2014 · 23 posts · 10 votes
12y

The long-term math behind the invest/pay off mortgage decision, historically speaking, says that investing the difference makes you better off about 2/3 of the time.

That said, there's a very strong psychological bias we have called loss aversion. Basically put, the pain from losing an amount of money is much greater than the happiness we get from gaining the same amount.

In other words, if you invest the difference and get a lower return than the after-tax interest rate, you'll have a lot more heartburn from the loss than you will happy dances if you do better.

Additionally, if you do perform worse for having invested in the market, you'll be more likely to take additional risk in subsequent investments to try to make up for the loss. You'll be doubling down.

So, from a mathematical perspective, the correct answer is usually invest the difference. From a psychological perspective, the answer is usually pay off the mortgage.

Perhaps there's a happy medium?

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  • Chris T.Pro Member
    Rental Property Investor · Charlotte, NC · Member since 2013 · 491 posts · 253 votes
    12y

    @Chootar Laal I am not sure what the balance or terms are on your primary residence mortgage, but with the numbers from your rental property plus adding in vacancy (10% = $520) and PM (another 10%). That would leave you with ~$700 a month. This of course does not take into account any maintenance. I'd just use that extra cash flow to pay down your primary mortgage. It wouldn't be immediate but you would pay off your primary residence much much quicker and still have your rental property. Once you have paid off your primary residence, you could do the same thing with your rental. Now you would have an extra $1800 a month to apply towards paying it down.

    This would also avoid the tax hit from selling your rental property and the 6% real estate agent commissions.

    0Reply
  • Chootar Laal
    OP
    Boston, MA · Member since 2011 · 23 posts · 0 votes
    12y

    I owe ~$300k on primary. Paying it down ~$700 a month will take quite a while.

    I'm just thinking living debt free would allow me to travel without having to worry about issues with tenants (I currently manage the property) and have piece of mind that I wont have to wake up in the middle of the night to tenant's phone calls. I realize this is probably not the forum for advice on such matter as its quite on the opposite spectrum, but I'm asking nonetheless.

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    12y

    @Chootar Laal - everybody has different goals and if that is yours than go for it! What exaclty are you looking for from us?

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  • Rhett TullisBusiness Member
    Property Manager · Oklahoma City, OK · Member since 2013 · 1k+ posts · 617 votes
    12y

    @Chootar Laal sounds like with your mind set it is best to sell and pay off your house. from a financial point of view you stand to make more if you hold onto it but I speak with owners every day that feel the way you do. Life is too short to spend it worrying about your rental and not being able to do what you want. If you are in a mind set to sell better to sell. Otherwise next time the water heater fails and you lose money that month you will be wishing you had, or next time the tenant trashes the place and you have to dig into your pocket to fix it.

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  • Chootar Laal
    OP
    Boston, MA · Member since 2011 · 23 posts · 0 votes
    12y

    Right. I know what you mean by doing what I feel is right, I was just looking for a devil's advocate opinion and see if I missed anything in my calculation.

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  • Bill Jacobsen
    Salem, OR · Member since 2013 · 701 posts · 159 votes
    12y

    I know successful investors who have made it with no debt and those who have made it using debt. I also know investors who have used debt and not made it. If you want to do it with no debt, do it.

    I added management, maintenance, and vacancies to your numbers and got $1,627 per month as expenses and you have $5,200 per month as income for a difference of $3,573. You also have the mortgage giving you positive cash flow of $648 for your investment

    You are paying $1,800 for your primary residence for a total negative cash flow of $1,152 per month. If you were able to sell your investment and pay off the primary residence you would be at $0.

    I am surprised that I go such a low expense ratio (31%) for your investment property. Since I don't know the numbers for the value of your properties I can't give you a definitive answer but even then it would only be based on financials, not on what your heart tells you.

    The best to you.

    Bill

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    12y

    The bottom line question, based on the title, is what is the best use of your money? Are you going to earn more by getting rid of debt, clearing that interest rate after taxes or is the use of the borrowed funds more valuable. Only you can answer that. What are your opportunity costs? :)

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  • Jean BolgerPro Member
    Aurora, CO · Member since 2012 · 2k+ posts · 1k+ votes
    12y

    You know, it's really a very personal decision. And there are many things to consider, including your entire financial picture, your age, your family, your future plans and goals.

    From a purely financial/math standpoint what @Chris T. is suggesting makes the most sense. But if I did this I would also hire a property manager to relieve most of the day to day worries about tenants. Here's a calculator to help figure out how much earlier you could pay off your loan.

    If you feel like you'll be in good financial shape in the future without having this investment property, then it might make more sense to sell. I sold a duplex that I lived in and was able to buy a smaller home without a mortgage. I will tell you, it is a good feeling. Sometimes a simpler life is better than the promise of more money!

    0Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    12y

    If your goal is to have no debt and no more landlord duties sell . If your question is, Is this the best path. The answer is no if your looking to grow your investments. You are currently leveraged in the all the goods ways with plenty of cash flow. Heck your mortgage is only $100 whe you look at the cash flow generating.

    Like someone else said, very personal decision.

    0Reply
  • Jason Hull
    Investor · Fort Worth, TX · Member since 2014 · 23 posts · 10 votes
    12y

    The long-term math behind the invest/pay off mortgage decision, historically speaking, says that investing the difference makes you better off about 2/3 of the time.

    That said, there's a very strong psychological bias we have called loss aversion. Basically put, the pain from losing an amount of money is much greater than the happiness we get from gaining the same amount.

    In other words, if you invest the difference and get a lower return than the after-tax interest rate, you'll have a lot more heartburn from the loss than you will happy dances if you do better.

    Additionally, if you do perform worse for having invested in the market, you'll be more likely to take additional risk in subsequent investments to try to make up for the loss. You'll be doubling down.

    So, from a mathematical perspective, the correct answer is usually invest the difference. From a psychological perspective, the answer is usually pay off the mortgage.

    Perhaps there's a happy medium?

    1Reply
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