Should I pay off my mortgage or buy rentals?

Question

I am asking for advice on what the best option is for me financially. I have a house I am paying a mortgage on and it is a 400,000 loan over 30 years. I have the ability to pay this off in 10 years which saves me around $300,000 in interest that I would have paid (over the 30 years). Or in the next 10 years I could start buying short term/long term rentals.

I am just torn because I could put a down payment on a small second home in the next two years and allow that to make money, but the downside to that is I will be charged interest on a 400,000 loan for those years as well. I am not sure that what I would make from renting a place out will make me the same net of $300,000 saved if I just focused on paying off my house.

Rick Albert · Answer

The challenge with real estate is that it only really makes sense if there is a loan on the property. Otherwise invest in the stock market with better returns and no headaches. Or even a high interest savings account can yield similar results if you are okay with missing out some of the other benefits of owning property.

By leveraging, you're cash on cash return is much higher. Keep in mind appreciation is on the value on the property, regardless on the loan amount. For example:

$500K asset

You put $100K down

3% appreciation on $500K is $15,000

Cash on cash return is 15%, which typically beats the stock market.

And your tenants pay off the loan.

I would also look to see when you want to retire and what that looks like. If you have time, you should buy more assets. If you are wanting to retire sooner and paying off the property accomplishes this, then go ahead and start paying it off.

Clayton Williams · Answer

My interest rate is 6.13%

Marcus Auerbach · Answer

If you had the drive to buy rental properties, you would not be asking the question. Those who have the bug understand, nothing would keep them from buying not one, but many, they just find a way somehow. This biz can be hard and it is throwing something new at you every week for like 5-8 years of gind before you really get out of the tunnel. It takes a lot of mental fortitude and persistence to stick with REI over many years. If you don't feel that, you'll burn out. Your instincts are actually protecting you.

Ann Crosby · Answer

Interests rates we gotta look at bud. Are we looking for cash flow to pay off that mortgage? Or cash flow in general?

Jules Aton · Answer

Depends on your interest rate and your financial plan. If I can likely make more in additional RE or stock market I don’t want a large chunk of equity just sitting in my primary residence. When interest rate was on the high end in the past I have split paying extra toward principal with TSM index fund or saving for down payment on rental.

Theresa Harris · Answer

What is the current interest rate on your mortgage?  My guess is it is low relative to today's rates. I'd save the money and use it for a down payment on a rental.  Yes you will be paying interest on your mortgage, but I'll also bet you'd make more interest putting that money in a high yield savings around...and therefore come out ahead.

G. Brian Davis · Answer

You’re really weighing certainty vs growth. Paying off the mortgage gives you a guaranteed, risk-free return and peace of mind. Investing in rentals can outperform over time, but only if the deals are strong and managed well.

The key question is whether your potential investments would realistically beat your mortgage rate after all expenses and risk.

Do you know what kind of return you’d realistically expect from a rental in your area?