Long term mortgage or pay off quickly?

15 Replies

I'm having a battle inside my head: • do I put a large deposit down on a house and pay high monthly rates to pay off in ~5 years Or • do I put a low deposit down and stretch the mortgage for cheaper monthly payments and more free cash flow for me Some background information -- I have $100,000 cash to spend and the house I'm looking at is around $150,000 so either way I will need to borrow some cash. The property is in a popular tourist location and will be used as an Airbnb rental. conservatively I expect it should bring in $2,000/monthly, but at worst it should generate $1,000 (already has a tenant paying this). My goal is to generate $6,000 per month in passive income whilst building up a property portfolio in my favourite places to travel between during the year. I don't want to pay rent and ideally I want the mortgages taken care of by tenants (or paid up). But what would you suggest? Paying the mortgage off within 5 years means I can take all the revenue from rentals and then borrow against the house to buy another. It'll take much longer to reach $6k per month but I'll be freed from monthly bank payments much faster. However If I take a longer term mortgage I pay more interest in the long run, but smaller monthly payments mean quicker cashflow for me and smaller payments during low season. It also means I can spread my $100,000 cash over 2-3 property deposits rather than just one. I'd love to hear what you pros suggest. I was always against having debt but since reading bigger pockets I see there can be some big benefits to finance. Thanks in advance!

Financially speaking, the right way to do is to borrow as much as you can, as long as you can still cash flow some decent amount of money every month. Use the extra to invest in more properties.

Thanks for the reply @soh. Would you suggest borrowing for as long a period as possible or paying off as quick as is reasonably possible?

I should also mention I'm looking to buy and hold not to flip.

Always a tough decision. Do you want one property or 3 properties? You can always refinance to get cash out later, but there is a cost to that. Figure out your returns on the investment and go with the route that gives the best results. Money is still quite cheap to borrow. My gut would say to use as little of your own money and borrow as much as you can. $150,000 is an awesome start!

The investment decision boils down only to risk aversion.

Spreading cash to purchase with maximum leverage over the longest term will produce the greatest return on investment. It accelerates your path to wealth. Tenants pay your mortgage, you sit back and reap the rewards. 

Paying cash or paying down a mortgage generates the lowest possible return on investment since all you are doing is earning the equilivant of the mortgage interest rate that you are saving. You are buying your income with your own money and slowing down your investment growth but you lower your risk.

Leverage produces maximum cash flow. Fastest wealth growth.

Cash buying is paying for cash flow and reducing risk.

Leverage as much as you can and put that cash to work!

Originally posted by @Thomas S. :

Paying cash or paying down a mortgage generates the lowest possible return on investment since all you are doing is earning the equilivant of the mortgage interest rate that you are saving. You are buying your income with your own money and slowing down your investment growth but you lower your risk.

Wow this is exactly the sort of comment I was hoping to hear. I never thought about the fact you're essentially paying for your own money back. 

I get so caught up on the total interest paid though that it does make me wonder if I played a slower game I could win the race.

@Adam McIntyre I agree with @Thomas S. as far as spreading out the cash to purchase more properties with the highest leverage over the longest timeframe will give you the greatest return on investment. I also agree that using the highest amount of leverage is more risky, but I just disagree with who carries that risk. The higher the leverage is on the asset, the more risk for the bank or person who loaned on the asset, not the person who received the loan.  Banks want to protest their invested capital and if something goes wrong, and there is a lot of equity in the property, then the bank is more likely to foreclose to get their money and fees back, however, if there is very little equity in the property, the bank would rather the asset become performing again rather than take the property back and lose money so they may be more willing to work with you. The same concept applies to attorneys. The more equity in an asset, the more you can become a target for a frivolous lawsuit. So rather than thinking “I want to own a cash flowing asset,” a different way thinking may be “I want to control and benefit from a cash flowing asset.” You do this by keeping high loan balances, spreading out the cash over multiple properties, extending the length of the loan as much as you can, and keeping some cash reserves to weather the storms associated with real estate investing. 

"keeping some cash reserves to weather the storms associated with real estate investing."

This is the key to high leverage/high return investing. Invest your extra reserves in a high return vehicle that is accessible and your leveraged properties are at lower risk than if paid off. The return on your cash investment should, by itself, be sufficient to weather the storm.  

I would suggest getting a long term mortgage to minimize your monthly payments. You would be able to generate stronger monthly cashflow and you will have the capital to invest in other properties all while having the tenant pay off the mortgage.

@Adam McIntyre
Leverage as much as possible, with longest amortization possible, and keep a healthy liquid cash reserve. Then wait and watch the cash flow come in and your equity build.

The money you put into the property is not liquid....what if you would need that money some day? Would you rather have $100k in your property or in the bank?

@Adam McIntyre don’t get caught up in the total interest paid when it comes to what type of mortgage to get. Think of it this way, you want to get an investment property but you don’t want to use all of your own money to do it so you bring in a partner and split the profits some how. Just think of the bank as your investing partner. They are going to put in the majority of the money, you are going to do the work in finding and managing the property and they will be mostly a silent partner. I would be willing to split the profit  with a money partner who puts in the majority of the money as long as we both make money.

@Thomas S. do you have any suggestions on finding those high return vehicles that are accessible?

Thank you all for the feedback, this is really interesting to hear. It's the mindset of a pro and an amateur. 

Another question related to this discuss would be: fixed interest or variable? 

Originally posted by @Adam McIntyre :

Thank you all for the feedback, this is really interesting to hear. It's the mindset of a pro and an amateur. 

Another question related to this discuss would be: fixed interest or variable? 

 Definitely fixed given today's rates.  There's a lot more upside rate risk than down. Just 10 years ago 6.5% was a great rate!

I agree with posters above to get the most long-term, low rate debt you can if it's fixed rate residential, but wish they would say as much.  I paid off 19 rentals this year that were higher rate and/or commercial that is callable and adjustable.  Not all debt is the same.  

I would recommend putting 20% down if you easily can. Avoid PMI. Congrats on having $100k to invest! Would love to hear how you got that, Adam!

@Steve Vaughan thanks for the reply - fixed interest it is (i suspected so much as well). Off to the bank today so I will discuss all this with them. And thanks for the reminder about PMI, when I was 18 I took out PPI on my credit card and wow was that pointless and costly.

RE: $100k, I make software apps and sell them from my websites. I sold one of my websites to raise the capital. Websites are kinda short term - especially the niches I'm in - so my plan now is to try and transition to long term property rentals.

Build a couple more websites, then sell to buy, hold and earn rental income of $6k per month (because I rarely spend more than that). 

I live in Thailand too, so I'm hoping to buy properties cheaper than back home in the UK, but still charge western tourists higher rental rates. That's my assumption, but I could be / probably totally wrong. 

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