Should I pay off primary residence mortgage and make it a rental?

11 Replies

I have researched a number of real estate investing strategies and like the idea of having high cash flow with little debt and little to no risk - (who wouldn’t!) to achieve this, I am considering paying off my current primary residence mortgage at an accelerated rate, renting it out, and then repeating this process. I would progressively “snowball” each property’s monthly rent income into my primary residence’s mortgage payment until it is paid off and ready to make me more passive income as a rental property. Essentially, I would like to be a buy and hold invester without having to get a loan for an investment property. I realize basically all the return on my investments until I was satisfied with the amount of passive income acquired would be tied up in the home’s equity, but the convential way of using mortgages for investment properties just would not work for me and is too risky for me. I have extremely high student loans and would likely never be approved for these mortgages with their stringent requirements. Is this strategy a good idea? Or are there other suggestions that would achieve my goals? Am I overlooking an opportunity cost? 

@Drew Hollowell Another way to achieve the same result is to stay in your house and use the money that you were going to pay off your mortgage to buy an actual investment property. A distressed property that you can add value to and that will cash flow well. Buying at retail price and renting it out at retail price usually equals zero after expenses. Buy it right and manage it well.

I would pay off the student loans first rather than the mortgage. The student loans are not attached to an appreciating asset. They are not forgivable and usually have higher interest rates than mortgages. If you dont like risk, why do you want large student loans hanging over your head in case you lose your job or get sick etc? 

The same strategy you just described is the same one that I've been considering for a long time, but I believe that Anthony is right. Save up that money and use it to buy a distressed property, fix it up, and create your cash flow through that. If you were to pay off your house it would make more sense to use either a home equity line of credit or just selling the house and using the cash from that for a small multifamily property. Live in one unit and rent out the other ones so that you basically live there for free while putting money in your pocket.

@Anish Tolia , point well taken, but my loans will be forgivable through the PSLF program as I work for a state agency which makes me eligible. I don’t think I missed that boat- but if I did, I would definitely pay them down first. @Isaiah Williams , I love the idea of house hacking. The real trick is convincing a spouse to live in a multi-family unit! Lol. I think @Anthony Dooley is right though. Thanks for the input gentleman. 

Originally posted by @Drew Hollowell :

@Anish Tolia, point well taken, but my loans will be forgivable through the PSLF program as I work for a state agency which makes me eligible. 

That is a good point. But the risk still remains. How many years do you have to stay at your job to have them forgiven? How much does that limit your earning potential and career growth? Only you can answer those questions. Maybe its a good idea to stay on the forgiveness plan or maybe its better to pay them off anyway.

@Drew Hollowell , are you saying that your student loan just automatically gets written off, with you not having to make any attempt or explanation as to why you didn't at least try to pay some/all of it along the way? [And are you suggesting that these days, new student loans will no longer be "free", because they changed the rules after a certain "miss the boat" date?]

To your broader question, I agree with those who recommend that you don't need to be in a hurry to pay any down low interest rate mortgage/s. Especially because, with all those "aggressive" extra dollars you have lying around, there are so many other investment opportunities that'll earn you more than those savings!

@Brent Coombs , I am banking on the Public Seevice Loan Repayment Program. I would have to fulfill a service requirement with the state of Oklahoma or another qualifying government or non-profit agency for 10 yrs while paying minimum monthly payments on my student loans. In my case, it’s about 100 dollars a month with an income based repayment plan. I’m 26 and have nearly achieved the highest income potential in my field so I don’t believe I would have to worry about getting removed from an income based repayment plan for making too much money. I went to a private school (big mistake) and owe just under 100,000 in student debts. So going this route would definitely be the cheapest option for me. I.e. paying 12000 it so versus 100000 + an average 6-7 percent interest. And I agree with the rest of the group as well. Thanks. 

Your money would work much harder for you invested in a mode rare risk income fund over the long term than sitting dead in a rental property. Chances are there will be a turn in the market which may take a long time to recover from.

Income wise you would safely guess you will earn a higher return than simply saving a measly 4% on your mortgage.

Paying down/off a mortgage is not investing your money.

@Thomas S. , I've read several articles and watched videos on why paying off mortgages early is a bad investment because your primary residence has no income potential and because other investments have a higher ROI than 3.25% in my case. However, that argument assumes that property would be my primary residence and not made into a rental that would produce passive income. Please forgive me if this logic doesn't be make sense. I'm honestly just starting to try to make sense of my financial options.

Originally posted by @Drew Hollowell :

@Thomas S. , I've read several articles and watched videos on why paying off mortgages early is a bad investment because your primary residence has no income potential and because other investments have a higher ROI than 3.25% in my case. However, that argument assumes that property would be my primary residence and not made into a rental that would produce passive income. Please forgive me if this logic doesn't be make sense. I'm honestly just starting to try to make sense of my financial options.

Nope, "that argument" works even after you turn it into a rental. Once you refinance your original owner-occupier loan into a conventional investment loan (presuming that you have sufficient equity built up, and the rent return would sustain positive cash flow even at 75% LTV with the higher interest rate), your next low interest owner-occupier loan can still happen for your next primary. Of course, if your primaries don't prove to show good rental ratios (ie. negative cash flow), then you'll be severely hampered in your property buying program! 

[But I suggest that the answer is not: pay down the mortgage asap and never borrow against the equity again! (Because, that would be the cause of you being hampered!)]. Agree?...