Which to pay off faster? Primary or Rental

Question

There is often a question on whether to pay off mortgages or not, but I would like to propose a different scenario.

If you have a little extra cash to pay per month (equal to one extra payment per year), would you pay off your primary residence quicker, or your rental property quicker. With either scenario this is after paying all expenses.

Kevin Sobilo · Answer

I would pay down the loan I already have more equity in!

The reason is that instead of letting my excess cashflow sit idle in a bank and earn me zero return, I am storing that money as equity in a property by paying down a mortgage. By paying down a property I have more equity in, when I do decide to refinance and access that equity and put it towards a more productive purpose there will be MORE available to access.

Michael Masters · Answer

The new tax rules change the way I view paying down these two different types of mortgages.  I will no longer be able to deduct interest on my primary home, but my commercial mortgage is deductible as an expense.  Therefore, you may have to compare after-tax interest rates.

Stefan Tsvetkov · Answer

An additional possibly more important factor besides interest rate (which tends to be higher for an investment property) is call risk for the mortgage in the event of a market downturn.

Generally there are more protections in place in the case of a primary residence. Paying off the investment property mortgage and lowering LTV on it may be safer from a call risk perspective unless the baseline LTV of your primary residence is higher (or say significantly so).

Theresa Harris · Answer

I'm in Canada, so tax rules are probably different, but I'd pay down the mortgage on the primary residence.  Here interest on rental properties can be claimed on taxes.

Corby Goade · Answer

If your plan is to leverage equity somewhere, but you don't have deal in which to use your cash, I'd put it on my primary and when you are ready to start shopping, open up a HELOC to tap in to it. You get a much better LTV on your primary and it's much easier to find a bank to do a HELOC on a primary than an investment.

Larry S. · Answer

@Jonathan Breton In your scenario, we are going with the idea that we've decided to make an extra payment on a mortgage (not deciding if this is a good idea or not). If that's the case, pay off the one with the higher interest rate.  Your return on the money is simply the interest rate.  If you want the best rate of return on your money (given the criteria you listed, not considering other investment options) you want to pay extra money on the mortgage with the higher interest rate, and not think about if it's on your primary or a rental.

This is assuming that the debt is fixed rate, conventional financing.  If you have an ARM, you have to consider possible future rate increases.  If there is commercial debt, there are often more stringent requirements (having to provide annual financials, etc.) that may influence your decision as well.

Marcus Auerbach · Answer

Generally the one with the higher interest rate.

Other factors to consider, you can HELOC any equity you have in your primary (easier than rental).

If you use cash to pay down a 30 year fixed rate note, your ROI on that money is whatever your interest rate is, say 4%. If you pay down a ARM, your ROI is your interest rate plus you mitigate against  future lending risks.

If you can invest your money into something that would yield 10 or 20% I would favor that over paying off any loans pre-maturely.

James Wise · Answer

Whichever one has the higher interest rate is the one you want to pay off the quickest.

Stefan Tsvetkov · Answer

Yes, what @Theresa Harris is pointing is a consideration, as generally for an investment property (or the latter portions of a primary residence, such as in the case of a multifamily) one can deduct pretty much each and every expense (cause it is a business). Not so for expenses that pertain to your owner occupied portion.

That said, to my knowledge mortgage interest is deductible on both primary residence (within certain limits) and investment property, it just gets claimed in different sections of your tax return. Thus, in many cases you may be indifferent as to whether you would pay off an investment property or a primary residence quicker from a purely tax deduction perspective.

Larry S. · Answer

There are plenty of threads debating whether or not to pay off a mortgage faster than necessary. I find them interesting to read different people's thoughts on the concept. Here's an example of one such thread: https://www.biggerpockets.com/forums/52/topics/568...

The decision to me isn't completely black or white.  Personally, I'd look at the interest rate on the mortgage(s) as the rate of return on my money and then ask myself if I think that rate is a rate of return that I am ok with earning. For example, if you have a mortgage with a 5.0% interest rate, is that enough for you to pay extra principal each month? To me, I think there are other opportunities to invest that money at a higher rate of return, whether that's in another RE deal, the stock market, etc.

Then there are other non-financial metrics to consider.  As @Marc Winter mentioned, some people love the idea of living in a home without a mortgage.  There's no way for me, or anyone else, to value that for you.  Where are you in your investing cycle? Are you trying to accumulate more real estate? If so, once you pay the extra principal, it's gone (until you refi, open a HELOC, etc) and can't be used for another RE deal.  Or do you have enough assets, and at this point you are focused on mortgage paydown.

Hope that helps

Which to pay off faster? Primary or Rental

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