Pay off Rentals or Invest in Equities
Member since 2019 · 2 posts · 0 votes
Looking for some insight and any angles I may be missing. I have 5 properties with financing. I owe ~475K between them and the interest rates vary from 4.35 to 4.75%
I am trying to work out if I would be bettrer off pouring my extra cash (about 4K a month) into paying down my rental debt or putting that money in the market. I am 41 and with ~25 years for the investments to grow, I beleive it could far exceed the interest payments given the realtively low rates.
Then again, I could have all my properties paid off in about 5 years...which would amazing.
Oh, I also contribute 15% of my income to my company 401K and that wouldnt change as well as my wife and I both having military pensions.
What would you do? Thanks!
@Neil Masincupp First of all, I want to congratulate you on your financial progress... What you listed above puts you light-years ahead of 90% of people your age, but you came here for advice, not kudos, so let's get down to it...
First, you need to decide your risk tolerance. Do you want higher cash-on-cash returns in exchange for debt on your properties? Or do you want lower cash-on-cash returns for the "peace of mind" of owning the properties outright. At your age, and with the properties producing $4k/month, my advice would be to keep the leverage on the houses and let them be paid off over the 30 year term. Your cash-on-cash returns will remain high- remember if you pay them off you will have a large amount of equity tied up making a lower return. You have to consider the returns you could get on that equity outside of the houses. You have plenty of room on your cashflow to weather a storm, and it doesn't seem like these are over-levered in the first place.
Now, my advice comes with the caveat that you have to make smart moves with the cashflow. It can't just go sit in a bank and lose value to inflation. As for the stock market, I personally think it's over-inflated and I know enough Wall St/Hedge fund guys to know they too think the market is ludicrous at this point. Also, you have plenty exposure to the stock market with your retirement and pension accounts.
I have been putting my extra cash into passive investments in apartments. I become a limited partner, invest my money with professional teams with decades of experience, and I get double digit returns and tax benefits. That may or may not work for you as well, if not, then use the extra cashflow to buy a few more rental properties because you seem to have done pretty damn well on the first ones!
Collin
@Neil Masincupp I agree with @Collin Placke that debt is fairly low interest, and as long as you cash flow enough to comfortably pay it down every month with room to survive rough months, you'll be alright. You can reinvest that money and earn a much higher return on investment.
The apartment complex we closed on recently has projected returns that are around triple most mortgage interest rates. I would MUCH rather let my money compound at those rates, instead of paying off low-interest debt.
Thanks very much for your insight gentlemen. I think you both make some great points. Perhaps the extra cash flow would be better used to secure addtional properties. Put that money to work. I don't know much about the passive real estate investing vehicles (perhaps REITs are what you are referring to) but I'll start some reseach. I like the idea of not having everything in the market.
@Neil Masincupp It doesn't necessarily have to be an all or nothing proposition. Finance 101 would suggest that leveraging your money and keeping the debt would lead to more wealth over the long-term. As you know, stocks and real estate have outperformed 4-5% overtime. However, investing is more than just numbers. Risk tolerance is involved and that varies for everyone. Having no debt, increases cash flow and your obligations, which helps some people sleep better.
I look at paying down real estate debt similar to the utility owning bonds used to provide. Today, bonds don't pay sh*t for income, so I don't own any. However, I have some mortgages with 4-5% interest rates. Whenever I pay down principal, I guarantee myself that 4-5% return. The stock market is bubbly in my opinion, so extra cash is going towards paying down debt at the moment. If the market corrects in the fall by 15%, I'll be plowing that money into the stock market to buy the dip. Just spreading bets. Roughly 75% of cash flow to buying assets and 25% paying down debt is what allocation works for my risk tolerance.
@Neil Masincupp When are you looking to retire? Are you looking to retire early, or work until age 60-67? I think that would play a lot into how I would handle this extra capital.
If you were planning to retire early (say in the next 5-7 years), I would pay off the rentals and have pure cash flow that wouldn't be as up and down as the stock market could be. Solely from my perspective, I wouldn't want to try to retire early with a biggish chunk of funding in the stock market and then get caught in a down swing when I needed to pull out the funding. I like to have three distinct pots of money, rentals that cash flow, 401k and then an after tax brokerage account in the market. I think it is very important to have asset diversity which allows one to choose which asset to draw from, depending on what is happening in the market.