Smart to pay down the mortgage sooner with low interest rate?!

General Real Estate Investing
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Smart to pay down the mortgage sooner with low interest rate?!

Kegan Brenner
Member since 2024 · 12 posts · 7 votes

Hello all, I am new to the group and wanted to start by asking a question on our business office building. My wife and I own a dental practice and purchased our building. Purchase price was $2M and we financed $1.7M @ 4.32%. Our mortgage payment is $12,849.05 per month. Now I know with that we got a great interest rate and at first I planned to not pay it off early as our tax break is helpful. However, now that we are exploring real estate more I was considering paying off the mortgage earlier to have more cash each month to invest elsewhere. My questions are:

a) Is it worth paying that 15 year note off earlier with that interest rate?

b) If so, does anyone recommend the method of making 2 half payments per month? Is this a good strategy that actually reduces the life of the loan? When using this method, how do I go about this with my bank?

Thank you all in advance!

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
2y
Quote from @Dave Foster:

@Kegan Brenner, We set up one of our sons in an optometric practice similar to you.  Where the practice is the tenant.  And the real estate is it's own holding company.

 If the practice is successful then raise the rent on the tenant.  This keeps the money in your family but transfers it to the real estate holding company.  So it lowers the net profit of the practice which = lower taxes to the practice.

The higher rent is offset by depreciation and mortgage write off and operation expenses.  So probably at a much lower tax rate than the practice.

Any extra income goes to purchase more real estate with higher depreciable basis to offset the additional revenue from the rental to the practice.  And so forth and so on - as long as real estate continues to be this tax advantaged.

keep the great rate.  Use the excess cash to buy more real estate


Genius Move !!
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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    2y

    If you were to put aside the money that would go to extra payments, what interest rates would you get on that (ie would it make more money sitting in a high yield savings account instead of paying down a low interest rate mortgage)?  Once you had enough set aside for you next venture, you can use that money.

    Talk to your bank about what your options are-both in terms of could you borrow more money without paying down the current loan and what the interest rates would be.

    Everyone has different goals, so you need to decide what works best for you.  Some people pull all the equity out of their rentals to buy more, others like to pay cash for them, others pay the mortgages down faster because perhaps they want them paid off when they retire, others just let the tenants pay them down over time.

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    I hate owing people money, but….

    Put the money in a bank cd and earn 5.4% or more? 

    1Reply
  • Jake AndronicoBusiness Member
    Realtor · Reno, NV · Member since 2019 · 1k+ posts · 938 votes
    2y

    @Kegan Brenner

    You have to weigh what you value more: Peace of mind or a return arbitrage. 

    If you're making a 100% pure financial decision, you'll probably be more attracted to the potential arbitrage. 

    If you're making a peace of mind/life choice than paying it off could make complete sense. 

    Some people make pure financial decisions, but it's rare that continues in full force for the duration of your entire life. 

    Whatever you decide, congratulations on what you and your wife have built!!

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  • Kegan Brenner
    OP
    Member since 2024 · 12 posts · 7 votes
    2y

    Thank you all for the help! I think we will keep doing what we are doing with making our current required payments. I plan to keep working for the duration of the loan as I hope to still be loving practicing at that time! In which case we will then just pay ourselves rent and invest elsewhere. I also plan to either keep it and have the next owner rent from us or do a 1031 exchange, so time will tell!

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Kegan Brenner, We set up one of our sons in an optometric practice similar to you.  Where the practice is the tenant.  And the real estate is it's own holding company.

     If the practice is successful then raise the rent on the tenant.  This keeps the money in your family but transfers it to the real estate holding company.  So it lowers the net profit of the practice which = lower taxes to the practice.

    The higher rent is offset by depreciation and mortgage write off and operation expenses.  So probably at a much lower tax rate than the practice.

    Any extra income goes to purchase more real estate with higher depreciable basis to offset the additional revenue from the rental to the practice.  And so forth and so on - as long as real estate continues to be this tax advantaged.

    keep the great rate.  Use the excess cash to buy more real estate

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Kegan Brenner
    OP
    Member since 2024 · 12 posts · 7 votes
    2y

    @Dave Foster Thank you for the advice, I really appreciate it!! Would you ever refinance (not sure I will ever get another matched or lower rate) but take out the equity for more properties?

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Kegan Brenner, A refinance isn't a bad thing by itself.  But a refinance into a higher rate I would never do.  There's a time to hold em and a time to fold em.  And a time to rearrange em.  At times like this we stockpile cash for either cash purchases.  And let the amortization of the loan be our friend.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Bill B.:

    I hate owing people money, but….

    Put the money in a bank cd and earn 5.4% or more? 

    Bill but U have to pay tax on your interest on your savings and so if you pay a little more to the mortgage each month that reduces actual cash in the form of a saving ??? For me I like to just round up what mortgages I have which is only two.. But for me I would just round up to say 14k a month payment and have it paid off in 12 years instead of 15 or what ever the math comes out to .. thats just me I like to round things off..LOL

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    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @Dave Foster:

    @Kegan Brenner, We set up one of our sons in an optometric practice similar to you.  Where the practice is the tenant.  And the real estate is it's own holding company.

     If the practice is successful then raise the rent on the tenant.  This keeps the money in your family but transfers it to the real estate holding company.  So it lowers the net profit of the practice which = lower taxes to the practice.

    The higher rent is offset by depreciation and mortgage write off and operation expenses.  So probably at a much lower tax rate than the practice.

    Any extra income goes to purchase more real estate with higher depreciable basis to offset the additional revenue from the rental to the practice.  And so forth and so on - as long as real estate continues to be this tax advantaged.

    keep the great rate.  Use the excess cash to buy more real estate


    Genius Move !!
    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    2Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    2y

    @Jay Hinrichs

    I’m completely on your side of that argument. I have one mortgage left and I send them $40,000/mo just to “round it off”.

    My suggestion was just in case they wanted extra cash as a security blanket. And turn a TINY profit on the spread. 

    Ps. I think the taxes work themselves out because you get to deduct the lower interest paid on the mortgage. (Which you’r keeping higher by not paying off.) So you’re only taxed on the spread. (The profit.). 

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