Paying off rental props vs. tax deductions for mortgages?

Question

We have a couple of rental properties that are almost paid off. We also have a very large mortgage on our personal residence. We have no other debt.
My thought process is to pay off the rental property with the smallest mortgage as fast as possible with our extra cash flow, then use that rental income to pay off the next smallest mortgage of another rental prop, and finally when that property is paid off we want to use all the rental income to pay off our personal residence quicker so we can retire without this giant mortgage payment. Are we making a stupid mistake from a tax standpoint by paying off our rental properties so fast?

Lynn Z · Answer

I know Dave Ramsey talks about paying the smallest debt first.  He really didn't touch on investment mortgages although he makes the statement that you need alot of money to invest in real estate and most investors don't have alot of cash.  I agree with him but am not sure about the smallest interest mortgage.  It's psychologically appealing but investors' mortgages are unlike credit card debtors when it comes to paying down that type of debt.

I have a $46,000 mortgage and a $110,000 mortgage.  The lower balance is at 5.85% and flows about $100/month and the larger balance is a 6.375% and flows $300/month.  I think if interest rates dropped back to 4.7% or 5% thereabouts on a 15 year, I might reduce that $110,000 with that $46000 cash I"m holding and refi at a loan of around $64000 which will pay off with "gazelle intensity".  The cash is earning 5% -6% in rewards checking accounts and that really offsets the gains on the small debt relief.

I've know realtors who do this refi with reduction in years down to 10 year mortgages etc. and seem pleased with the results.  Just a thought.  One problem is,  mortgage companies don't want a low mortgage loan sometimes...not worth it they say.

Shari Posey · Answer

We did get the idea from the Total Money Makeover, we just weren't sure if it applied to income properties as well as for our personal residence.

In these uncertain economic times, I "feel" more secure by owing less.

Frank Adams · Answer

Sounds like the Dave Ramsey "debt snowball". Great idea! I know some people on here will disagree but I like the no debt deal. I paid off my last mortgage (residence) in '97 or '98, at the time I owned 16 rentals, free and clear.

It gives you tons of flexibility.

I strongly disagree with the concept of "tax advantage". Giving the bank a DOLLAR to keep from giving the government a QUARTER, is dumb. Or, to paraphrase someone I read on another REI site; "If you're willing to trade dollars for quarters, we can trade as fast as you like, for as long as you like. When you get tired, we'll quit".

Go for it.

all cash

Richard Warren · Answer

I agree with all cash.  A tax deduction just means that you lost money.  The other side of the coin is to ask, “what is the best use for this money?”  If there is a better investment than paying down the mortgage you should consider that.  Don’t downplay the psychological factor of having the mortgage paid off.  If you haven’t read The Total Money Makeover by Dave Ramsey, you should.

8)

Hunter Grey · Answer

Your idea to pay down your rentals before your own mortgage is incredibly smart and 100% the right thing to do. Here is why:

The government has decided to debase our currency in order to save financial institutions and keep the U.S. from falling into a deep recession.  In other words, The Fed is printing more money now than ever before.  With an increasing money supply the price of goods and services also must increase, because we will have an increased amount of money fighting for the same amount of goods and services.  I guess I could have said all this with one word

INFLATION

So what does inflation have to do with you paying of the mortgages on your rentals before your own mortgage?

Well as inflation rises so to will the rents on your rental units.  The cost to rent throughout history has kept pace with inflation. So  Lets say inflation is at 6% and you raise your rents by 6% per year.  You won’t be getting any richer, you wont be able to buy more goods and services than you can today, but it will be a lot cheaper for you to pay of the mortgage on your house, because that mortgage is fixed – it did not increase with the inflation.

And even If you do have an adjustable rate mortgage I doubt it will keep pace with inflation.