# Analysis of pay-off vs. keep loans

7 Replies

I've read dozens of pros and cons about paying off properties early compared to paying off in 30 years. I have felt paying off was mostly a benefit for peace of mind and saving on the interest. (Yes, I know the arguments deductions for interest, etc.) However, I heard Suze Ormon give another reason and I just want to verify the math before I get too excited...
We've got \$2,160 cash flow minus all expenses per month.
Is it true we would have to have \$675,000 at 5% interest in order to generate the same income and preserve the capital?
That compares to \$475,000 in total we paid for the properties. (Well, we also had a few years of interest before paying them off which I have not included but should to be completely accurate.)
Am I missing something in this anaylsis?

I did this calculation based on simple (non-compounding) interest:

2160 times 12 = annual interest needed = 25920

divide that by the interest rate percentage = 25920 / 0.05 = 518400

So, \$518,400 at 5% simple annual interest would give you \$2160 per month.

Hi, well Suzie is in show business too. \$2,160 monthly X 12 = 25920 / .05 = 518400. ALthough that does not account for taxes, 1-tax rate x yield.

It's your "preserve the capital" that I'm not sure what you mean. If you had 5% CDs that preserves capital, but doubt you'll find a 5% CD right now.

Paying off a mortgage early makes sence depending what your goals are. I'd suggest you not for an investment property, but that depends on your cost of capital and opportunities costs.....oh boy here we go again!

I have property that is paid off, I don't really care about humping deals anymore, don't need to, but if you're in the game you might have a better use of cash, we can't really tell you that here from what you have said (and you can't say enough to get good advice about that off a RE site). Good luck, Bill

Steve, I would have beat you to the button if I hadn't written sooo much! LOL

When will you be consuming the cash that is spit off by the capital invested? Absent that nobody will know what you mean by "preserve the capital."

Is this for your personal residence or investment property?

If you can beat the cost of interest on your note with your money elsewhere then it makes more sense to not pay off the mortgage. This doesn't account for risk tolerance or peace of mind at all. There is something to be said for having liquidity too.

Here's the website I used...
http://moneycentral.msn.com/personal-finance/calculators/retirement_income_calculator/home.aspx#Results

But I see that it also has 3% rate of inflation per year so maybe that makes the difference.
By preserving capital I just mean, maintaining the principal.
Yes, it would be impossible to find a CD at 5%--I was just assuming that I could get 5% in a mixture of investments.

Mainly I'm doing this as an exercise to see the pros vs. cons of paying off early. I had not considered how much cash you need to generate the same amount of income as our rentals get. Also, I'm not including any appreciation of the property in my analysis, which hopefully will go up again in the future. (We still have some appreciation since we purchase them well before the market tanked.)

OK, so if you look at inflation, don't forget appreciation which will also reflect higher rents, but then your future expenses will also increase, like the plumber's bill and materials. I don't think you'll get much out of this over a thirty year term, other than a headache. But that's why the invented calculators! LOL Have fun with it....Bill

Bill-Yeah, you're right, the rentals can be a pain in the butt. Yet, for some reason, it seems easier to me to buy properties and pay them off early than to save money and try to invest in the stock market to get generate the same amount income.

Then that's you plan, it's as good as any other! So, your "question?" is a mute point, IMO. Pay them off in a manner that is comfortable for you and it will likely happen as you plan! Good luck, Bill

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