Payoff mortgages or not

37 Replies

I have two rental properties in Missouri. Both with a mortgage. One of them has $25k left on it and the other one has $90k on it. If I pay them off in the next few years I would be cash flowing right around $1,800/month. Should I pay them off if I can have them both paid off in 5 years or not?

That depends on your goals.

I started by determining what my "end goal" would be. Let's say I want to earn $100,000 a year (using today's dollars) for my retirement years. 100 houses renting for $1,000 each will help me reach my goal.

I start buying houses. I will continue leveraging my equity and borrowing from banks until I have 100 houses that rent for $1,000 each. If I manage to buy a 20-unit apartment complex, I'll have to adjust the total number of units because the apartments may only rent for $600 each.

My goal is to acquire the right number/mix of units that - when all paid off - will earn me $100,000 in cash flow. Once I reach the right number/mix, then I start paying them off from the smallest debt to the largest.

This should have a snow-ball effect so I can pay off the units in a short period of time, perhaps 5 - 7 years. By that time, rent rates should increase so I'm actually earning enough to cover expenses and still net $100,000 a year.

Long story short, I would keep a mortgage of 30% or so and focus on acquisition until I'm 5 - 10 years away from retirement or whatever your goal is.

No you wouldn't be cash flowing around 1800/month.  That "extra" money you are adding to the cash flow is just money that is now catching up to the cash you negatively put into your properties.

Since you don't mention what the payments are now for those two mortgages, I'll assume it would be a total of 1000/month you are now paying for them.  That said, it would equal 12k/year.  That means if you pay off 115k, cash out of your pocket, it will take you about 10 years before you break even.

If you want to increase your CF, take that same 115k in cash and buy another property (20% DP) that will cash flow, and let the tenants payoff your mortgages.  That's their job, and they're really good at it...don't help them...they don't need it,

The explanation of this goes back to simple math...vectors (for those that remember those days, and said you would never use them).

                                            0     (-103k)   (-91k)  (-79k)   (-67k)    (-55k)  (-43k)   (-31k)   (-19k)     (-7k)   115k 

Cash in hand at start:  .    I           I            I            I            I            I           I           I             I             I           l  I          

Payoff Mortgages:       .     I<----------------------------------------(- $115k)------------------------------------------------X            
CF recovery Yr #1:       .     I------->
CF recovery Yr #2:                       . I------->
CF recovery Yr #3:                                    . I------->
CF recovery Yr #4:                                                 . I------->

etc.... until you break even near the end of year 10    . I-------------------------------------------------------------->

No financial benefit to paying off houses.

you might FEEL better at night if mortgages stress you out, but that's the only advantage. Paying off houses just trades liquidity for non-liquidity, which isn't an improvement.

Hi @Jason Waldo

Mortgage basics: When making mortgage payments, you are paying repairs + PITI (Principal, Interest, Taxes, Insurance). When you pay off a mortgage, you still pay repairs + PITI (Principal, Interest, Taxes, Insurance)

Alternative: Rather than putting profits into existing debts, put your surplus cash into more investments, such as lending or acquiring more deals.

Proof: Corporations try to be debt free. They borrow money by issuing bonds to then purchase assets that produce more profits than the cost of borrowing. I believe we should do also the same.

If you have nothing else to do w/ the money, then yes pay it off. You're getting better return then the money sit in a bank account. Now, if you actually want to grow your portfolio or have other debt, look at the numbers. If you have debt then look at your rates and pay off the higher ones first. If you're planning on investing then save the cash to invest it, even if you just keep it liquid to satisfy reserve requirements.

Thanks for the different ideas and opinions. My main goal as of right now is not necessarily a “really” good ROI on my money which might sound silly to some of you. My main goal is to get enough money coming in from my properties. All my expenses added together are right around $1700/month. So my first goal is to cover that and then use those two properties as collateral for getting loans on other investment properties.

I know you guys would probably like to know the numbers for the properties. Let me know how they look to you.

Property A) bought for $32,000 and rents for $940/month. Mortgage is $326/month put nothing down for the property.

Property B) purchased for $100,000 put 5k as a down payment and currently rents for $975/month and the mortgage is $645/month.

What do you guys think of those #’s? I think they are pretty decent myself.

Looking forward to hearing your thoughts.

@Alexander Felice , I mistyped when editing, good catch!

*Proof: Corporations never try to be debt free. They borrow money by issuing bonds to then purchase assets that produce more profits than the cost of borrowing. I believe we should do also the same.

Originally posted by @Nathan Platter :

@Alexander Felice , I mistyped when editing, good catch!

*Proof: Corporations never try to be debt free. They borrow money by issuing bonds to then purchase assets that produce more profits than the cost of borrowing. I believe we should do also the same.

 haha now this is a statement I can get behind!

#teamwork ;)

Your numbers look good on A, unfortunately B is not that great. You would make a higher return on 100K in a income fund than paying off B. B would have significant negative cash flow if paid off and would be a liability. 

@Jason Waldo looking at your numbers, the total rents are $1915. If you expect to cash flow $1800 that means your expenses are around $115 a month. That is pretty low for taxes, insurance and repairs. Not to mention vacancy and CAPEX. I am not saying the investments are bad, but don't overestimate your cash flow for planning purposes.

If your end game is using the properties to buy more properties, why not just save up cash to buy more properties? The new properties act as collateral for themselves.

This is basically a loaded question here on BP. Almost everyone will tell you to not pay off early and what not. I tend to be somewhere in the middle, in that I like to pay down my debt early (using my excess cash flow) and may accelerate this more down the road. The people I know who paid off rentals or their primary houses early are millionaires, and I don’t think they care that they didn’t make the right financial choice initially.

@Jason Waldo   If you are happy with 1800 a month of cash flow then pay them off but if that doesn't get you to your goals which I assume are much higher you have to be comfortable with debt to grow your business.  I would leverage to some degree and get more rental properties by cash out refinancing, or pay them off first and take out a line of credit so you have access to "cash-like" funds.

When you pay off mortgages you lose the main advantage of investing in rental properties which is leverage. You also drastically lower your cash on cash ROI. Also the more equity you have in the property more risk and liability you have. I wouldn't pay off the properties but instead use the cash you would of used to pay off the properties to buy more properties. Let your tenants pay off the mortgage!

@Jason Waldo , I'm going to take a contrarian view to most of your responses. As a syndicator who uses leverage for a living, I like to keep leverage on my personal investments quite low. This allows me to act fast on new opportunities that hit the market. 

We have been witness to one of the biggest real estate booms in the history of the US over the past 7 years, and many investors have forgotten the fear of leverage. 

My advice: Payoff the properties, and open a line of credit. Use the line of credit to quickly act on new acquisition opportunities.

Best of luck!

Originally posted by @Tyler Kastelberg :

@Jason Waldo , I'm going to take a contrarian view to most of your responses. As a syndicator who uses leverage for a living, I like to keep leverage on my personal investments quite low. This allows me to act fast on new opportunities that hit the market. 

We have been witness to one of the biggest real estate booms in the history of the US over the past 7 years, and many investors have forgotten the fear of leverage. 

My advice: Payoff the properties, and open a line of credit. Use the line of credit to quickly act on new acquisition opportunities.

Best of luck!

 Tyler,

You are saying the same as everyone else. yes you like to pay down more so that there is more equity but you are using that equity and creating a lien against the property in the form of a HELOC and then stripping that equity from the property to purchase more properties, you are using your own money and not the banks money to invest more. i would rather use as much of the banks money as i can and not my own and have the tenants pay the mortgage down for me while gaining the equity of the property and income with little invested. I understand the more you have paid off the more is available and ready for you to buy more but why give it to the bank to reuse. if you pay your regular payments, and your tenants rent covers all expenses, and put the profit in a savings account when another property comes up you use the money in the savings as down payment, interest free.. what you are doing by paying down the debt, then borrowing from the equity, is paying interest on a loan against money that should have been in your savings earning interest, not much, but earning but you are still doing the same as everyone else has mentioned by keeping the payments going and then using the equity that is in the property to buy more properties.

Patrick Liska, Contractor

https://www.google.com/search?ei=XTZjWonGDo_YsQWfyLWgBQ&q=should+i+pay+off+my+mortgage+bigger+pockets+&oq=should+i+pay+off+my+mortgage+bigger+pockets+&gs_l=mobile-gws-serp.3..30i10k1.3626.12102.0.12775.28.27.1.8.8.0.261.4028.2j19j5.26.0....0...1c.1.64.mobile-gws-serp..1.27.3096...0j0i20i264k1j0i22i10i30k1j0i22i30k1j33i160k1j33i22i29i30k1j33i21k1.98.mjKCo4z6u90

That didn’t work as planned...a search on google for “should I pay off my mortgage bigger pockets” will return dozens of threads.

Originally posted by @Brandon Hicks :

That didn’t work as planned...a search on google for “should I pay off my mortgage bigger pockets” will return dozens of threads.

 Brandon, FYI,  You do not have to go through Google to search that, BP has a search at the top right of your screen and you can search for any subject you want and you will get back the different areas that the topic has been mentioned.

Patrick Liska, Contractor
Originally posted by @Jason Waldo :

Thanks for the different ideas and opinions. My main goal as of right now is not necessarily a "really" good ROI on my money which might sound silly to some of you. My main goal is to get enough money coming in from my properties. All my expenses added together are right around $1700/month. So my first goal is to cover that and then use those two properties as collateral for getting loans on other investment properties.

I know you guys would probably like to know the numbers for the properties. Let me know how they look to you.

Property A) bought for $32,000 and rents for $940/month. Mortgage is $326/month put nothing down for the property.

Property B) purchased for $100,000 put 5k as a down payment and currently rents for $975/month and the mortgage is $645/month.

What do you guys think of those #’s? I think they are pretty decent myself.

Looking forward to hearing your thoughts.

 What numbers?  You're missing a lot of them.  The numbers you provided are worthless without the rest.  You're missing all the expenses.  The rent means nothing by itself.  The measure you're looking for is Cash Flow.

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