Pay off Mortgage Early or Take advantage of low interest rate and

7 Replies

Hi All! 

I'm curious to know people's opinion on this situation. I just closed on a duplex ($166,500) in ohio that rents for $1960 (section 8). I have a 30 year fixed mortgage at 4.87% , loan balance $125,000. I'm reading that if I make bi-weekly payments, I can pay off the mortgage faster and avoid paying more interest. However, this is also my first investment property in which I continue to grow with. Would you be more concerned with paying off the house early or continuing to leverage?

@Rik Patel - This is definitely a personal choice.  One the one hand, responsible leverage will magnify your cash on cash returns and enable you to stretch your investment capital.  Leverage also enables you to diversify your holdings and, thus, spread your risk.  Many of the growth-minded investors here are going to echo this sentiment, especially those looking to achieve F.I. through cash flowing rental properties.  After all, the more property you own, the more you benefit from all of the ways real estate pays you. 

On the other hand, irresponsible leverage, especially in the commercial realm, can create significant risk to your holdings should cap rates increase significantly in the future.  Irresponsible leverage can lead to a negative cash flow position if rents drop.  Irresponsible leverage has resulted in investors losing their properties all together when they try to refi an underwater commercial investment.  There is definitely a crowd that "sleeps better" knowing their properties are paid off or have low leverage.

I think there is a happy place in between - one that lets you take advantage of the growth leverage affords, but has enough equity and cash flow to protect against downside risks that recession brings.    

Originally posted by @Rik Patel :

Hi All! 

I'm curious to know people's opinion on this situation. I just closed on a duplex ($166,500) in ohio that rents for $1960 (section 8). I have a 30 year fixed mortgage at 4.87% , loan balance $125,000. I'm reading that if I make bi-weekly payments, I can pay off the mortgage faster and avoid paying more interest. However, this is also my first investment property in which I continue to grow with. Would you be more concerned with paying off the house early or continuing to leverage?

Continue leverage.  We are in a historically low interest rate period.  Use it to scale your business.

 

@Rik Patel    What are your goals?  If you want to buy more properties, put that money aside for a down payment on your next place.  Times to pay them down quicker are: you've maxed out your debt to income ratio, you aren't planning on buying more rentals or interest rates are high.  Take advantage of the low interest rates. 

Really tough to say without knowing your goals.  Do you have a certain dollar amount you are looking to make each month in cash flow for all your properties?  I would figure that out first.

With the interest rate being so low and the tenants paying the rent I see no problem with letting someone else make your payments.  On the other hand if you are really bothered by having that much owed and have the ability. You could certainly pay it off which will increase your cash flow more.

If your goal is to increase your cash flow and you are far from that I would use some of that cash flow for a down payment on more properties.

Everybody has different strategies and you will find what works best for you.  I know of investors that work to pay off 1 house before buying another and others that instead of paying off 1 house buy 2 or 3.  It really depends on where you want to get to.

Podcast #305 kinda went over the pay for a house in full strategy.  In his case he knew the dollar amount he needed per month to live and figured out he only needed 5 properties to make it happen.

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