What to do with excess cash?

Question

So I have a good problem...I am running 2 short-term rentals and they are producing a large amount of excess cash which is currently sitting in a business savings account doing nothing.

I have mortgages on both properties.  First is a 30-year ~3% and the other is a 15-year ARM at 4.375%.  The savings account is giving me 0.4%.

I am not interested in buying another property at this time and I would like to do something with the money instead of it just sitting there.  The easiest option I see is paying off more of my mortgage each month.

What would you suggest?  Thanks!

Kenny McCarty · Answer

@Chris Mason yep this was my exact thinking...got the oh crap fund fully loaded and I don't like lending my money out at almost 0%.  Just wanted to make sure I wasn't missing some magic math equation with regards to tax deductions or something like that.

@Hai Loc I wouldn't be against investing the money in notes but I have done zero research into that...perhaps some light reading is in order

@Matthew Paul I already have all the nice things I will ever need :-)

Chris Mason · Answer

If you muck about in a spreadsheet for 3 hours, you will eventually conclude (if you've mucked about long enough) that the ROI on paying down a mortgage is exactly equal to the interest rate. That holds true if you sell it in 6 months, and it holds true if you own it until the mortgage is paid off in full.

So that's at least a guaranteed 4.375% return if you throw it at that mortgage. Better than the 0.4% the savings account is paying.

Expressed another way: You're borrowing at 4.375% but "lending" the bank money at 0.4%, the spread between those two %s is basically what the financial sector is extracting from you each year on the sum of money equal to the lesser of the two balances ...& now we've discovered the crux of how banking works at a very basic level.... "borrow"/buy from Consumer #1 and pay 0.4%, then lend/sell that exact same money right back out to Consumer #2 at 4.375%... except in your case you are BOTH consumers, you're selling them money and then buying that exact money right back at a higher price.

Obviously I would suggest first maxing out any employer-matching 401ks or other tax-advantaged retirement accounts, having a good "oh crap" fund, etc, as those are similarly low risk but generally will beat 4.375%.

Matthew Paul · Answer

Or go buy something nice for yourself .

Kenny McCarty · Answer

@Brian Garrett does Ally or American Express have business accounts?  I have my personal stuff at Ally...but never saw an option for a business account.

Brian Garrett · Answer

There are many savings accounts that pay 2%+ such as American Express, Ally, etc.

Hai Loc · Answer

Your interest rate is relatively low. I wouldn't bother paying down your mortgage unless the LTV is over 75%. I would pick up some cheap notes or private lend to get DD yields