Pay off my mortgage?

12 Replies

Hi I am looking for some advice, heres my situation:

$82k Mortgage

8 years left

3.75%

$1000 P & I payment

Personal Assets:

$180k liquid cash ready to deploy into real estate

I live in Northern California and so far have not had any luck deploying my funds into real estate here (really hot market, seems overpriced, my offers are constantly beat out). I am contemplating paying off my mortgage to free up my monthly income but I am afraid I am leaving returns behind by not instead placing the money in a deal(s).

In addition, I am contemplating investing the money into cash flowing properties outside of California but I have no experience in this.

I guess the question is, can I invest the 82k in real estate instead and achieve a net monthly cash flow of $1000?

Any advice/thoughts is appreciated!

Thanks

Roman

Short answer: No, keep paying your monthly mortgage payment. and invest your $82k in another property

I am not familiar with your specific real estate market. So I don't know what type of property you can buy with the $82k as a down payment. In Chicago, that $82k could get you a fourplex in some parts of the city. Maybe not so in Northern California. 

Since your mortgage is at such a low rate (3.75%), there isn't much of an interest savings to paying of the loan early. 

@Roman Kozlov   If you pay off your mortgage, your debt load will go down; but if your debt ratio is good, I'd use that money to buy a rental instead.  The $180K you have is could either buy a rental free and clear or be used as a down payment on a house (or multifamily).  Talk to your bank to see how much they will lend you and go from there.

better keep the mortgage and invest the cash into real estate. 

you can probably yield between 7 and 9% out of state. Since your bank is only charging you 3.75 the  you get a nice cash on cash return. Besides it's harder to get a mortgage on investment property and rate is higher. 

you don't have to go out of state you can go to tertiary markets within 90 minute drive of you and get just about as good of cash flow safely.. if you then decide to go out of state just use on metric.

buy a property at or as close to the median price point of the msa  so for iNDY Lets say that is 130k to 140k might not be super winner.. but it will keep you safe.. you go looking for highest yield in these markets and your looking for trouble.. good quality assets in any market are what you want.  much safer

Your P&I is $1000 per month.  If you pay off the loan you are not actually saving $1000 per month, you are only saving the interest.  So compare the investment you make to that interest.  You have a great rate, historically low even.  I'm not sure how freeing up monthly income would be all that helpful when you already have a pile of cash to use as necessary.

Stay patient.  Look for that house you can be creative with that others might not see the opportunity in.  If you keep all that cash in a high yield savings account you are already making back over half of what you would save by paying off your current mortgage.

This will not be a popular strategy with interest rates being so low but I appreciate having my primary residence mortgage free.  

Yes, there is potential to increase your returns if you deploy that capital elsewhere.  It really depends on your risk tolerance, personal strategy and short/long-term goals.  You're afraid to leave returns behind but I wouldn't invest money you can't afford to lose either.

No matter where you buy,  you'll most likely be buying high.  I have no idea where we are in this cycle or when it will change but real estate appears to be pretty expensive right now.  Unfortunately, many investors continue to buy high and will most likely be selling low when the shift occurs.  

Looking at net cash-flow comparisons is the way I do it.  Is $82k worth a hassle-free, risk-free (opportunity cost aside) and tax-free perpetual $1000/mo return? I say yah and have done the same many times. 

Others may not strive to be a Napper with freedom and choices.  Others may balk at this simple reasoning and suggest you buy a mediocre investment in this frothy market, frustratingly hunting and turning 200 rocks to get it.  Shaking their heads as they slog off to punch in. 

I'd pay it off and be done with it.  Funny thing is, when I do this and my opportunity fund gets lower, I focus and build it back up quickly. I bet you'll do the same.  Only having $100k will trigger action. 

And you can always get a heloc if you're worried about missing out on something.  Congrats on having this awesome choice!

@Roman Kozlov if you are not finding anything, I would just pay it off. Your return is the interest rate and you are taking risk off the table. If you really want to have a mortgage you can always get a heloc down the road to invest.