Rental debt snowball?

Question

When people use the rental debt snowball approach, do they typically pay off their personal mortgage first or would you pay off the rental mortgage first? Looking for advice! 🏡

Joe Splitrock · Answer

@Kristy Swenby pay off your primary residence first. The interest for a rental property is tax deductible. Another option is save the cash to buy more properties that generate cash flow. I call that the "cash flow snowball". Each property I add gives me over $400 additional cash flow, which allows me to build up another down payment even faster. At some point you have so much cash flow that you could quickly pay off properties. I view that as the end game strategy. I am not sure where you are at in your investing journey, but something to consider.

Pat L. · Answer

Back when I started I paid down the principal residence mtg to drop my DTI. The rentals all paid for themselves & the majority were seller holds. But I made the mistake (now foresight) to slam the rents down on the mortgage principal(s). So as my high interest rate mortgages came due very 5 years I'd shorten the term so the payments would equal that of the rental income.

One day I was free & clear & never looked back...

Kenneth Garrett · Answer

@Kristy Swenby

I agree with @Theresa Harris analyze the best approach.  Look at tax consequences and direct cash flow.  The debt snowball generally takes the smallest debts in order of balances and you try your best to pay them off to give you little victories along the way.  Smallest debt first and then move to the next one.  It’s your plan, I encourage to talk to your tax advisor so you are clear of the ramifications of being debt free.

Theresa Harris · Answer

First look at interest rates, then look at deductions and balances.  Where I am (Canada), I can write off interest in rentals, but not my personal property.  If you can write off interest in your personal property as well, then interest rates and balances are the big two.

Would it motivate you more to know one is paid off or are you a numbers person, where you want the biggest bang for your buck?  If having one paid off would motivate you, start with the one with the lowest balance (assuming there is a large difference between them).  For a bang for your buck, look at which will save you the most money and make you the most money.  Is one property likely to result in more money coming in and less towards interest if you pay it off first?

Corey Hawkinson · Answer

@Kristy Swenby I’m going to use oversimplified numbers in my answer, but I agree with the others that have said pay off the highest rate first while considering tax implications. I’m still in the growth phase but let’s say I was ready to pay things off for my example:

Home mortgage: 4% interest rate. Not large enough to help with taxes as I take the standard deduction.

Rental mortgage: 5% interest. Tax deduction.

Tax rate: 25% (making the numbers easier to follow)

At first glance it looks like the rental is costing me more, but considering the tax rate at 25% for comparison purposes that rate is 3.75%. So I would be better off paying off the personal residence first.

There is also the piece to consider how large each loan is because it will be easier to get the snowball rolling by paying off the smaller balances first, but I wanted to simplify my answer as much as possible.

Stephanie Simmons · Answer

@Kristy Swenby. What do you want to lose if everything goes wrong?  Personally I wouldn’t want the house I am living in to be lost before a rental. Just my opinion.

Kevin Hunter · Answer

@Kristy Swenby, such a great topic and quite an emotional one for a lot of people.  If you are truly looking to maximize your money and intent of paying off properties free and clear, then in my opinion, you pay off the highest interest rate loans first.  You are ultimately saving yourself money that would be paid to the bank.  However, if you lean toward the emotional side of the investor pool, paying off the lowest balance property will allow you to achieve a free and clear property the fastest, assuming you are making the extra principal payment the same amount in both cases.  This also benefits you when dealing with lenders because it is one less mortgage you carry, etc...  Not a question someone can answer for you, but one I have been thinking about for a while.

Your question specifically is about two properties, a rental and a primary residence.  In this case, with all other things being completely equal, I would recommend the primary residence.  Consider your mortgage payment as rent you are paying yourself.  Paying this down quicker will provide more opportunities for you in terms of refinancing to reduce the payment, leverage in the case of a HELOC or cash-out refi.  These are in addition to the tax advantages mentioned several times above.

Tyler Weaver · Answer

Likely paying off the loan with the highest rate will get you the quickest return. Another consideration is how bankruptcy law works in your state. Not a fun topic to think about, but the equity in your home is likely exempt from bankruptcy and you can keep the home up to a certain dollar amount of equity.

Rental debt snowball?

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