25K should I pay down mortgage or invest at 7%

19 Replies

I have $25K in savings and am putting 2-4k each month into this saving acc it is currently invested and making about 7%. My question is this should i keep investing it and make 7% APY or should i pay the $25k to principal  on one of my mortgages and also pay the 2-4k a month to the principal on my mortgate were is the better return on my money. 

Rob,

Not when we average 18-24% rate of returns

Jim Sakalis

Use it to acquire another property that cash flows. Leverage

Depends on a couple of things... 

1. What is the interest rate on the mortgage(s)? It is Unlikely to be higher than 7%, so you would be losing money by transferring the money to pay off the mortgage.

2. What are your long-term plans in real estate? If you would like to acquire more rentals, it seems like the 25K and monthly savings would be put to better use in acquiring another property. 

Considering your question leaves you with two options, either paying down mortgages or investing at 7%, then I would suggest that you continue to invest.

I'm assuming that this $25k is not the only liquid savings you have. If it is, then I would keep some portion (6-12 months of living expenses) as a safety net. Then, I would continue to invest like crazy at the 7% interest rate. Remember, even if your mortgage interest rate is 7% (not likely if it's recent enough), it is still a business expense on your rental properties. This makes the effective interest rate lower because it's lowering your overall tax burden as well.

If your mortgages are on income properties it is not financially wise to have equity in those properties. Equity reduces your cash flow more than having a mortgage.

For you to be asking this question indicates you may not be financially educated to the level of being able to comfortably invest. You would be safest continuing to save as you presently are doing.

Greg S. In California, our prices are extremely high, let me rephrase 'insanely' high but our rent doesn't catch up to our monthly payments, in actually having equity doesn't hurt our case flow. Let me give you a simple example: standard 20/80 conventional loan, monthly payments excluding maintenance is $3000. Now, rent is $3100, if you are lucky. By paying down the mortgage your payment becomes $2800 perhaps. Now you have more cash flow.

I agree it's not good for leveraging to pay down mortgages but if you have negative cashflow on a property, that's also not a good thing.

@Rob Smith your question is circumstantial.  7% APY is not a bad yield however what are you investing in to get that return?  depending on what real estate market you're thinking of investing in, your returns can be the same or worse.  With that said, I'd encourage you to examine your current income/expenses to see what sort of reserve you need to maintain in case of emergency.

I agree with @Patsy Waldron . Paying down your mortgage gets you a guaranteed return of your mortgage rate x (1-effective tax rate). I highly doubt this figure is greater than 7%. If the question was whether to apply the 25k to a new mortgage for a new property or maintain investing in the market at this time, it would most likely come down to personal choice (ie. how much risk do I want?, how much leverage can I comfortably take on?, etc.)

@Rob Smith as long as you are making more money on your rentals than you are paying on your mortgage...buy more rentals.

I'll break down in conceptual form. 

If you are at a point in your life that wealth conservation is more important, then pay down the mortgage.  If you are going after wealth accrual, then invest, whether in that 7% investment or other real estate ventures.  

That's two great comments in a row I have read from @Daniel Chang

I was going to say the same hung. How old are you? How long do you plan on working? That should really guide you to your answer.

Thanks guys for all your answers 

 I am 45 yrs old i have 4 rental properties 1 losing a few 100 a month i am going to be selling it in the next yr or 2 once it climbs in value.  i have another rental it is making a few hundred a month positive and i have 2  more rentals they are both making me about 300 a piece each rental. I have about 28K in savings and i am putting about 3-4k a month into savings i have no debit other than the rental property mortgages and i am positive on each home except one. So i am trying to find out my next move i worked it out in an excel sheet last night and it looks like what is going to be best is to pay off my lowest rental that will take me about 4-6 months then i am going to take the 3-4k a month and invest in a 7-10% APR vehicle  I am going to take the extra money from the mortgage that i payed off and snowball it into the rest of the mortgages by age 55 i should have 2.5 homes paid for and about 10 yrs away from having them all paid for and a million or more invested with a pretty good monthly interest payment and a business that i can think about selling for a few 100K  and maybe retiree but that means i dont buy another rental for 10 years i am not sure if i want to wait that long on buying another rental ether but i guess cash is king and i can always change my plan down the road 

Rob,

There have been some good suggestions and comments. I'd like to pose the question and ask you what is your 7 - 10% APY vehicle?

Is this a guarantee?? Typically I can get these returns in the stock market but they are not consistent nor are the guaranteed.

I tend to diversify and pump a lot of my real estate income into the stock market (dividend paying securities mostly) to diversify my assets. This does take away cash to invest in more rentals but I feel like if a super deal come up too good to pass up on I always figure out a way to come up with the funds.

Another thing to consider is with rates so low right now it really is a great time to leverage and buy some rental property for the long term buy and hold investor.

Good luck!!

Chris

Hi Chris Masons i invest in notes with at least 18 months of never late pay history and 700+ fico scores 

Hello Rob Smith,

I'm still new to all this so bare with me.

That 7 % return would be 1,750 $ per year, right? Won't you make more if you buy another house and use that 25k for the down payment?

What do you think would be the cash flow of a new property after paying all the expenses? I'm asking because if you have 145 $ of monthly cash flow with the new property you are already making the same amount of money while paying for another house at the same time.´

I'm sorry if I'm missing something here.

Wonder what is the 7% investment. As someone suggested earlier, if it's stable and and somewhat safe investment, especially nowadays, i think you should stick with it. 

Originally posted by @Dani Sung :

Greg S. In California, our prices are extremely high, let me rephrase 'insanely' high but our rent doesn't catch up to our monthly payments, in actually having equity doesn't hurt our case flow. Let me give you a simple example: standard 20/80 conventional loan, monthly payments excluding maintenance is $3000. Now, rent is $3100, if you are lucky. By paying down the mortgage your payment becomes $2800 perhaps. Now you have more cash flow.

I agree it's not good for leveraging to pay down mortgages but if you have negative cashflow on a property, that's also not a good thing.

 Wait a minute. Paying down a mortgage does lower your monthly payment. Once you get a mortgage your payments are set, they change it only for variations in your escrow account. The only thing paying down a mortgage does at that point is pay off the property sooner. 

Were i am getting my 9-13% ROI is buying 1 year seasoned loans they have never been late for the past 12 months and they still have 12 months left to pay they have 700 fico score or better, as with every thing there is risk but i have been doing it for a few years and am very happy with the minimum risk i have experienced

here is another thing you can do call your bank and ask them about loan reforecasting it keeps your loan at 30 years but it drops your monthly payment what you do is send them the 15K and they take that amount off your loan and reforecast it over 30 years and give you a new lower payment that is if you want more money monthly or your could just keep paying the same amount and pay off your home faster saving lots of money or like Nuno suggested and buy another home that is always smart 

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