Should I try to pay investment properties mortgage early and how?

Question

I have few rental properties and all of them have a mortgage. The idea so far is to pay them all off before I retire, so I have been using the cash flow to make extra payments, but I am not so sure that this the right approach.

First, should I really need to try to pay the mortgages early, or maybe just use the cash flow to buy me nice things right now?

And if paying early make sense, which of these options is the best way to accomplish it:

a) use cash flow on each property to make little extra payments on their own mortgage (current)
b) use all properties cash flow to make a big extra payment on the one with more or less equity
c) use all properties cash flow to make a big extra payment on the one with the higher interest rate

Thank you

Calvin Lipscomb · Answer

Not quite.  "First, should I really need to try to pay the mortgages early, or maybe just use the cash flow to buy me nice things right now?"  There are a number scenarios in which this may not be the best use of the money.  Next, defining best use can also be subjective or strictly numbers based.  What are your tax implications for paying early?  Disclaimer: Always consult a financial  professional to see what is best and right for you.

Chris Tran · Answer

You didn't give enough info in your description for us to give you a good answer. The best course of action depends on how much you owe on each property, how much they cashflow, and what your life goals are.

Thomas S. · Answer

It makes very little scenes to pay down a income property mortgage. I never recommend anyone do it if they want to increase income however you are an exception. If all you are going to do with the income is waste it on buying "things" then by all means pay down your mortgages. Saving 4% is better that throwing your money away.

In the case of planning for retirement the best option, when no longer wishing to expand your investments, is to pay off your properties then liquidate when you wish to retire. Investing your money in a income fund is a far better plan, income wise, than retaining rental properties after retirement.

Does not make much difference which payment method you choose since the financial difference is likely not significant. Dead equity is only money waiting to be put to a better use.

Paul Allen · Answer

From a 'pure math' standpoint, if you can invest that excess cash flow at a higher return than your mortgage interest, then it makes more sense to reinvest it than to pay off the mortgages.

We don't really live by pure math, though. If we did no one would ever go to Italy or buy a boat.

The problem with answering your question is that you have not clearly articulated your goal(s). You seem to be saying, "My goal is to pay off the properties, should that really be my goal?" We can't answer that for you. We can only offer alternatives to paying off your mortgages. Only you can decide what is right for you.

Don't feel bad about that. Most of my clients struggle with articulating their financial goals. In many cases I spend the bulk of my time with a client trying to get him/her to define what "I want to retire comfortably" means. It's impossible to make a cogent plan without a quantified goal, though. So, squirm as they do, I drag them through that process. (My wife, by the way, is my absolute worst 'client' in this regard!)

Best of Luck with Your Real Estate Investing!

Sam Shueh · Answer

Interest rate variance. Work on total payment schedule pay off the highest interest rate off first so you have less total payments.

We are at the market top.

Trevor Ewen · Answer

@Juan Del Arco

I like the think of this in terms of opportunity cost. Let's say your mortgage rate is 4%.

You have 10K to invest today. Would you invest it in something returning 4% (or less), guaranteed? If that's the case, then you should go with a pay-off. If you're half and half, invest $5k in the pay-off and $5k in something with more risk.

If you can (reasonably) earn a higher low-risk return somewhere else, then I would hold off on the early payment.

Chris Tran · Answer

Lot's of different options on how to proceed, but difficult to help you without more details. All 3 options you laid out are valid paths, but can't help you figure out what's best without mode details.

Typically paying off highest interest is best, but depending on the balances and rates on each house, that may not help you snowball.

Should I try to pay investment properties mortgage early and how?

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