Updated about 15 years ago on . Most recent reply
Payoff mortgage on rental
I am a conservative investor who has a good income and good liquidity. I have a rental home that is getting into a range where I can pay it off this coming year. The benefits to this are:
-less debt
-increased cash flow (at the expense of liquidity)
-interest savings on mortgage
Beyond simple issues like opportunity costs, are there tangible disadvantages to paying off a rental house? Will I be taxed on all of my rental income if I do this or is there a way I can do a charge back for the money I contributed to pay the mortgage off? That is one of my major concerns but I am interested in any other issues I might have missed.
Most Popular Reply
Paying off your debt takes some of your cash out of circulation. It will come back to you over time in the form of additional rental income. You will pay a little more in taxes but this is offset by paying much less in interest.
If your low interest real estate debt is the only debt you have it may make sense to pay it off in your case. Being debt free is a great position to be in. It is also a very safe position to be in. Over the long haul though it is tougher to build your investments when you have no leverage at all.
Opportunity cost is the biggest reason to consider not paying off the mortgage in full. I would look at the payoff like any other investment. You are using cash that in return creates a stream of after tax income. If this cash investment is producing a stream of income after taxes that meets your investment goals great. It is low risk and has a good return.
Generally though returns correlate with risk and wisdom. An investor that has learned to read the market and has a good sense of what the real value of RE is in various scenarios can successfully get much better returns with at least some leverage and minimizes the risk involved.
You have to know your risk tolerance. It is also important to understand your market. Is your job situation secure? Do you intend to build your own business someday. Is RE a part time pastime or a full time endeavor? Will it ever be a full time endeavor?
I think if you look at your goals, opportunities and needs you will have a better idea of how you want to invest this cash. Maximizing the investments you have is not a bad strategy. Creating new opportunities is not a bad strategy. You know your particular situation better than anyone here.