Overcoming the Idea That Paying Off Mortgages Is A Good Idea

Houston, TX · Member since 2010 · 150 posts · 159 votes

Overcoming the mindset of paying down mortgages is a dilemma for me. Considering the low interest rates I am going to refinance a couple of my SFH rentals and my primary residence. It makes financial sense to me to refi and use the proceeds to buy more and better assets. On the other hand its hard for me accept reduced cashflow and new 30 year terms. I understand all the reasons to use leverage and pull equity out. I have no desire to pay off any RE other than maybe my primary residence and even that goes against financial sense. Has anyone else had this struggle?

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Twana RasoulBusiness Member

Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes

@Wade G. It doesn’t always have to be about optimizing everything and maximizing returns. There’s something to be said for having peace of mind and comfort

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Todd Goedeke
Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
6y
@Adam Martin how do you retire with 10 investment properties if each, after mortgage payments and all expenses only cash flows $200-$300 per month?
0 Reply
Todd Goedeke
Contractor · Sheboygan, WI · Member since 2016 · 921 posts · 266 votes
6y
You can t eat equity.
Cash flow is the only way to have any type of guarantee.
For the passive investor not wanting to fix toilets or deal with renters, there are plenty of master lease real estate investments. Investing with retirement funds and 40-60% leverage still allows positive net cash flow of 10%+. A key is making sure your property is leased to an experienced property management company or business like Walgreen s or Storage facility manager for example.
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Adam Martin
Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
6y
Originally posted by @Todd Goedeke:
@Adam Martin how do you retire with 10 investment properties if each, after mortgage payments and all expenses only cash flows $200-$300 per month?

My wording may be a bit off I plan on retiring at 55 so I’ll pay them down for 10 years and continue to do so. After expenses I generally cash flow about 500 or more each so that would put me at 50k/ year minus taxes. I’m also saving money on the side in 401k, 529, and hsa accounts so it should work out. The first home to pay off is mine since I’m not getting an interest deduction and then moving from there. I don’t have a lot of expenses so if mine is paid off I should be good to go if not and I work longer than it won’t be the end of the world.

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Curtis Phillips
Member since 2020 · 1 post · 0 votes
6y
I have known several very wealthy people some of whom made their wealth in real estate. The general strategy they espouse is to balance liquidity with the mortgage on your personal home, but in the end, the mortgage on your personal residence should be paid off as promptly as you can without sacrificing liquidity/portfolio building.
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Anthony Stephenson
Investor · Murfreesboro, TN · Member since 2013 · 59 posts · 80 votes
6y
Proverbs 22:7 says the borrower is slave to the lender. It don't get no plainer than that.. Pay off the house then get a HELOC set up to use on future investments!
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Jerome KaidorPro Member
Investor · Hayward, CA · Member since 2013 · 139 posts · 65 votes
6y
My properties are minimally leveraged. Generally I owe 10% to 30% of a building's worth. I'm open to refi-ing if there's no prepay. I refi'd one complex two years ago for cash out - but I kept it within reason, so the monthly payment did not go up very much. And I threw most of the cash proceeds back into the properties, keeping about a third of it in my "capex fund". A paintjob, a new roof, an earthquake retrofit.... It goes fast.
I like doing capex with loan money because I have to depreciate it. So I don't get to call that new roof an "expense" - and I only get a small fraction of the amount I paid as a yearly tax deduction.

I'm a lot more chary with loans for my personal stuff. My house has a small mortgage, which we are paying off with all deliberate speed. Expect to zero that one out in about 5 years. I have never taken a loan to buy a car.

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Steve Morris
Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
6y
I paid off my primary residence. So barring not paying property taxes, I can stay there.
The primary issue is - If I borrow $1 at 3% can I invest it and make more than 3%? On rental housing, that should be easy. Add in that each month (on an amortizing loan), you're increasing equity with price appreciation so there is long term growth plus operating income for return.
With a house, I guess you can say that paying 3% for no return beyond the use of your money spent paying the mortgage down is the argument you should answer.
However, I think for the being-able-to-sleep-well return, you'd beat 3% :)
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Ryan Copeland
Rental Property Investor · Columbia, SC · Member since 2020 · 245 posts · 275 votes
6y
When I think about paying off a mortgage, I look at all of the interest I would be saving on paying the loan off early. I'm not talking about paying it off in one lump sum, but adding extra payments over time.
Purchasing a $400,000 home on a 30 year mortgage, financed at 3.5%, the buyer will pay $246,624 in interest over 30 years. If that same buyer puts an additional $200 per month ($2400 annually, $60k over 30 years)....the buyer will save $60,200 in interest payments.
I personally hate the thought of paying all of that money in interest on my personal residence.
1 Reply
Robert Sanchez
Memphis, TN · Member since 2018 · 8 posts · 17 votes
6y
I used to abhor debt and embraced the paying mortgages off early theory. After many complex calculations and some real world experiences, tying up money in bricks and homes slows down the velocity of money to be invested to generate wealth. Equity always pays 0% when locked in a house. The faster you can tap it, access it to invest elsewhere is always the better play. Refinance to pull money out is always the better play especially in this low interest rate epoch we live in. HELOCs fare slightly less beneficial than a refi because they can be called by bank at any time and locked down at a higher interest rate than a refinance. Please never confuse a home with a house. You can make a home anywhere, but putting your equity to use and controlled outside of the house is the better play to generate economic prosperity. The banks want you to pay these mortgages early because they are arbitraging your equity to generate money. Hope this helps someone. Semper Fidelis, Robert
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Devan Sprayberry
Accountant · Woodstock, GA · Member since 2019 · 37 posts · 15 votes
6y
@Joe Cassandra I agree! Working backwards is the best way to find exactly what you (specifically you) want. There are so many opinions that are great depending on what their goals are.
Until you figure out what you want individually they (opinions) just seem to pull me away in a different direction.
Also are you still in Woodstock? We should meet up and grab some coffee/tea.
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Robert Sanchez
Memphis, TN · Member since 2018 · 8 posts · 17 votes
6y
One more that most people always forget to fully evaluate. They compare the total cost of the mortgage with interest but most always fail to calculate and factor in the opportunity cost of deploying that money into good investments.
1 Reply
Todd Hayes
Investor · Katy, TX · Member since 2013 · 24 posts · 1 vote
6y
@Chris London- if you are correct and housing prices drop which I also believe lending will tighten up. It already has. In fact, I wouldn't count on financing anything later... Grab your liquidity now and get ready for buying season because it is coming...
I appreciate this post as well. I believe that it depends on where you are in your investment/ life stage. If you are later you need not carry mortgages and risk. As a young person I was spread thin into many deals that cash flowed and appreciated. Over time that was excellent. Now I expect the down turn and I do not want to get caught with a lot of debt. So are selling.
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David Corder
Member since 2019 · 1 post · 2 votes
6y
Without a doubt pay your primary residence off. You will sleep much better
I've been through that last recession and everyone before thought there was no way house prices were coming down. And they did
2 Reply
Mark S.
Las Vegas · Member since 2020 · 38 posts · 29 votes
6y
I own 10 high equity properties. I paid all of them off. I'm not sure why anyone would want to carry debt and multiple mortgages if they don't have to.
My buddy has 22 properties (mortgages on all) and I make more money on my 10 than he makes on his 22. And right now, due to COVID-19, he has 7 vacancies - and it's burning a hole in his pocket and he's hurting.
Mine are all rented, but if any of them went vacant then at most my only expense is an HOA fee until a new tenant is secured. I don't have to worry about the market crashing or a bank taking one of the properties. Paying off properties gives you a real sense of security and peace of mind.

4 Reply
Mark Stair
Member since 2020 · 1 post · 1 vote
6y
You don't have to keep making more and more and more, or else you never get out of the rat race, you just changed courses.

However, in the current market, it feels to me that the dollar is going to lose value, just like it has for the past, so might be good to have debt. Here's an example, say you have a property worth $120k and get a loan of $100k and the dollar drops in value in half so your property is worth $240k and your less loan to value without doing anything. So holding property (and stocks) seems will be better than holding cash based assets like CDs, savings, bonds, and mortgages.

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David P.
Member since 2020 · 404 posts · 235 votes
6y
Correct me if im wrong but doesn't the new tax laws not help that much. In the last two years while filing my tax return the max deductions were capped at 10k. All the interest from mortgages didnt seem to be helping as much before when there wasnt a cap.
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Matt BellPro Member
Rental Property Investor · Montgomery, AL · Member since 2015 · 93 posts · 95 votes
6y
I have paid off 7 of my 11 personal rentals (have 24 in an LLC with a partner that are leveraged) but I am also putting in a place a secured line of credit on the 7 that are free and clear. With rates so low, I will have access to nearly $700,000 on my line at 4% interest if and when a good deal arises and then I can refinance that new purchase into a mortgage and pay off the line. I can also lend to friends at 9-10% interest and make an arbitrage on the rates but if I feel the market turning down I can probably call most of my money back in fairly quickly and be able to pay the mortgages on the leveraged properties as long as I maintain 20-25% occupancy. This gives me both economic security and allows me to scale some as deals arise.
3 Reply
Sonja Sevcik
Member since 2020 · 65 posts · 9 votes
6y
No debt is the best debt to have! To get started or to invest for others, it's a handy tool but look closely at the math. If you can take out debt, re-invest it in another profitable property, and it improves your cash flow then go for it. You should not use debt if the increase in payment on the refinanced property plus the payment on the new property leave you with less cash flow than before taking out the new debt. I've banked too many people who used debt to grow revenue and assets but not cash flow. Cash flow or selling the asset are the only two things that repay debt ... but, cash flow or selling the asset are the only two things that pay you, too. Make sure you pay yourself before the Bank, always!
1 Reply
Cassie ChunPro Member
Rental Property Investor · Mililani, HI · Member since 2018 · 51 posts · 26 votes
6y
@David P.
It sounds like you are referring to the state and local tax (SALT) deduction which is capped at 10k. SALT is a part of an individuals itemized deductions (Schedule A) and is not related to the tax benefits/deductions you realize on investment property (Schedule E). This is just from personal experience as I am not a tax professional.
2 Reply
Tim Boehm
Investor · Tillamook, OR · Member since 2013 · 8 posts · 4 votes
6y
I think this is age dependant, many of us leaving the industry want to leave something for the kids, in our case the kid. Right now we'd love to sell out but with CD rates where they are that's impossible. I hate to leave a lot of property for the kids (kid) to have to dispose of as he hasn't known the industry or want any part of it. But right now if I was a young person I'd be all in, and going as far as I could. We grew up in the days of 20% interest rates for commercial property and home loans were running over 16% so right now I think is a very good time to go all in especially if you're under 55.
0 Reply
David P.
Member since 2020 · 404 posts · 235 votes
6y
Originally posted by @Cassie Chun:
@David P.
It sounds like you are referring to the state and local tax (SALT) deduction which is capped at 10k. SALT is a part of an individuals itemized deductions (Schedule A) and is not related to the tax benefits/deductions you realize on investment property (Schedule E). This is just from personal experience as I am not a tax professional.

I see what you mean. I currently have 1 duplex with tenants and 2 SFH for myself and my parents. I do file the duplex under schedule E.
Do you know if i could technically file one of the SFH as schedule E and say that im generating 0 income from that place to get more deductions. My parents are not paying me at all and basically im letting them live there for free and the home was purchased with an investment property mortgage. They are technically free loader tenants.
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Carlos Gonzalez
Investor · Queens, NY · Member since 2016 · 5 posts · 1 vote
6y
You will certainly come across many different opinions on whether paying off a mortgage is a good idea or not. For me, it all comes down your wealth goals and investment strategy. My approach combines asset acquisition and rapid debt pay down. I'll get into a phase of buying real estate, then I'll transition into paying off the debt fast using specific accelerated mortgage reduction strategies that will allow me to payoff a mortgage in about 1/3 of the time. There's nothing better in my eyes than debt free cash flow. I'll then obtain a Home Equity Lines of Credit on the property and utilize the HELOC to fund my next purchase(s) (or the down payment). It really all comes down to the eye of the beholder and what works for you.
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Alfred Bell
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
6y
Leverage all investment properties. Own your residence. = Maximum rental income and peace of mind and stability owning your own home. Use an effective strategy and your rental income to pay down your home mortgage to zero as quickly as possible. But have a 40 year fixed on your home mortgage so you have low payments just in case you go through some tough times you will never have to default.
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David Kurtzman
Member since 2019 · 3 posts · 3 votes
6y
I must admit I am working on my end game (I'm 76) but I have found that the happiest people I know do not have primary home loans. I do remember before the last recession people who leveraged their primary homes to buy more homes and ended up with nothing. Any time you take on debt it is a calculated risk. Calculate cautiously.
2 Reply
Daniel Gorski
Member since 2020 · 1 post · 0 votes
6y
Once the cash is in the land, you've limited your options. When the tax system rewards a responsible level of debt, it makes sense to reduce your exposure. I like to have the option of paying off my property -- or not. If cash is tied up in a property, my options get limited. If I have a cash crunch and don't want to refinance but wish to make upgrades, it becomes complicated to trade a bathroom for a new kitchen remodel.
There isn't a "right" answer. I carry a mortgage while my brother does not. I retain the option of paying down the mortgage or eliminating it altogether. That, to me, is financial freedom.
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