Pay down mortgage or save the cash?

9 Replies

I am about to purchase my second property with almost 100% financing & equity from my first property. Goal is to buy a third a year or two after that. Question is do I use any extra money I have to pay down the mortgage faster? Or save the money for a downpayment on property #3? I know 100% financing isn’t ideal. Especially in this market. Thoughts are appreciated!

@Ashley Lynn

Most people would not agree with my current statement but real estate is a tax shelter haven. One of the best ways to legally prevent Uncle Sam from sticking his grubby hands into your cookie jar. If you pay off your property quickly it no longer become a liability but an asset. Uncle Sam loves taxing you for your assets. Don't let him do that. 

Save money for the downpayment on your 3rd property. Rinse and repeat. 

That’s my next concern is the tax factors of a rental property.

Cash is king!

if you pay down the mortgage, you trade liquidity for non-liquidity but no increase in worth, or buying power. you really don't gain anything and you don't lower your debt service.

if you keep the cash, you gain options. You can always pay down mortgages later.

If the mortgage is above 6-7% then consider paying it, but it's probably not so keep the cash.  With the potential of higher interest rates in the coming years cash will truly be king, especially if the doomsayers are correct in an economic disaster.

Personally unless my interest rate on my mortgage was >10% I would not pay it as I favor the liquidity and I'm confident I can invest elsewhere and get over 10% annually.

This is helpful and exactly the opposite of what I thought to do. I’ve been pouring my extra money into my current mortgage and now that I’m ready to buy #2 I have barely any cash to put down. I ran into that issue when buying my first property in 2012. Everything was going to cash buyers. My HOA requires live in for two years that’s the only reason I was able to get it during that time. Glad I asked, especially from the tax side of things that makes sense to hold it as cash.

The question you is a math problem only.  If you use extra cash to pay down mortgage then you are earning a zero rate of return until the mortgage is completely paid off and at that point you will earn the reduced amount of interest paid over the life of the loan.  If you have another use of those funds then what is the potential rate of return the cash will earn?  The more cash you invest in a property in general ; the lower your Rate Of Return will be.  But, Rate Of Return is only one factor to consider.  Another factor is Cashflow and that is not effected by paying additional payments after the loan terms are set.

@Jerry Jenkins My idea was to pay down the loan faster, refinance and have a larger cash flow from the property. Now I’m seeing this might not be the way to go. Maybe it’s better to use the cash to acquire more properties.

Paying extra principal only to borrow it again in a Refi means that you get zero return during that period.  A Refi can be a great idea to free up equity for additional properties because if you can borrow at 4 % or 5% and then reinvest the capitol at 10% or higher so get faster velocity of your money.  I have never made great money just off cashflow on long term rentals after paying taxs, repairs, vacancy, etc.  The real goal for me has always been appreciation.

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