Pay off current mortgage or ...?

Question

Hi Everyone

This is a question I’ve been pondering for quite some time now. Currently I owe roughly about $300K on my principle residence. Over the past 1-2 years I’ve purchased 5 rental properties that all cash flow well and have appreciated nicely.

My question is: should I sell a few properties/or most of them to pay off my current mortgage?

We are all unsure about what 2020 might bring and no one has a crystal ball.

Would like to hear everyone’s thoughts.

Much appreciated

Greg

Theresa Harris · Answer

If you plan on buying more properties, then I wouldn't sell one to pay off the mortgage on your primary residence.  Yes it is nice to have a house paid off, but put the money where it will do the most work.  If you have extra and don't plan on buying any more rentals, make extra payments on your mortgage.

Kyle Wells · Answer

I think 20 years from now you would regret selling your investment properties to pay off your mortgage. Mortgage rates are currently under 3% so that is cheap money to pay off (that percentage is even lower once you account for tax benefits of the deductible interest). I would look at what your ROI is on your investment properties (both equity appreciation and annual income) and compare that to your mortgage interest rate. Although, I completely understand the desire to pay off debt! I would say you're probably better off using the cash flow to build reserves and buying more properties (or paying extra on debt).

Ryan Cleary · Answer

Hey Greg!

I agree with most of the contributors so far.  Yes, no one can see what 2021 will bring and there is a chance it will not bode well for the real estate industry.  That being said, real estate is a long game.  You say that your properties are currently cash-flowing nicely, the odds that your current investments are all of a sudden going to change in such a way where they will start to negatively cash-flow are astroinomical.  And even if they do start to perform unfavorably, this will merely be a blip in the long-term.

I would agree with building your cash reserves, as everyone in the past year should have been doing.  But selling your investments could be a knee-jerk reaction that you will possibly regret a year or two from now when the dust starts to settle.

Nonetheless, anyone who has been able to acquire a few rentals properties in life is going to be resilient enough to bounce back from anything.  Follow your gut, you have gotten this far in the game and only you know the best option!

Chris John · Answer

@Greg Gangle  I hear what you're saying (even though I don't ever plan to know that feeling.  haha), but just remember that equity is money invested at 0%.  Your house appreciates the same amount regardless of whether you have no loan or are upside down, so I figure I may as well retain some liquidity.

I totally realize that not everyone shares my views though, so best wishes!

Chris John · Answer

@Greg Gangle

If you get enough cash flow to pay your current mortgage, I'd say that you already have your house paid off.  Or even if you could tap into the equity of your current home and investment properties to make that happen with more investment properties.  It's hard to know exactly without seeing specific loan terms, rent rates, etc. but you can consider this a vote against!

Good luck and Happy New Year!

Bud Gaffney · Answer

Hold Hold Hold :) Keep buying!

Greg Gangle · Answer

@Klint Ruud@Kyle Wells@Brian Gerlach@Jacob Kenneally@Ashton Karp@Ondrej Brown. Thanks everyone for your input. Truly appreciate many different approaches. I think I’m going to retain my properties as they all cash flow nicely and I can build up a nice reserve and also make additional payments. I was never one to sell a property (buy and hold right). That’s the approach I’ll take. Even though being mortgage free is incredible on your primary. My cash flow from my rentals is also paying it down.

Chris John · Answer

@Ondrej Brown

I can't disagree that 2021 should be... interesting.  I'm personally trying to stay a little more liquid than normal.  If things do go south, hopefully it'll get me through in decent shape.  One never knows, however.

Regardless, have an awesome 2021 and stay safe, brother!

Brian G. · Answer

@Greg Gangle it’s safer in my opinion to take your cash and stack it so you have an extra fat reserve account, ie if you pay extra on the mortgage you have to refi, sell or put a Heloc on it to access that equity in the form of real money. Once you can write a check and pay off the balance in one swoop, if that meets your goals then go for it! Having said that, the goal of having a paid off primary I personally think is super awesome. I’m in growth mode and as such it makes sense for me to use leverage as I’m early on in my investing. At some point down the road I will likely have more of a blended approach and work toward paying off properties, ie perhaps 25% or more of my properties will be free and clear of any mortgage just to reduce my risk and protect my overall position. It’s a powerful thing to have some free and clear properties to sell or re-leverage in the event you need a capital infusion for your business. Btw, you could in theory sell a property or two and pay down your primary mortgage and then do a 30 year refi to greatly reduce your monthly mortgage payment. Good luck!

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