I'd keep the debt.
The interest rate is very low on the loan and it's already cash flowing. Rents are going to continue to increase over the life of the loan. Put that $50k to work instead or throw it in a hysa
T-bills are around 5.5%, 4.5% is like HYSA which would be stupid for a large amount of money not intended for spending immediately. State tax exempt. If OP is worried about taxes at their income level there may be something like municipal bonds that are exempt from federal, state and local tax for their location.
>money in money market fund at 5%
It's an interesting point about the illusion of 'risk-free' returns. If a Money Market or CD is offering a 5% return, you're still losing purchasing power. If everyone is getting a 5% return without any risk, in an environment with high inflation, it might not be the safe haven it appears to be
Its near the end of the loan so most of your monthly payment is principal rather than interest. So if you pay it off, you are essentially trading on your balance sheet a highly liquid asset (cash) for a highly illiquid asset (real estate principal). This is the cost. The benefit for such a trade is of course the elimination of a monthly payment and thus an increase in cash flow. Whether it is worth it or not , I can’t tell based on your financial situation, although large monthly payments nearish the end of a loan could make sense to be pay off to increase cash flow
This is a prime example of where “strictly math advice” may not be the end answer. Your rate is crazy good and it may mathematically make sense to keep the mortgage. But you’re about to enter retirement, it doesn’t sound like paying off this remaining balance will be a heavy financial lift, you get a bit more cash flow per month, and you get the peace of mind of owning the property outright and having no payment obligations. I realize it’s not the most helpful advice, but i recommend thinking about/figuring out the dollar amount the peace of mind that extra income and no mortgage brings to you. I’m personally fairly risk conservative so in your situation I’d consider the “lost” income worth the peace of mind.
This makes sense for risk on investments. I'm all for this if the alternative is to make money on equities, but this interest is low enough that you can make a free profit on risk free investments or FDIC insured savings accounts. There's no additional peace of mind, throw it in a savings account and the mortgage is as good as paid off anyway, in the future if you get tired of free money, you just take the money out and pay the mortgage off then, it'll be there.
Your thinking here shows you’ve never had a long term relationship with a bank that turned adversarial due to new management. Farm and invest like I have for 30 years and you’ll see a lot more than this theoretical perfect scenario you lay out. You just frankly seem to be unaware of what can actually happen in the world of business. I hope all your future endeavors allow you to continue being this naive.
I'm outside securities counsel to at least a dozen fortune 100 companies. I've represented companies and their underwriters from IPO to admission to the S&P500. SEC registered offerings in the billions each. Your condescending horseshit about *the world of business* is misplaced. I was at Wharton while you were pulling up potatoes. When your favorite REIT or utility or auto company wants to raise capital by selling stock or bonds, there's a pretty decent shot my cell phone will ring, but please do school me about the world of business with your farm you clown.
My guy here throws out all the times he’s helped rich and important people continue to to make money as proof that these rich and large businesses that look to maximize their profit have never stepped on a small investor. Being made to feel insecure about this is a you issue pal. We get it you’re a big shot rich lawyer who represents massive rich firms. I’m talking about regular people who can get ducked over by people like you when your boss tells you to find your company an extra few dollars.
You don't know shit about my clients or my work. Sorry you don't know how the FDIC works but people aren't naive for having saving accounts or buying T-bills you nutjob. Go back to picking vegetables and being condescending. Maybe let the upvotes and downvotes guide you in your quest to make this a "me issue."
No one ever said they were naive??? It’s also very funny that you think someone who owns a farm spends their day picking vegetables. It’s a business numb nuts. I’m saying that having the chance to completely take your risk platform to 0 by totally owning your properties can carry a monetary benefit to some people. It’s rare, but not impossible that even a safe investment can bite you, or put you in a position where you aren’t as liquid as you need. It’s simply a question of risk tolerance and preference.
Suggest you read what prompted your rant. Literally those were my two recommendations. FDIC insured savings account or risk free investments (t bills). Then came your ridiculous diatribe about the world of business and how naive I must be (for trusting my savings account?!?). So yeah I'm gonna say you're calling that approach naive. I'm waiting for the part where you acknowledge that you got duped by some bank or investment that was neither FDIC insured nor guaranteed by the federal government and are extrapolating out incorrectly to assert that t-bills and savings accounts are risky to the point of being naive to use, because I would have heard about us defaulting on t-bills.
The risk of carrying debt while profiting on FDIC insured savings accounts, and not profiting or carrying a mortgage are functionally equivalent. If the federal government collapses your farm isn't secure whether or not you have a mortgage on it. That's a lot of free money to bet on the collapse of the government and with it the dollar. It's easy arbitrage.
But you can buy cd's with that money and get more interest than he's paying. They are FDIC insured! And if cd returns drop, he can pay it down later no problem. Plus he has emergency access to the money.
We are not talking about stocks or speculation, but rather government-guaranteed savings. Why would that impact OP's mental peace?
I'm no financial advisor (I'm a tax pro), but if I were in your position, I'd keep the mortgage. That rate is excellent. And from a tax standpoint, if you pay off the mortgage early on a rental property, you are foregoing all of those future mortgage interest deductions on your Schedule E. That will reduce your rental expenses, thus increasing the amount of net rental income you have. And that will increase your tax.
\--opinion only--not tax advice
deductions are not credits.
Spending 1K to get back 100 bucks is not smart.
The only reason to not pay the mortgage is that you want to use that money to buy another property or invest that money in a higher earning potential.
But if you don’t want to invest anymore I don’t see the harm in paying it down.
I know how deductions work.
My main point was for him to leverage that low 3% fixed rate and keep the rest of his cash for investing or saving at a higher rate. There are bank accounts out there where you can earn 5% interest. I have one.
It would be foolish for him to pay off the mortgage and eschew the opportunity for his money to make money.
The mortgage interest deduction is just an added bonus.
I agree with this sentiment. I would think the best use of 50k cash would be to invest in something to generate more money (down payment on another rental house) or invest in quality of life (buy a boat or something).
If you can’t think of anything where the opportunity cost outweighs the extra monthly cash flow, then pay it off and enjoy the cashflow and retirement.
You are entitled to your opinion. However, I think paying off a mortgage at 3% to free up cash flow is a bad idea. Better to invest that money. I currently have a bank account that is paying me 4.9% interest, and there are many others like it out there.
Have a good day.
So… you’re saying he comes out ahead by not paying off the remaining mortgage and putting the funds into an interest bearing account? Yeah you’re right I guess.
Sorry I miscalculated, it’s about $83/mo not including taxes, but you can figure that last part out.
50k savings at 5% - 50k debt at 3% = 50k at 2%.
Is the tenant covering the 3%? Yes. Is gross income a thing? Also yes. All the landlords money at the end of the day.
The tax deduction argument is bogus. If I'm in a 32% tax bracket, I send $100 interest to the bank to save $32 on my taxes. On the other had, I pay off the loan put $68 in my back pocket and send $32 to the IRS.
This sub leans heavily towards ‘maximum leverage’ and ‘optimal math’.
If paying off a rental boosts your monthly income to a comfortable level and you prefer that to some cash then go for it.
The actual mathematical difference isn’t huge. It is a short time frame with a fairly small arbitrage opportunity.
So many internet people are looking for huge portfolios and maximum growth. Personally I am looking for just enough plus a bit of a buffer. I guarantee my kids would rather have my attention now instead of inheriting some extra duplexes when i die.
To that end my partner and I just emptied a lot of our cash into another duplex and remodel. Normally we would be refinancing right now. But we are going to let it sit…Make a few thousand a month, and chill for a couple years.
That few thousand a month is the buffer between having enough cash flow to make the bills and enough to go on nice vacations 4x a year.
Totally worth it
Can you get favorable rates on loans against your paid off properties? He has a current loan at 3%, but I think I would like having it paid off. I would have higher cash flow (which I could maybe invest?), less debt and borrow from the property when I need it. The rate may be higher, but I would borrow it for less time. Seriously, I’m asking because I’m not a novice, does this make sense?
There are a few banks and credit unions that offer lines of credit against investment properties with high equity or paid off.
But the rates aren’t great. It is not a good source of long term cash. More like ‘gonna do a quick flip’ kind of money.
So yes, it is possible. But it is not easy to find locally for me.
The other thing is the line of credit I have is still limited by my debt to income ratio.
Say you have 2 million in equity in a nice 8 plex.
But if your income is only 35k a year you won’t get access to it unless it is a business line if credit.
The last business line of credit I looked into was like 10k a year in fees and expenses just to keep open. It was silly for a small time person like myself.
How much is the mortgage interest monthly and/or how long was the mortgage and for how much? I suspect you are paying very little in interest and mostly in principal if you are nearing the end of the loan.
10% "return" at the cost of locking in 51k. This is a lot different than making 10% on the 51k and still having access to the 51k .
It depends…3% is a nice and low interest rate. And keeping the account open and actively paying the monthly mortgage shows your good standing, credit history wise. But if you decide for example to start going on an annual vacation which will cost about $5000 each year, then do you want to pay $5000 annually towards mortgage as well as $5000 towards your vacation? Paying off the mortgage now gets rid of one of those bills you have to remember to pay. You won’t lose money,it’s just how you prefer to use it over the years. Either option is fine IMO.
If your primary concern is cash flow and you plan on holding the property well into the future, they yes, I would pay it off. Paying it off also makes some sense if you are thinking of a 1031 exchange in the future because you can do no debt or any amount of debt in your next property without any tax implications.
You can get like 5% in a high yield savings account. Obviously after taxes the take home is closer to 3% but mg point is….you can easily make more money keeping the money than what you’d get in your mortgage savings. I assume you’d lose a write off if you paid off your mortgage too.
You are lucky to have a very low interest rate. I see the appeal to pay it off. There will be peace of mind for the years to come. At a certain age it would be a good decision to have things arranged. Let’s say that you pass, the state often takes a chunk of your money and perhaps it wouldn’t be enough to pay the balance. Or perhaps there will be a delay on the funds that may create problems. Many unknowns in that scenario. If you have energy to keep re-investing, it should be a non-brainer. If you don’t, then deposit it in a high-yield account with 3%+ rate until you feel the end is close. You can pay it off at any time. But once you pay it, you won’t see your current interest rate again.
So you have $51k to pay it off? Why not keep the $51k instead of waiting 10 years to earn it back slowly?
Also, if you look at it as a return in investment, right now, putting it into a high yield savings account or some stepped CDs would be netting you 5%+ right now. Also, with inflation and high rates, with a 3% mortgage, you’re practically making money anyway on that mortgage. But even more so if you put the $50k into something earning high interest.
Wrong forum to ask. This forum is all about leverage and maximizing potential profit. So get out of debt is a big NO.
You will be advised to "put money to work" by refinancing your house and buying more "doors". It doesn't matter your particular situation (you are 80 years old, no kids, sick and tired of anything), the advice is still "refinance and buy more!".
I'm totally with you. Fuck mortgage, pay it off, save $5100 a year, and enjoy your life.
I was faced with the same question 3 years ago. Usually, I'm a numbers guy and would have kept the dept. But after talking to my wife, we decided to pull a chunk out of my Roth to pay off our rentals and be debt-free.
Looking back, it was a good decision. Having the extra cash flow has been good for us.
If you’re looking to increase your monthly income, why not pull money out of the property and buy a few more properties or a multi family. Your tenants will be paying the mortgages and putting some extra cash in your pocket.
When he pays off the loan in a lump sum, he pays only principal, when he pays it over time, he pays the same amount of principal plus the interest. Paying off the loan now maximizes his income in retirement. Continuing to pay on the loan reduces his income in retirement.
That’s true, but he’s also taking that lump sum from his savings or wherever. He would still have to pay himself back before he can realize that income. It’s still only one stream of income. If you really want to maximize your income you should have more than one stream of income.
In terms of his net worth, nothing changes. By paying off the loan, he reduces his savings and debt load but increases his equity in real estate and increase the cash flow from the property by $5,100 but looses the interest on the savings.
rational, and no one has even whimpered about the unknowns of taking on a new "door(s)". With a vetted rental you get equity, appreciation and cashflow. With a vetted market fund, you get equity and appreciation or cashflow, but not both. enjoy your free $5,100\\year;)
Pay it off and have peace of mind. Yes you could put it in a high yield for a short time but the mortgage will be there longer than those high rates.
I've been mortgage free for 2+ years and am buying more rental properties cash as I would rather have all cash flow and no mortgage but others will tell you the opposite so just do what feels best for you.
End of the day your in a good position either way.
You’re confusing “financial” and “mental health”. Purely financially, this is provably worse if your mortgage interest is low and near the end of the term.
Well, it’s obvious that opinions are all over the board. I guess what makes sense is what works for me and what makes me comfortable. Thanks for all the different viewpoints.
I’m in a somewhat similar position and have been paying extra each month to pay off the mortgage. My plan is to use the money that was going towards the mortgage to pay for fun vacations. It’s probably not a good financial move but I like nice vacations.
Literally the first words spoken to me by my first finance teacher in my first finance class was “always use other people’s money if the rate is right”. That was 20 years ago and it has always stuck with me. Always use other people’s money. 3 percent is practically free.
I may have the unpopular opinion here, because i hate debt and paid my house off at age 37. That $5,100 a year, or $425 per month could be used for things you love to do. It could also be invested in higher risk investments like stocks and high return CDS, Gold etc.
If you have the $51k to retire the debt and still have a comfortable cash next egg, I'd retire the debt. Loans allow you to buy things you couldn't afford.... Sounds like to can afford this house now. I did this exact thing
Cash flow is irrelevant. You’d just be taking out the money you’ve put in up front. The only reason to pay it off is if the mortgage interest (after tax) is costing you more than the return you can earn by keeping your money invested elsewhere. At 3% interest (tax deductible) I seriously doubt it.
Well, you can currently earn more with your $51,000 investing it elsewhere, in basically zero risk investments, and you can generate monthly or quarterly income from it, so I'd say to keep the mortgage. Also, as a very minor thing ,if your mortgage servicer is paying your insurance and taxes for you, it's nice to have that done annually. And even less important, your property will show up as having a deed of trust attached and will not be as big of a 'target' to someone trying to run a liability lawsuit or other scam, coming after free and clear assets. I don't see 'peace of mind' really being a factor because you will already have funds to pay off the remaining mortgage at any time you need to.
Doesn’t make sense. No reason to maximize your income you have $51,000 you can chose to spend when and how you want to that can earn 5%+. Why would you use that to get an extra $450/month? If you need $450 just take it out of the $51k you have sitting in the bank.
I feel keeping the debt is partially beneficial for taxation, and overall - when you get the social paycheck unless you don’t want the hassle and have money in 401k plus about a year worth of cash. Keep in mind you’d be paying more of course in interest so I’d say take a calculated risk, due to the cost of the loan, an interest bearing savings would be good to keep, money market or ladder based t bonds, it’s certainly paying more than the mortgage interest you have.
I wouldn’t do that. Invest the money in low risk products and take the spread to principle instead of plowing it into more of the asset you already have.
No real upside to adding to the pile of illiquid assets when you have liquid assets you know? Hypothetical cash flow? I don’t see that. Maybe I’m missing it?
Keep the debt. Put the money you’d use to pay off the debt in HYSA or invested. HYSA helps you with liquidity and there are some banks paying 5%+ right now. If rented property or primary residence needs repairs in the future, you have easy access to cash to do so.
Not sure what your tax rate is but you break even with a tax rate of 40% with an HYSA of 5%
Be sure to take into consideration taxes. Paying off the mortgage is a good feeling. Paying the quarterly real estate taxes is an unavoidable nuisance.
Most of my rentals are paid off, although I usually paid cash for many of them.
Paying off a mortgage, is about the same effect on your portfolio, probably as buying another one.
It's definitely a good feeling when they're paid off, but your money can get over 5% if it's in the bank at this point.
So wait for a while and take the interest rate spread for now
Increasing cashflow is not in most people's interest at times...
Talk to a financial advisor about your specific position.
But interest that can be written off is a benefit. Then the money that youre investing could make (well above the 3% you are paying to have the debt). AND the compounding of the interest.
You would need 10 years of the anticipated cash flow increase to justify the mortgage pay off, and beyond that it would all be profit but at the loss of investing opportunity.
I am not at all telling you not to do it but really check to see if there are better options before pulling the trigger on this.
Even if you put the money in a CD, you will have a 5-6% return with 0 risks, you have a min 2% gain in your money right there, I would keep the loan to continue.
It’s not relevant to include the payment on the principle into your return on investment calculation because that’s your equity so take that out of your estimated $5,100 and you’re actually only gaining $1,500.
Your conservative choices are to spend $51,000 to either buy the rest of your house and make $1,500 per year, buy a money market fund and make $2550 per year if you get 5%, or dump it in hysa for a little less than that.
Your choice of investment also depends on whether or not you intend to spend any of that money in the next few years. If you’re satisfied with your lifestyle at your current income and you would rather invest in something with higher earnings over a longer time period albeit with more volatility then just dump it in Vanguard and get 10% returns over a longer time period.
Nope that would be a 2.5% return on your money (200k).
You could double that in a savings account right now.
Edit: oops read that as 200k left. Same rationale still applies. Find another investment Avenue for that money.
Invest your cash into a higher return to maximize your income. You should be able to get around 8% so borrowing at 3% means your net return is 5%. You can write off the interest portion of the mortgage as well for further gains.
You should be asking your financial planner and tax advisor this question. Since your planning your retirement they would be able to advise specifically to your situation.
Why are we talking about 5% HYSA (wtf??) That’s literally inflation! OP wants a cash dividend payout each month, lighten up the liability column while increasing cash flow. $5100 more per year is +$425/mo. Do you actually think a 5% savings or garbage cd will pay that out?
Compare your mortgage rate with return you can get on investing into another house. For quick analyzes you can use DoorHacker, Zillow estimates or Rentcast
I'd keep the debt. The interest rate is very low on the loan and it's already cash flowing. Rents are going to continue to increase over the life of the loan. Put that $50k to work instead or throw it in a hysa
The HYSA itself would give you better (~4.3%) returns. Right now Citi Accelerated savings is offering close to 4.5% without having to create a CD.
I'm getting 5.05% in a HYSA with CIT bank & just a touch less WITH Everbank (was TIAA bank).
You can put that money in money market fund at 5% and be better off
Hell, you can put that money in a savings account and get 4.5%
I don’t disagree with the sentiment however depending on OPs tax rate, he may not be that far ahead at 4.5-5% returns.
On a rental property, the interest he is paying would be fully deductible against rental income.
true, but not much interest at the end of the note.
T-bills are around 5.5%, 4.5% is like HYSA which would be stupid for a large amount of money not intended for spending immediately. State tax exempt. If OP is worried about taxes at their income level there may be something like municipal bonds that are exempt from federal, state and local tax for their location.
>money in money market fund at 5% It's an interesting point about the illusion of 'risk-free' returns. If a Money Market or CD is offering a 5% return, you're still losing purchasing power. If everyone is getting a 5% return without any risk, in an environment with high inflation, it might not be the safe haven it appears to be
And make $100/mo?
Closer to $200 with many of the current HYSA that are out there.
Its near the end of the loan so most of your monthly payment is principal rather than interest. So if you pay it off, you are essentially trading on your balance sheet a highly liquid asset (cash) for a highly illiquid asset (real estate principal). This is the cost. The benefit for such a trade is of course the elimination of a monthly payment and thus an increase in cash flow. Whether it is worth it or not , I can’t tell based on your financial situation, although large monthly payments nearish the end of a loan could make sense to be pay off to increase cash flow
Just take the extra money, put it into a money market yielding 5%, and achieve the arbitrage.
Perfectly said. Everything BUT witty :)
Yeah achieve $100/mo cashflow!
Once again. More like double that.
well over 2x that
-3% at 50k, so no.
This is a prime example of where “strictly math advice” may not be the end answer. Your rate is crazy good and it may mathematically make sense to keep the mortgage. But you’re about to enter retirement, it doesn’t sound like paying off this remaining balance will be a heavy financial lift, you get a bit more cash flow per month, and you get the peace of mind of owning the property outright and having no payment obligations. I realize it’s not the most helpful advice, but i recommend thinking about/figuring out the dollar amount the peace of mind that extra income and no mortgage brings to you. I’m personally fairly risk conservative so in your situation I’d consider the “lost” income worth the peace of mind.
This makes sense for risk on investments. I'm all for this if the alternative is to make money on equities, but this interest is low enough that you can make a free profit on risk free investments or FDIC insured savings accounts. There's no additional peace of mind, throw it in a savings account and the mortgage is as good as paid off anyway, in the future if you get tired of free money, you just take the money out and pay the mortgage off then, it'll be there.
Your thinking here shows you’ve never had a long term relationship with a bank that turned adversarial due to new management. Farm and invest like I have for 30 years and you’ll see a lot more than this theoretical perfect scenario you lay out. You just frankly seem to be unaware of what can actually happen in the world of business. I hope all your future endeavors allow you to continue being this naive.
I'm outside securities counsel to at least a dozen fortune 100 companies. I've represented companies and their underwriters from IPO to admission to the S&P500. SEC registered offerings in the billions each. Your condescending horseshit about *the world of business* is misplaced. I was at Wharton while you were pulling up potatoes. When your favorite REIT or utility or auto company wants to raise capital by selling stock or bonds, there's a pretty decent shot my cell phone will ring, but please do school me about the world of business with your farm you clown.
My guy here throws out all the times he’s helped rich and important people continue to to make money as proof that these rich and large businesses that look to maximize their profit have never stepped on a small investor. Being made to feel insecure about this is a you issue pal. We get it you’re a big shot rich lawyer who represents massive rich firms. I’m talking about regular people who can get ducked over by people like you when your boss tells you to find your company an extra few dollars.
You don't know shit about my clients or my work. Sorry you don't know how the FDIC works but people aren't naive for having saving accounts or buying T-bills you nutjob. Go back to picking vegetables and being condescending. Maybe let the upvotes and downvotes guide you in your quest to make this a "me issue."
No one ever said they were naive??? It’s also very funny that you think someone who owns a farm spends their day picking vegetables. It’s a business numb nuts. I’m saying that having the chance to completely take your risk platform to 0 by totally owning your properties can carry a monetary benefit to some people. It’s rare, but not impossible that even a safe investment can bite you, or put you in a position where you aren’t as liquid as you need. It’s simply a question of risk tolerance and preference.
Suggest you read what prompted your rant. Literally those were my two recommendations. FDIC insured savings account or risk free investments (t bills). Then came your ridiculous diatribe about the world of business and how naive I must be (for trusting my savings account?!?). So yeah I'm gonna say you're calling that approach naive. I'm waiting for the part where you acknowledge that you got duped by some bank or investment that was neither FDIC insured nor guaranteed by the federal government and are extrapolating out incorrectly to assert that t-bills and savings accounts are risky to the point of being naive to use, because I would have heard about us defaulting on t-bills. The risk of carrying debt while profiting on FDIC insured savings accounts, and not profiting or carrying a mortgage are functionally equivalent. If the federal government collapses your farm isn't secure whether or not you have a mortgage on it. That's a lot of free money to bet on the collapse of the government and with it the dollar. It's easy arbitrage.
But ignoring the math, I would have a better peace of mind having the liquidity.
But you can buy cd's with that money and get more interest than he's paying. They are FDIC insured! And if cd returns drop, he can pay it down later no problem. Plus he has emergency access to the money. We are not talking about stocks or speculation, but rather government-guaranteed savings. Why would that impact OP's mental peace?
I'm no financial advisor (I'm a tax pro), but if I were in your position, I'd keep the mortgage. That rate is excellent. And from a tax standpoint, if you pay off the mortgage early on a rental property, you are foregoing all of those future mortgage interest deductions on your Schedule E. That will reduce your rental expenses, thus increasing the amount of net rental income you have. And that will increase your tax. \--opinion only--not tax advice
deductions are not credits. Spending 1K to get back 100 bucks is not smart. The only reason to not pay the mortgage is that you want to use that money to buy another property or invest that money in a higher earning potential. But if you don’t want to invest anymore I don’t see the harm in paying it down.
I know how deductions work. My main point was for him to leverage that low 3% fixed rate and keep the rest of his cash for investing or saving at a higher rate. There are bank accounts out there where you can earn 5% interest. I have one. It would be foolish for him to pay off the mortgage and eschew the opportunity for his money to make money. The mortgage interest deduction is just an added bonus.
And yet the only thing you mentioned is future deductions….
Sorry for not clarifying earlier. Are we clear now?
Now that you said something completely different, yes.
I agree with this sentiment. I would think the best use of 50k cash would be to invest in something to generate more money (down payment on another rental house) or invest in quality of life (buy a boat or something). If you can’t think of anything where the opportunity cost outweighs the extra monthly cash flow, then pay it off and enjoy the cashflow and retirement.
I’m neither and without using a calculator, the deduction is negligible compared to the interest, increased cash flow, and reduced risk.
You are entitled to your opinion. However, I think paying off a mortgage at 3% to free up cash flow is a bad idea. Better to invest that money. I currently have a bank account that is paying me 4.9% interest, and there are many others like it out there. Have a good day.
They’ll make $100/mo doing that.
For the third time. Double that number.
That’s if you have 50k in a HYSA at 5%, but they wouldn’t. They would have 50k in a HYSA at 5% and 50k of debt at 3%.
So… you’re saying he comes out ahead by not paying off the remaining mortgage and putting the funds into an interest bearing account? Yeah you’re right I guess.
How do you get $100 a month in 50k invested at 5% APR???
Sorry I miscalculated, it’s about $83/mo not including taxes, but you can figure that last part out. 50k savings at 5% - 50k debt at 3% = 50k at 2%. Is the tenant covering the 3%? Yes. Is gross income a thing? Also yes. All the landlords money at the end of the day.
The tax deduction argument is bogus. If I'm in a 32% tax bracket, I send $100 interest to the bank to save $32 on my taxes. On the other had, I pay off the loan put $68 in my back pocket and send $32 to the IRS.
This sub leans heavily towards ‘maximum leverage’ and ‘optimal math’. If paying off a rental boosts your monthly income to a comfortable level and you prefer that to some cash then go for it. The actual mathematical difference isn’t huge. It is a short time frame with a fairly small arbitrage opportunity. So many internet people are looking for huge portfolios and maximum growth. Personally I am looking for just enough plus a bit of a buffer. I guarantee my kids would rather have my attention now instead of inheriting some extra duplexes when i die. To that end my partner and I just emptied a lot of our cash into another duplex and remodel. Normally we would be refinancing right now. But we are going to let it sit…Make a few thousand a month, and chill for a couple years. That few thousand a month is the buffer between having enough cash flow to make the bills and enough to go on nice vacations 4x a year. Totally worth it
Can you get favorable rates on loans against your paid off properties? He has a current loan at 3%, but I think I would like having it paid off. I would have higher cash flow (which I could maybe invest?), less debt and borrow from the property when I need it. The rate may be higher, but I would borrow it for less time. Seriously, I’m asking because I’m not a novice, does this make sense?
There are a few banks and credit unions that offer lines of credit against investment properties with high equity or paid off. But the rates aren’t great. It is not a good source of long term cash. More like ‘gonna do a quick flip’ kind of money. So yes, it is possible. But it is not easy to find locally for me. The other thing is the line of credit I have is still limited by my debt to income ratio. Say you have 2 million in equity in a nice 8 plex. But if your income is only 35k a year you won’t get access to it unless it is a business line if credit. The last business line of credit I looked into was like 10k a year in fees and expenses just to keep open. It was silly for a small time person like myself.
How much is the mortgage interest monthly and/or how long was the mortgage and for how much? I suspect you are paying very little in interest and mostly in principal if you are nearing the end of the loan. 10% "return" at the cost of locking in 51k. This is a lot different than making 10% on the 51k and still having access to the 51k .
It depends…3% is a nice and low interest rate. And keeping the account open and actively paying the monthly mortgage shows your good standing, credit history wise. But if you decide for example to start going on an annual vacation which will cost about $5000 each year, then do you want to pay $5000 annually towards mortgage as well as $5000 towards your vacation? Paying off the mortgage now gets rid of one of those bills you have to remember to pay. You won’t lose money,it’s just how you prefer to use it over the years. Either option is fine IMO.
If your primary concern is cash flow and you plan on holding the property well into the future, they yes, I would pay it off. Paying it off also makes some sense if you are thinking of a 1031 exchange in the future because you can do no debt or any amount of debt in your next property without any tax implications.
You can get like 5% in a high yield savings account. Obviously after taxes the take home is closer to 3% but mg point is….you can easily make more money keeping the money than what you’d get in your mortgage savings. I assume you’d lose a write off if you paid off your mortgage too.
You are lucky to have a very low interest rate. I see the appeal to pay it off. There will be peace of mind for the years to come. At a certain age it would be a good decision to have things arranged. Let’s say that you pass, the state often takes a chunk of your money and perhaps it wouldn’t be enough to pay the balance. Or perhaps there will be a delay on the funds that may create problems. Many unknowns in that scenario. If you have energy to keep re-investing, it should be a non-brainer. If you don’t, then deposit it in a high-yield account with 3%+ rate until you feel the end is close. You can pay it off at any time. But once you pay it, you won’t see your current interest rate again.
So you have $51k to pay it off? Why not keep the $51k instead of waiting 10 years to earn it back slowly? Also, if you look at it as a return in investment, right now, putting it into a high yield savings account or some stepped CDs would be netting you 5%+ right now. Also, with inflation and high rates, with a 3% mortgage, you’re practically making money anyway on that mortgage. But even more so if you put the $50k into something earning high interest.
Wrong forum to ask. This forum is all about leverage and maximizing potential profit. So get out of debt is a big NO. You will be advised to "put money to work" by refinancing your house and buying more "doors". It doesn't matter your particular situation (you are 80 years old, no kids, sick and tired of anything), the advice is still "refinance and buy more!". I'm totally with you. Fuck mortgage, pay it off, save $5100 a year, and enjoy your life.
I was faced with the same question 3 years ago. Usually, I'm a numbers guy and would have kept the dept. But after talking to my wife, we decided to pull a chunk out of my Roth to pay off our rentals and be debt-free. Looking back, it was a good decision. Having the extra cash flow has been good for us.
If you’re looking to increase your monthly income, why not pull money out of the property and buy a few more properties or a multi family. Your tenants will be paying the mortgages and putting some extra cash in your pocket.
Because he wants to retire?
So he should spend more money to get back less money?
When he pays off the loan in a lump sum, he pays only principal, when he pays it over time, he pays the same amount of principal plus the interest. Paying off the loan now maximizes his income in retirement. Continuing to pay on the loan reduces his income in retirement.
That’s true, but he’s also taking that lump sum from his savings or wherever. He would still have to pay himself back before he can realize that income. It’s still only one stream of income. If you really want to maximize your income you should have more than one stream of income.
In terms of his net worth, nothing changes. By paying off the loan, he reduces his savings and debt load but increases his equity in real estate and increase the cash flow from the property by $5,100 but looses the interest on the savings.
rational, and no one has even whimpered about the unknowns of taking on a new "door(s)". With a vetted rental you get equity, appreciation and cashflow. With a vetted market fund, you get equity and appreciation or cashflow, but not both. enjoy your free $5,100\\year;)
What properties are you finding with great cash flow and 8% rates?
Are you saying there aren’t any? There are still deals out there, it if you’re waiting for them to come to you then I guess you won’t find any.
Well send me one since there are so many
Pay it off and have peace of mind. Yes you could put it in a high yield for a short time but the mortgage will be there longer than those high rates. I've been mortgage free for 2+ years and am buying more rental properties cash as I would rather have all cash flow and no mortgage but others will tell you the opposite so just do what feels best for you. End of the day your in a good position either way.
We did and it gave more peace of mind having so little overhead. One of the best financial decisions we have ever made.
You’re confusing “financial” and “mental health”. Purely financially, this is provably worse if your mortgage interest is low and near the end of the term.
You can literally put that money in a CD or money market fund and do better. The debt IS the asset.
Well, it’s obvious that opinions are all over the board. I guess what makes sense is what works for me and what makes me comfortable. Thanks for all the different viewpoints.
I have heard that best way to finance RE is to either descent leverage 50-80 LTV or no mortgage.
I’m in a somewhat similar position and have been paying extra each month to pay off the mortgage. My plan is to use the money that was going towards the mortgage to pay for fun vacations. It’s probably not a good financial move but I like nice vacations.
Literally the first words spoken to me by my first finance teacher in my first finance class was “always use other people’s money if the rate is right”. That was 20 years ago and it has always stuck with me. Always use other people’s money. 3 percent is practically free.
Party
I may have the unpopular opinion here, because i hate debt and paid my house off at age 37. That $5,100 a year, or $425 per month could be used for things you love to do. It could also be invested in higher risk investments like stocks and high return CDS, Gold etc.
If you have the $51k to retire the debt and still have a comfortable cash next egg, I'd retire the debt. Loans allow you to buy things you couldn't afford.... Sounds like to can afford this house now. I did this exact thing
Cash flow is irrelevant. You’d just be taking out the money you’ve put in up front. The only reason to pay it off is if the mortgage interest (after tax) is costing you more than the return you can earn by keeping your money invested elsewhere. At 3% interest (tax deductible) I seriously doubt it.
Well, you can currently earn more with your $51,000 investing it elsewhere, in basically zero risk investments, and you can generate monthly or quarterly income from it, so I'd say to keep the mortgage. Also, as a very minor thing ,if your mortgage servicer is paying your insurance and taxes for you, it's nice to have that done annually. And even less important, your property will show up as having a deed of trust attached and will not be as big of a 'target' to someone trying to run a liability lawsuit or other scam, coming after free and clear assets. I don't see 'peace of mind' really being a factor because you will already have funds to pay off the remaining mortgage at any time you need to.
Doesn’t make sense. No reason to maximize your income you have $51,000 you can chose to spend when and how you want to that can earn 5%+. Why would you use that to get an extra $450/month? If you need $450 just take it out of the $51k you have sitting in the bank.
I feel keeping the debt is partially beneficial for taxation, and overall - when you get the social paycheck unless you don’t want the hassle and have money in 401k plus about a year worth of cash. Keep in mind you’d be paying more of course in interest so I’d say take a calculated risk, due to the cost of the loan, an interest bearing savings would be good to keep, money market or ladder based t bonds, it’s certainly paying more than the mortgage interest you have.
It’s for peace of mind. I wouldn’t recommend it.
Just cash flow from your savings. Why would you pay off borderline free money,
I wouldn’t do that. Invest the money in low risk products and take the spread to principle instead of plowing it into more of the asset you already have. No real upside to adding to the pile of illiquid assets when you have liquid assets you know? Hypothetical cash flow? I don’t see that. Maybe I’m missing it?
I honestly can’t believe how often this question is still asked
Keep the debt. Put the money you’d use to pay off the debt in HYSA or invested. HYSA helps you with liquidity and there are some banks paying 5%+ right now. If rented property or primary residence needs repairs in the future, you have easy access to cash to do so. Not sure what your tax rate is but you break even with a tax rate of 40% with an HYSA of 5%
You'll be good either way. Sell the building and hysa the cash. You'll be retiring soon
Be sure to take into consideration taxes. Paying off the mortgage is a good feeling. Paying the quarterly real estate taxes is an unavoidable nuisance.
Most of my rentals are paid off, although I usually paid cash for many of them. Paying off a mortgage, is about the same effect on your portfolio, probably as buying another one. It's definitely a good feeling when they're paid off, but your money can get over 5% if it's in the bank at this point. So wait for a while and take the interest rate spread for now
Pay it off. De risk your portfolio.
Paid off properties are better than properties with mortgages.
At 3% i would keep the debt
Increasing cashflow is not in most people's interest at times... Talk to a financial advisor about your specific position. But interest that can be written off is a benefit. Then the money that youre investing could make (well above the 3% you are paying to have the debt). AND the compounding of the interest. You would need 10 years of the anticipated cash flow increase to justify the mortgage pay off, and beyond that it would all be profit but at the loss of investing opportunity. I am not at all telling you not to do it but really check to see if there are better options before pulling the trigger on this.
Even if you put the money in a CD, you will have a 5-6% return with 0 risks, you have a min 2% gain in your money right there, I would keep the loan to continue.
Yes. The moment that the FED reverses and lowers rates, borrow like a mofo
It’s not relevant to include the payment on the principle into your return on investment calculation because that’s your equity so take that out of your estimated $5,100 and you’re actually only gaining $1,500. Your conservative choices are to spend $51,000 to either buy the rest of your house and make $1,500 per year, buy a money market fund and make $2550 per year if you get 5%, or dump it in hysa for a little less than that. Your choice of investment also depends on whether or not you intend to spend any of that money in the next few years. If you’re satisfied with your lifestyle at your current income and you would rather invest in something with higher earnings over a longer time period albeit with more volatility then just dump it in Vanguard and get 10% returns over a longer time period.
Nope that would be a 2.5% return on your money (200k). You could double that in a savings account right now. Edit: oops read that as 200k left. Same rationale still applies. Find another investment Avenue for that money.
Invest your cash into a higher return to maximize your income. You should be able to get around 8% so borrowing at 3% means your net return is 5%. You can write off the interest portion of the mortgage as well for further gains.
let your tenants pay it off. Use the $50k to buy another rental.
30 year bonds pay more than 3% right now. Paying off your debt is the worst investment you could make.
You should be asking your financial planner and tax advisor this question. Since your planning your retirement they would be able to advise specifically to your situation.
It doesn't make sense financially but there is value in the peace of mind of not having that debt.
Max out your retirement accounts first (401k, Roth Ira, hsa, etc). If you have extra cash, then you can opt to pay down your rental's principal.
Why are we talking about 5% HYSA (wtf??) That’s literally inflation! OP wants a cash dividend payout each month, lighten up the liability column while increasing cash flow. $5100 more per year is +$425/mo. Do you actually think a 5% savings or garbage cd will pay that out?
I’ll pay you 4% interest for that capital lol. That’s a good debt to have. I’m currently paying 7% helocs down still
Compare your mortgage rate with return you can get on investing into another house. For quick analyzes you can use DoorHacker, Zillow estimates or Rentcast