[USER]

Age old “Should I pay off my mortgage” question with a twist. This is not meant to be a “is being debt free good” conversation. I am familiar with that and not as interested in that debate.

THE NUMBERS
I live in my home and it is a 3 unit. The other two apartments bring in a combined $50,000 a year and each year rents are increased for inflation.

I owe about $150,000. Interest rate is 3.175%
Mortgage, taxes, insurance are about $4000 a month.

The rents pay for the mortgage with a small surplus.
I will FI in about 3 years with investments.

I am comfortable with the math and psychology behind the “mortgage vs investing” question but the primary residence being a rental unit is skewing my thoughts.

QUESTION
Doesn’t it make sense to pay off the mortgage, $150,000, to gain a return of $50,000 a year in cash flow?

If there was an investment where you could invest $150,000 and receive $50,000 a year every year (with inflation increase) wouldn’t you take it?

Help me make sense of this please.

Any thoughts are welcome!

[Brian]

You won’t gain $50k in cash flow as you will have to continue paying your taxes and insurance. You are paying just under $5,000 a year in interest.

The rest is going to principal, taxes, and insurance.

You can do better than 3.175% interest simply by putting your money in a high yield savings account.

And historically much better by investing in the stock market.

[Marcello]

You will still be out of pocket for property taxes/insurance, so the net cash flow is not $50k. Also, the cash benefit is only for the duration of the mortgage.

Having said that, I would still pay off the mortgage and be done with it.

3.175% rate is about 5.3% before taxes and we can’t get that yield nowadays..

[Sarah]

I think it’s gonna come down to also factoring in how conservative you want to be in retirement. How would the mortgage impact your overall cash flow if you have a long unexpected vacancy?

What if the house insurance/property increases?

(I owned a house where my property tax doubled within 5 years – would’ve never thought it was possible until it happened to me).

How long will your liquidity last under different scenarios and how comfortable are you with that?

I know you want the numbers and this is kinda a ‘less debt is better’ talk, but just something to consider since you said it was a small surplus after the mortgage.

[Jennel]

No, it doesn’t make sense. I would not pay off a loan that’s 150k with an interest rate of 3.175% and my mortgage is covered by my tenants.

Hard for me to see any benefit to this.

[Nana]

If you can afford to pay it off and nothing else in your financial life is affecting, than pay it off.

Now the money you collect in rent you can invest it and reserve some to a HYSA to pay the cost associated with the property.

[Ernest]

States: “This is not meant to be a “is being debt free good” conversation. I am familiar with that and not as interested in that debate.”

Then proceeds to put up a “is being debt free good” question.

[Dara]

FWIW your peace of mind and freedom mean more than the optimal math. Neither side is wrong. Investirs maximize return and wouldn’t pay it off.

But the people with a paid off mortgage and rents are 100% theirs to use as they like hit retirement earlier with far less stress.

IMO paying off your primary is worth the peace of mind.

Rentals you don’t live in/at it makes more sense to maximize profit. Good luck with your decision.

[Alan]

I think it’s not just about leverage for me. Would having that 40-50k a year accelerate your comfort level with the RE portion of FIRE.

A lot of people here will discuss rate of return but there is something to be said for psychological safety. It’s sometimes not about the numbers.

I personally find not having a mortgage very relaxing – I paid off my rentals and then eventually converted them into syndications to be aligned to the life I want.

[Jule]

If there was a $150k investment that would yield $50k, would I do it? Absolutely, anyone would! But this is not your scenario. In your case, no I’d not do it.

You are not getting $50k because of the $150k loan payoff “investment.” The $150k left on the mortgage loan is not going to yield $50k if you pay it off.

You already made that decision when you bought the rental units.

The $50,000 is independent of the mortgage, that’s just your gross income from the rent for which you use a
portion to pay the mortgage.

Which you’d get with or without the mortgage loan. Also consider that that the taxes and insurance will remain regardless, so the $50k is not net income.

[Christina]

I say pay it off. You then cash flow a greater portion of the money that is coming in.

Further you could use the equity in the property to acquire another property and the debt is paid off fully by the cash your investment properties generate.

I love the snowball process that happens by letting your paid off property buy your next property.

[Laurie]

If you are claiming expenses as a business for the rental you can write off taxes, interest & insurance for the rentals. You lose the interest deduction when it is paid off.

Just another factor to add to your analysis.

I had a commercial rental that I paid off early – so it is nice to have it paid off but I was still working so put commissions I earned toward paying it off early rather than adding commissions to other investments.

I was maxing out retirement & had the option & knew I was close to retirement.

[Cailen]

How old or how long since the house has been rehabed? If the rent is barely covering the mortgage you are not getting net cashflow right now.

You are paying 833 a month plus likely another 35% of gross rent in capx and repairs if it’s an older home if you average it out over the next 15 years.

So, you are looking at -1767 a month minus whatever surplus you are getting above your mortgage in raised rents.

That’s closer to negative 21k a year if you are being conservative pre pay off.

On the positive side you are getting principle paydown that’s significant because you are late into your ammoritization schedule and appreciation as well as tax benefits.

And once you pay off the mortgage your right you will be positive 2k ish which isn’t too bad especially if you are living there and not paying another mortgage.

Good luck!

[Patrick]

I don’t see anyone answering the cash flow question. You need to create a cash flow projection to decide whether or not it makes sense from a cash flow standpoint.

That surely includes how you would deploy the cash if you didn’t not choose to pay off the mortgage now.

[Serena]

Highly probable that you would do better investing the $150k instead of paying it off. Yet there is still a lot missing to get final numbers.

Things that would need to be known and included on the post would be property tax and insurance cost, current year interest paid and principal paid.

And the remaining years on the loan.

If you add those numbers a more conclusive response can be made including what you could expect to save/spend by paying it off.

[Erin]

How much is the tax and the insurance separate line items not together. How much is tax?

How much is the insurance? You sound like you’re in Florida like me LOL

[Sarah]

When is your pay off if you do not pay early? You also stated taxes and insurance are less than $1k a month.

What did your mortgage start at that principle and interest would be a $3k a month payment?

It sounds like you are already at the end half of the mortgage.

[Mike]

You’re not getting $50K for a $150K investment… you’re getting $4,762.50.

The only expense of a mortgage is the interest. The principal portion of the payment is just a transfer of assets from cash to dirt.

You’d essentially be making a $150K investment into an illiquid asset that returns precisely 3.175%.

[Richard]

From my perspective I ignore net worth maximization as long as I have a specific fire goal that I am aiming for, thus my goal is to hit the fire net worth number at the same time as I am mortgage free because into retirement I don’t want to burden my portfolio with a 300x value of monthly mortgage payment extra.

I built a calculator that you might want to play around with. Its going to be different if you are generating revenue from the property however that can be reflected in the calculator as interest rate costs (reflected as negative value) + profit from rentals.

[Author]

Posts