Should I Pay Off My Investment Property?

[Anonymous]

Anonymous wrote:

Anonymous wrote:Pay it off- No brainer. You will have more freedom!

+1

+2

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:If you have enough money to pay off the mortgage, don't you also have enough money to refinance into a 10 or 15 year loan? You should be able to get the interest rate comfortably below 4%. Having a fully paid-off investment property doesn't make a ton of sense since it minimizes your leverage.

What is the importance of leverage (real question - not being snarky)? How does cash on hand, if it is not needed, outweigh spending more by paying unnecessary interest?

Anonymous wrote:What is the importance of leverage (real question - not being snarky)? How does cash on hand, if it is not needed, outweigh spending more by paying unnecessary interest?

Leverage changes the return on the investment.

If you put 10% down on a house worth $100,000 and then sell it after a year for $110,000 (pretend that selling a house is free, for a moment), you got close to a 100% ROI, which is excellent.

If you had bought the same house outright, your ROI would be only 10% (which is still good, but a lot less so).

Its true that if you're literally doing nothing with the money, there's probably not much reason to be paying interest. But a few things to consider:

1. If you have it in a high yield checking account and you have an interest rate on the loan under 4%, you're already making back a good percentage of the interest payment by parking the money, which might be worth it to have cash on hand instead of cash stuck in a property that you've have to sell or refianance to get at.

2. If you put the money in an only moderately aggressive money market account, you have a pretty high chance of beating your interest rate payment. Over the past year, a ton of mutual funds outperformed the prevailing interest rate. And getting your money out of a money market account is a lot simpler than getting it out of your property.

3. If you're hyper-aggressive, you could simply invest the additional money back into real estate. In the example above, the person who was able to buy the place outright could have instead bought ten places and sold them all, netting $100,000 instead of $10,000. Plenty of people have gotten rich doing this (though half of them filed bankruptcy in 2009).

4. Under a lot of circumstances, you can deduct some or all of your interest payment from your taxes, saving some of the money back.

5. Finally, you need to factor in the effect of inflation. Inflation makes your cash in hand less useful, because you can buy less with it. But it also makes your debt less significant. Obviously, having available cash is better than having debt, but its not nearly as much better when the inflation rate is high. Under those circumstances, your money is becoming less valuable, but your debt is not becoming more burdensome.

Anyhow, I don't advocate taking on a ton of debt, but I think some people, in the name of being debt-free, act in a way that doesn't maximize their wealth or flexibility. See for example the 12:00 poster, whose reasoning is "You will have more freedom!" That's certainly false. The whole point of OP paying off the loan would be to trade away unneeded financial freedom in the short term with the goal of being wealthier over the long term.

I am the PP who said "You will have more freedom", I am sorry that is not false. Your definition of freedom and mine are totally different. I am a risk management professional and look at investments all day, so I am not just commenting for the sake of commenting. I was sharing my thoughts according to what I know, my knowledge of the current market, any potential exposure the OP might face and what my preference is if I were faced with his decision. This is what I would advise anyone to do, you don't have to agree with it, you are taking another approach to this which I completely do not agree with, but to go and say this is false is a bit of a stretch!

[Anonymous]

Right now about allocation is as follows:

Real Estate 52%
Stocks 7.2%
Bonds 0.22%
Retirement 31.7%
529s 2.56%
Cash 6%

If we divert the money and pay off the loan, our real estate would be more like 60%. Then cash would 3%.

I think we are diversified enough for now. The location has been okay to rent out.

[Anonymous]

Anonymous wrote:Right now about allocation is as follows:

Real Estate 52%
Stocks 7.2%
Bonds 0.22%
Retirement 31.7%
529s 2.56%
Cash 6%

If we divert the money and pay off the loan, our real estate would be more like 60%. Then cash would 3%.

I think we are diversified enough for now. The location has been okay to rent out.

Hm, your real estate allocation seems high. We also have an investment property with a smallish (just under $100K) mortgage. Between that and our home equity, real estate makes up 33% of our net worth. We decided not to pay it off a few years ago and invested in the stock market instead. Since we made that choice in 2009 it worked out pretty well. If you have a long time horizon, your money should be more productive in stocks as long as you are comfortable carrying the debt. Ours doesn't worry us because both the investment property and our primary residence have significant equity and we believe they could be sold relatively quickly if the need arose.

[Anonymous]

Anonymous wrote:
I am the PP who said "You will have more freedom", I am sorry that is not false. Your definition of freedom and mine are totally different. I am a risk management professional and look at investments all day, so I am not just commenting for the sake of commenting. I was sharing my thoughts according to what I know, my knowledge of the current market, any potential exposure the OP might face and what my preference is if I were faced with his decision. This is what I would advise anyone to do, you don't have to agree with it, you are taking another approach to this which I completely do not agree with, but to go and say this is false is a bit of a stretch!

What is your definition of "freedom" then? I am not being snarky. I have a hard time seeing a definition of "freedom" where tying additional money up in a property constitutes greater "freedom" (even if there are other good reasons for doing it.

[Anonymous]

Anonymous wrote:I am about to finish a refinance of an investment property with a loan balance under $100,000 and without any closing costs. But its in a different state so maybe the rules/willigness to complete the transaction are different there.

What lender? I called around looking to refinance the mortgage on my investment property (I have $60,000 principal left, the rest has been paid off) and no one would do a refi for me. I even tried lending tree and such and got no takers. But if I could find a lender that would let me refi, I'd love to do it; my credit is excellent!

[Anonymous]

The one with the lowest rate was licensed in Ga. But Rob Suling at Presidential Bank also said he'd do it and he's in MD. Not sure if he has some theoretical minimum price where he either won't do it or won't give you a credit towards closing costs.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I am about to finish a refinance of an investment property with a loan balance under $100,000 and without any closing costs. But its in a different state so maybe the rules/willigness to complete the transaction are different there.

What lender? I called around looking to refinance the mortgage on my investment property (I have $60,000 principal left, the rest has been paid off) and no one would do a refi for me. I even tried lending tree and such and got no takers. But if I could find a lender that would let me refi, I'd love to do it; my credit is excellent!

Quicken Loans (MI) was going to do one for me for 60k but the costs were 4k, so I declined.

[Anonymous]

I'm doing a refi on an investment property right now for a 93K loan in WV. Closing costs are almost 4K, but it's still worth it since my current rate is 8.75% so will only take me 6 months to make back the closing costs.

I also do not plan to pay this off for a while so this was worth it to have the super low rate for years in the future.