Reply to Should I Pay Off My Investment Property?

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]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.[/quote]

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? [/quote]

[quote=Anonymous]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? [/quote]

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 [i]debt[/i] 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 reasonin[b]g is "You will have more freedom!" That's certainly false.[/b] The whole point of OP paying off the loan would be to trade [i]away[/i] unneeded financial freedom in the short term with the goal of being wealthier over the long term.[/quote]

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! [/quote]

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