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Should You Pay Off Your Rental Property Mortgage Early?

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People are greatly divided on the topic of early mortgage pay off — some say it’s a good idea, others disagree. This topic is highly debatable because there are so many factors to consider, and even a slight change in one of these factors could swing the answer in one way or another. In any case, a reader by the name of p3keith left an interesting comment with a different twist on this topic — should you pay off mortgage early on a rental property?

Should You Pay Off Your Rental Property Mortgage Early? 1

Photo woodleywonderworks via Flickr

The Question

Not to take this rabbit down a different hole, but I have a similar question on mortgage prepayment that involves a rental property. A little background on my situation. I am 35 years old and six years away from my military retirement. I am looking for my rental property to generate some additional income when I retire (it is zero sum right now, breaking even between rent income and mortgage payment), so I am considering paying it off in the next six years. To do this, I will have to stop my IRA and other retirement contributions.

Is it worth it?

Once it is paid off, I could start with the retirement contributions again, but I am not thrilled with the idea I can’t touch my retirement investments until I am 59 1/2. A paid off rental property is in effect a retirement savings that I would immediately reap the benefits of once it was paid off. I know my ROI drops with every dollar I pay into the property, but I think I am more concerned with cash flow than ROI. The cash flow from the property couple with my retirement would make a decent living in the area I want to retire in.

And here’s the first answer from another reader, Gene:

I’m in a very similar situation as you. I have a rental property that is zero sum as well… breaking even between rental income and everything I owe on the house monthly. I’m considering paying off the property so I can pocket the income (minus taxes and homeowner fees).

Taking everything discussed here into account — if one can pay off the mortgage on a property that in turn generates income immediately, the decision is heavily weighted towards paying it off. For instance, I owe $100,000 left on the rent house — and I have about $110,000 in mutual funds that are liquid — if I pay off the rental house, it not only immediately saves me 5.8% in interest but generates a net profit of $1,000 a month — which is which is a 1% a month gain on the “investment” of paying off the mortgage (the rent is actually $1,400 but $400 is spoken for via taxes, homeowner fee, insurance).

Does anybody have any input for us when it comes to paying off a home that currently has renters? I can’t see any additional drawbacks, but I do see an extra 10% on an “investment” in my mortgage being paid off…(PS: I’m military also and have very secure employment – 10 years away from full retirement if I stay in…). I also have $50,000 in a Roth IRA and max the contributions every year, so that $110,000 in mutual funds isn’t my only retirement fundage.

My Take

I think the problem is quite intriguing. Without going into all the fuzzy math and simply compare the two possible scenarios:

  1. Own a positive cash flow rental property, no mortgage, and has less in retirement savings, or
  2. Own a zero cash flow rental property with a mortgage, and has more in retirement savings.

I think the answer is self-evident…I would choose #1 over #2 any day — even if it means I have less “wealth” in the end. Why? I think there is a lot of value in the peace of mind that comes with scenario #1.

Advantages of Early Pay Off

Here are some advantages that I can think of right away

  1. Better cash flow.
  2. No more interest payment (so the higher the interest rate on the mortgage the better it is to pay off early).
  3. 5% saving on mortgage interest is better than 5% gain on your investment because you don’t have to pay taxes for the former.
  4. It reduces your debt-to-income ratio and allow you to purchase more rental properties.

Disadvantages of Early Pay Off

On the flip side, here are some disadvantages

  1. You lose out on mortgage interest deduction so more of your rental income is taxable at your regular tax rate.
  2. You are less diversified (a big chunk of your money is in real estate instead of diversified investment).
  3. Your investment might grow faster.
  4. You are less liquid (easier, faster, and much cheaper to sell a stock or fund than it is to sell a house).
  5. You lose out on inflation. Basically, $1000 you pay on your mortgage today is going to be a progressively smaller payment each time after you factor in the effect of inflation on mortgage payment.

If you’re in this situation, what would you do?

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88 thoughts on “Should You Pay Off Your Rental Property Mortgage Early?”

  1. For rental property, it’s all about ROI and ROE. If the property is worth $200k and throwing off $10,000 per year in net income (doubtful but possible), your yearly ROE is 5% on a paid off property. That’s not very good considering it may be taxable income, further considering that you have to work at managing the property, and also considering that it’s a highly illiquid investment. There are ways to do better with other asset classes so run the ROE and ROI numbers and do what makes sense, comparing it to alternatives.

  2. I’m in agreement with Mr. ToughMoneyLove. A lot of rental properties just aren’t worth it unless you throw leverage into the equation.

    That said, the 5% is fairly stable, so if you are retired and care more about cash flow than returns, and you don’t mind spending time looking after tenants, then it can work for you.

  3. People who are tax savvy invest in real estate for the purposes of taking the depreciation expense on the property. I do several hundred returns a year and I can tell you that right of the bat, I think it would be a big mistake to pay off the rental mortgage early. Mortgage interest on rental property amounts for a big expense and the loses you incur help reduce the tax liability.

    If you can’t break even and are losing money, get rid of the property. Paying off mortgage and hoping the property will generate positive cash flow is a long shot in my view but I am not saying it is impossible.

  4. What if you put the *extra* in a REIT? This could be divided both within your taxable and tax-free accounts. Try using VGSIX (Vanguard REIT Index) as an example.

    By law, REITs pay out 90% of their reported earnings as dividends in exchange for status as tax-free corporations.

    There is Risk in REITs and Risks in Real Estate. I think that relying on a single property in a single neighborhood is risky. You can use REITs to diversify your Real Estate holdings.

    You want to find the right Risk/Reward profile for your personality in looking at the Yields of these guys.

    I think Long Term Health REITS are a smart move right now. for instance, Omega Healthcare Investors(OHI) owns income producing assisted living facilities across US. As boomers get older, Omega will grow and produce even higher dividend payments.

    In Sum: pay your mortgage on your rental property and invst in a healthcare REIT. Diversity and liquidity are your friends.

    -WR

  5. I clicked over to this post with great interest. We, too, own a rental property that we could conceivably pay off within a few years (5 if we put the entire net rent back into the mortgage, faster if we threw in a bit of our personal money.) The taxes are the primary reason that we have refrained from paying this house off early. We are borderline AMT every year, and any additional profit from this property is bad. As our income continues to increase, and we definitely get into the AMT zone, we really don’t want to have lots of business profit.

    I would love to hear more people’s thoughts on this subject. I’m ready to sell the house, but my husband loves the monthly income and the thought that we’re building lots of equity.

  6. Start a business. Form an LLC (KateRents LLC) This business structure will allow you to approach your rental property in a different light.

    It is sometimes hard to start thinking in terms of Expenses/Income/Depreciation but it is well worth it.

    Make the effort you put into your rental property pay.

    Employees are taxed on wages.
    Businesses are taxed on profits (After Expenses!)

    Your business losses reduce your income.

    -WR

  7. I’m thinking the opposite on my rental property, mainly because I’m not in a position to pay it off. I’m thinking that I might not EVER pay it off, but simply continue to refinance into new 30 year loans to continually lower the monthly liability and increase cash flow. Whaddya think?

  8. This is something I’ve been thinking about. I’ve got 15 years left on a smaller (well, in my city, it’s small) mortgage. I wonder whether it makes sense to work on paying that off or if I should increase it to 20 or 25 years and instead take on a cash flow positive rental property. I can write off my business use of home, so that helps with my self employment taxes. And then I would have cash flow from the investment property. I live in Canada and we CANNOT write off interest on our own homes, except for the portion used for a business, assuming you have a business.

  9. it is hard to argue with positive cash flow knowing that this acts as a income stream for you and your family.

  10. it likes some very interesting thoughts. Lets look at this way, pay off your mortgage lowers your monthly expensies but increases taxible passive income. But if the rental increases invalue and you have no debt aginst it then you could possibly buy another one with half of the equity of your rental and have 2 cash flows and two mortgages. but if licened in the Business quadrent then you have two passive income which pay for all expensive and usually increases your passive cash flow by 20-30%. , passive is taxed the least if your savey and know the tax laws, build a team of realestate and business tax accountants and you can see what develops. plus your still working. Earned income is taxed at 50%, portfolio is taxed at 20% and passive is the least. So leave your retirement alone, look for future nuggets and start thinking like the rich, and fallow what they do!

  11. Great thread. Glad to see a post dealing with mortgage payoff on income property for a change. I had the same situation as the original poster. I own two houses besides my primary and have just paid off the mortgage on one (the other is already free and clear). I played with the idea of paying down my primary (300k+), but decided on the rental because in the current climate, a job is never guaranteed. I am not tax-averse per se and never let that alone sway the decision. One thing I realized was that NOT increasing income purely because of tax effects is the same sceanrio as your boss coming up and offering you a 10% raise. Would you say no thanks, because the taxes would be higher? I don’t think so.

    In short, I’m looking at income property as an income replacement vehicle. I’m hoping to replace as much of my primary income as I can while continuing to hold an emergency fund and my job. I’m not expecting to lose my job, but then no one is. But if that happens, I’ll at least have continuing dependable income coming in. I have read Dave Ramsey’s view on this, and he’d probably be against it. But in one of his books he mentions breaking the debt logjam with additional water (i.e. income) which is exactly what I’m doing. In about four years, if I stockpile income and still have a job, I’ll be able to afford another house free and clear. That will not only allow my primary mortgage to be paid “free” every month, but allow additional principal payoff as well. If I lose my job, I won’t have as much capital tied up in a primary house that I need to leave quickly. btw, I’m 51 and looking to retire with no primary mortgage in the next 7-9 years.

  12. Simply put, there is not enough information here to give an accurate answer.

    There are 2 scenarios ONLY where you should pay down your mortgage:

    1) If the CAP rate of the property is lower than the mortgage interest rate, pay off the mortgage or sell the house.

    2) Are my alternative investments earning more than the interest rate of my mortgage? If they are earning LESS than your mortgage, then pay it off.

    Those are the only 2 scenarios in which you should pay down your mortgage. Otherwise you are making a bad financial decision, period.

  13. One thing about income property that lots of people miss is that some folks look at income property as their investment vehicle of choice (as opposed to putting money in an IRA or mutual fund). That said, the incremental yield on the lump sum used to pay off my rental mortgage was a little over 12%. It’s hard to beat that in a mutual fund or IRA, especially when the yield generates current income. It’s real and comes in the form of a check every month, vs an IRA yield (theoretical/paper gains and even if achieved, only realizable in the future). If I didn’t still have the emergency fund as a cushion, I probably would have weighed this more. But now that it’s paid off, I have a *perennial* income stream that can be used to fund an IRA, pay down primary mortgage, or invest in additional properties.

    Like they say, personal finance is personal and no two investors are alike.

  14. I am looking at it a little differently. We have positive cash flow properties and use that for buying more. more.more. Someday they will be paid off and instead of just looking at 1000 per month. It will be like 50k per month. I would use the property to leverage to buy more and create a bigger retirement nest egg from rentals.

  15. Thanks for putting it so simply. I would also go for case 1 for the same reason you have. When I retire I want to be debt-free. I think I can sleep better with the knowledge that the place is already mine. Even if I have less retirement funds I still have a source of income. And I think the proceeds will be enough to get me through my retirement years. And besides I also would want to look for form of work even after I retire so that life won’t be boring. It’s never too late to earn money fast.

  16. If Im understanding BLairW…
    A rental worth 200k with 150k in equity and a 50k loan balance that has 15k in rents and 5k in annual expenses has a capitalization rate of 10k/200k or 5%
    So if the loan is at 6.5% then pay it down?

    WTS

  17. Comments are similar to what I read elsewhere….all over the board so it comes down to personal opinion and comfort. If it’s breaking even I see that as a problem as you should be positive after a couple years and the paper loss for depreciation should offset your income. I don’t know if I’d pay it off at this point but would increase my payment to have it paid off earlier. IF something should happen you do have the ability to pay it off. On the other hand, if you pay it off and don’t need the income right away, you could fully fund a ROTH IRA which would be income tax free based on current tax law and it gives you the ability to withdraw contributions and your money would have a little bit longer to work for you or you could use it to replace the money you took. So many possibilities so it would come down to the risk of the unknown, your tolerance level, ability to deal with emergencies, having good debt, having a good budget etc etc et.

  18. First off, thanks to everyone who took the time to post their comments and thoughts here. Very constructive and informative.

    My situation is that we have a very financially manageable mortgage on our prinicpal residence, along with two rental properties that we paid cash for. Income from our jobs easily covers our principal residence costs. The decision to pay cash for the rental properties, for us, was easy. I can walk up to the properties any day of the year and touch and feel my investment. Can’t do that with stocks in companies. It’s call piece of mind and affords me a comfort level that I just don’t have with the stock market or other similar investments. Don’t get me wrong, we do have money in IRAs and retirement accounts. But all things being equal, I will pay cash for our next investment property, sit back, watch it increase in value and wait for the monthly rental check to be delivered to my door.

  19. i will give a dumb country boy prospective.first i would like to say my home is paid off. i bought it from in-laws. We had 2 thirds of the money from sell of our home that was paid off…thanks to in-laws’ intrest free loan on that house. the other third once again i had an offer from in-laws to do an owner finance, we declined and paid off the house with the sell of investments. today by my calculations the investments would be worth far less and i would have ulcers from stress and oh yea i would still be paying the mortgage to the in-laws.

    Another point to make is when we all started out roman noodles were good eating. Bologna sandwiches were part of our every day diet. Our taste change as we get more wealth but not as we get more stuff. In my case if i had 100,000.00 in the bank and my wife said lets do a 100.00 dinner the my reaction would be ok sounds good. If i have 10,000.00 in the bank yet i still have the mortgage free property I would say hell no to the 100.00 dinner we are broke, but really i have property growing in value i have no mortgage i do not have to worry about a terrorist striking our country and my investments tanking and me screaming oh god why did i not pay off this dreaded mortgage.

    Lets face it some of the lets make a lot of money idea that people have are the reason we are in the shape we are in in this country.

    i roll with the philosophy of pay as you go…i promise in the end you will have less gray hair be a better parent be a better spouse sleep good and to me that is worth more than the possibility of me making a lil more money.

    one last thing before i go this is very important…it was not the people with pid off mortgages that were killng them selves during the stock market collapse it was the greedy one that had all there life in quik money stocks.

  20. I HAVE A QUESTION. I OWN 3 RENTAL PROPERTIES THAT I PAID CASH FOR . BETWEEN THE THREE I BRING IN $1650.00 MONTH I AM SAVING TO PURCHASE ONE MORE BUT I WAS TOLD IM NOT BEING SMART BY PAYING CASH FOR MY HOUSES AND IT IS GOING TO COST ME IN THE LONG RUN . IS THIS TRUE …. THANKS BIL

  21. Late to the comments… but if you have a zero-sum property you need to get out of the rental businesses… no point in holding something where you can’t even generate any income to pay for the crap you have to deal with. You have no buffer against bad tenants in this situation… my advise increase the rent by upgrading the place a bit… don’t know of the tenant laws where you at but you need to bring the property cash positive by any means possible. If it even means evicting current tenants and getting new tenants at current market rate.

    Income from rent is taxable so unless you can show that you can make money from the property without paying it off.. don’t pay it off… and just take the tax deductions from the mortgage on it.

    Don’t get into this whole Suzzy Orman crap about being debt free… their is good debt and bad debt and as long as you understand what is what… then debt is the way to get richer my friend.

  22. I own five rentals averging in price $40,000 to $150,000. I try to put as much down as I can when I buy them and the take out nothing more than a fifteen year mortgage or home equity loan on them. I realize very minimal cash flow during this time, but I am paying these properties down rather quickly and should be in a good place in about ten years assuming these homes gain in value as they have historically done. I know this may not make sense to some people out there, but I am 42 and feel that by the time I am fifty these places will be close to being paid off. Any thoughts out there would be appreciated??

  23. I have 3 houses, my primary and 2 others. One is paid off, I owe a mortgage on my primary and a mortgage on a rental. The interest on my rental is slightly higher. I’m trying to figure out whether to pay off my primary first or my rental first, I’m not sure which of the 2 should be first, but I’m thinking I should pay off my rental, then I’d not be throwing money at a bank and I’d be getting more cash flow.

    Why get so wrapped up in trying not to pay taxes, that you would rather pay a bank $1.00 than pay the government $0.30. Tax deductions on mortgage interest is not a scheme which was invented to help you out. It makes the banks rich and keeps you poor. When you use “other peoples money,” it is the “other people” who are making the money. Pay cash or pay it off as fast as possible, then you are the one making the money.

  24. Bill, I think you have made a very wise decision by putting more money down on your properties. It shows that you are not an investor who tends to rely on speculation (i.e. putting the least amount of money down in hopes of either flipping or creating an increased risk of losing your property to unaffordable payments on the mortgage due to vancancies) I choose to do the same with mine.

  25. Hudson:

    I think you have made a very wise decision by putting more money down on your properties. It shows that you are not an investor who tends to rely on speculation (i.e. putting the least amount of money down in hopes of either flipping or creating an increased risk of losing your property to unaffordable payments on the mortgage due to vancancies) I choose to do the same with mine

  26. Great forum. I’m 67, living with a partner in his home, but have a small house, currently rented, for the future if I need it. My main objective is to own a home when/if I have to live alone. Currently I owe $100,000 on the mortgage, but could pay it by using all my investments. The tax benefits I now have would disappear, and my income would probably rise to a higher tax bracket. But I want the peace of mind of having a home should the markets crash again. My only other income comes from Canadian government pensions.

  27. Here is idea. It is the method I see savy immigrants using. and my wife’s Grandfather use it pre Great Depression.

    I have 6 paid off rentals and 2 that are very very close apx 2 years. (I am not paying much interest on the mortgage).

    I like using a WOLFPACK approach. Like a snowball. Paid off rentals all pitch in to pay off a single property. then I can take the 8 incomes and pay off my home mortgage or the next multi family unit (which I prefer to own)

    IRA, Stock, 401k (it took 20 years for it to grow… then shrink with the recession, and grow back) NO FAITH IN THE CASINO CALLED WALL STREET. No faith in my employer who offers no pension or 401k.

    Deductions -sure I have plenty of them…. Hey Andrew I need a new central A/C or heater. I get a lot of that. Walls that need to be replaced due to poor construction.

    Crazy or sain? Any input would be nice.

  28. A concern I have: If you own a primary residence, and a rental house, both with mortgages, wouldn’t it make sense to pay off your home’s mortgage first? Then, if the worst happened (job loss, disability preventing you from working, etc), your own home is paid off, and if the bank forecloses, it forecloses on the rental house. Less disruption to your life.

    Please explain, why do people choose to pay off the rental mortgage first? I just don’t understand

  29. What exactly are the tax benefits to owning a rental house with low cash flow? I heard at a seminar that even a property which is “break-even” (income and expenses cancel each other out on paper) has tax advantages (depreciation, etc) which you can use to offset your regular income.
    Are there other tax benefits I don’t know about?
    A detailed answer would be appreciated.

  30. Important question: When you are buying a rental property, how do you estimate the average monthly cost for repairs and maintenance?

    Is there a ballpark figure that landlords usually use? For example, a certain percentage of the property’s value?

    What number(s) do you use, and how do you arrive at those numbers?

  31. Which makes the most sense to pay off depends on the situation. I can only speak to the single family home market but very few people have a rental SF home with a larger mortgage than their primary mortgage. And in that case, paying off the rental mortgage simply requires less funds and/or less time to pay off. But almost all investors would do a cost/benefit analysis of paying off any outstanding mortgages as well as other potential investments (REITs, stock, etc).

    Another reason people don’t pay off their primary home is because they are not in the home they want to spend the rest of their life in and expect to move at some point. So why pay off a home you don’t intend to stay in.

    Once paid off, the amount you no longer pay each month to a bank becomes incremental income. And increasing income is a very attractive proposition these days.

    Earmarking funds for maintenance is a function of the home’s age. For newer properties I use 5%, for my oldest one I use 15%. It also helps to have more homes in rental, as that provides the ability to pull together a larger chunk of funds from multiple homes for as long as needed. That is, if you can pull $10K together in a month’s time (from multiple rental sources), you may wish to set little or none aside as budgeted maintenance vs saving up 10% each month from each property.

  32. Great comments. WRT the question why pay off a rental vs a primary.. in most cases the primary residence mortgage interest rate is significantly lower than the rental.. i just refinanced a home for 3.75% took out cash and am considering paying off a rental that has a 5.7%.. this is known as an arbitrage opportunity.. i.e making or saving money simply by using a difference in interest rates to your advantage.. the difference as others have stated is that the rental will be taxable income.. but if your primary mtg is enough tho offset it tax wise then its still worthwhile to consider. Especially depending on your age.. the closer to retirement the more sense it makes IMHO.

    I say this because your opportunity to make more than the interest on your rental mtg is more suspectible to stock market swings which become much more of a consideration closer to retirement.. if you are 35 or less..then I think paying it off is generally not the way to go.. If 45, 50 or older then it may be.. its close math..

    GL and DD

  33. (reply for the two active duty guy’s with rental property)

    Guy’s, I was active and bought two rental properties. Paying off your motgage debt early might not be the way to go. Reason: your salary from work and rental property will increase over the next few years, and the only way to shield that income legally is via depreciation, and losses from your income property i.e. mortgage interest…etc.

  34. “…and the only way to shield that income legally is via ”
    Off the top of my head.
    1. 401K/IRA contributions
    2. Pretax deductions for insurance.
    3. HSA account (if available)
    4. Charity
    5. Carry-over losses from the crash
    6. Tax loss harvesting

  35. I’m retired military. My wife and I purchased a house 19 years ago, then we moved and decided to keep and rent it. Average annual expenses are less than $3,000. Mortgage is $720 and the rent is $900. We’re now in a position to pay it off. But if we sell then we will pay huge capital gains taxes since we have not lived there since 1994.

    * What are the tax ramifications if it gets paid off?
    * Is it safe to say the monthly income generated if this property is paid in full will be taxed like my payroll?
    * Do I need to consider the income from this property coupled with our salary from my current employer?
    * Should I sell and invest the meager profit and invest in a property closer to where I live?

  36. In addtion to the 25% capgains tax theres also the “depreciation recoup tax”. You’ll have to pay 25% of the allowable depr. even if you didnt take the depreciation deduction on the tax returns all 19 years..

    Have you looked into a 1031 exchange?

  37. Appraised Value
    + Improvements
    – Depr x 25% = DeprRecoup(see below)
    = Cost Basis

    Selling price
    – Commission 6%
    – SalesPrep costs (paint,carpet etc)
    – Cost Basis
    =Capital Gain 15% Fed + applicable state

    Sales Proceeds
    – CapgainsTaxes
    – DeprRecoup Tax
    – Closing costs (if any)
    = Net Profit

  38. I lived in my house for 12 years. 7 months ago i moved in with my girlfriend and rented my house out. The rent covers all my expenses on the house with zero profit. I only have 3.5 years left on the mortgage and i’m wondering if it is better to pay it off and have that steady income coming every month or should i take the equity out that has built up and lower my mortgage payments on the house so i start seeing a profit. My gf and i will be getting married and are currently looking into buying a bigger home.
    I love this thread!!
    Thanks everyone.

  39. Bill, I’ll preface this by saying talk to your accountant and wishing you congratulations. That said, here are a few thoughts.

    We, as sophisticated investors, hope for the best and plan for the worst. If you have a non-negative cash flow on a 15 year loan, you’re doing pretty well. Most need to drop back to a 30 year mortgage to get it to flow well.

    Take this next one as intended – solid advice from someone who didn’t follow an old attorney friend’s advice: keep the rental home titled in your name alone after you get married. Reason being: whatever you bring into the marriage AND DON’T COMMINGLE WITH YOUR SPOUSE, cannot be taken from you in a divorce. Retitling into both your names would commingle the house. Best case is, you two stay married forever and you can use the money to put the kids thru college. But best cases don’t always happen. Without factoring in anything you didn’t mention, I would probably hold onto it and let the tenants pay if off.

    In my case last year, I wanted several known solid income streams in the event I was laid off. So I paid the rental off and did get laid off (but was hired back). If you hold onto it and do get laid off, you can probably use your severance to pay it off (given it’s so late in the amortization period). Having income separate from your job is great peace of mind. This is the reason most of us do this in the first place. My personal goal is to replace 100% of my job’s income.

    Whether you pay it off or not depends on many factors and will usually boil down to how you feel about it, all things considered.

  40. Bill, Lots to consider….
    If you have no other history as a landlord and less than two years of 1040 Schedule E history on this property then a conforming loan program will not allow you to count the rental income as income. So, for purposes of buying a new property this will adversely affect your debt-to-income ratio. On the other hand if you refinance the rental to pull equity out the ROI & ROE on the rental will increase and you’ll have more for a downpayment to qualify for a better rate. But you’ll want to keep the LTV on the rental under 80% to avoid PMI. Or you could just sell it but perhaps now is not a good time to do that.

  41. Luke: It depends on whether your investing for appreciation or income. If income then I wouldnt pull any equity out of a paid-off property.
    If for appreciation, I’d leverage both properties to the hilt.

  42. Thanks for great inputs.

    I’m thinking to cash-out refi my prim at 2.75% (7/1 ARM) and use that money to pay off the 2 rentals at 6.5% (145K each). I m currently break even for each property if no vacancy. Our job/investment income should hopefully pay off that refi prim mortgage in 7 years.

    Is this a wise idea?

  43. @Ken – It sounds like a good idea, it seems like you’ll be able to save money. But I would consider the following.

    1. How far along are you in the rental loans? Toward the end, you probably paid down most of the interest already.

    2. Instead of 7/1 ARM, what about 30-year fixed?

    3. What’s the closing cost of the refi?

    4. Check with a tax advisor to understand the tax implication of doing this.

    Just my 2 cents.

  44. Sounds like your primary is free and clear.
    Thats a solid place to be whether you staying put for good or planning on selling in a 5-7 years.

    You should be able to get a FRM on the rentals thats close to 4.50%. Where would you invest the cash out?
    Assuming a 28% tax bracket with the cost of money now at 4.5% any new investment would need to return at least 3.25%
    (28% x 4.5% = 1.26 and 4.25 – 1.26 = 3.24%

    If its looks like local RE is going to appreciate over the next 5-7 years I’d leverage the rentals 80% LTV and hang on. If on the other hand your thinking of selling one or both in 2-3 years then I’d refi for rate and term only and leave the equity in them.

    Its a nice ‘problem’ to have because the other option is to simply do nothing!

  45. I had a paid off mortgage on a rental just did a cashout refinance 4% fixed for 30 years plan on taking the money and locating more rentals. Feel a little sick to have gone from a paid off rental to a mortgage but the mortgage is 455 and the rent is 700. I split the property I originally purchased and kept the land just mortgaged the house. Heading into unchartered territory if anyone has anything to offer I’m listening.

  46. Unable to take out a mortgage on the property at this time because the propety is a camp with no septic and no indoor plumbing. It is my understanding that I would have to pay cash to get the property. Then after improving the lot ie septic etc then I could get a mortgage.

  47. Great topic! This has been very helpful learning all he different options available. I also own three properties; one primary and two rentals. I logged onto to this site to see what people have been contemplating in similar situations. I am 43 years old and want to choose the best financial option. I am a government employee with a pension plan so paying off my rental income properties sounds good. My accountant says I should keep a mortgage on my primary and one of the rental properties for the tax benefits because my salary and rental income could push me into a higher income bracket. I was thinking about refinancing my primary from a 30 year to a 15 year mortgage so that I would not have a mortgage when I retire in 20 years or so. Is my accountant giving good advice or does anyone differ?

  48. I have 2 rental houses with mortgages.My question is I owe 166,000 on the original that I bought in 2003 for 250,000 with 20% down.Is it wise to pay down the princ 20,000 at this point to inrease the amount by about 100 bucks a month that the princ will be paid down going forward vs. letting the 20k sit in a money market???Thanks for any opinions.

  49. I have a home paid cash, a 3 flat paid cash with a positive cash flow of $5600.00 a month. If possible, I think the way to go is to pay cash, or borrow equity from a home that may have a mortgage and purchase property with cash, rehab and rent or flip. Hope that helps some.

  50. I have a variation on this thread that I hope someone in the group could help me with.

    I am considering the purchase of a small SFH in a depressed market. Asking price is $69K (originally sold for $200K in 2007) and rental comps are $1000-1050/mo…an 18% CAP! I’ve been running the numbers for estimated OE and debt service and it looks like I could maintain a small positive net cash flow carrying a 10 year note. A 30 year note throws off an appreciable amount of cash. I can see both sides to this but the math starts getting fuzzy when you start accounting for tax advantage, future appreciation, etc.

    Anyone want to take a crack at this?

  51. @Carl – Tax deduction alone is usually not a good enough reason to keep a mortgage if you can pay it off. For example, if paying off a mortgage saves you $100,000 in interest, that’s a $100,000 savings vs. deducting $100,000 which only saves you about $25,000 (assuming average tax rate of 25%).

    On the other hand, it might not be a bad idea to keep around a mortgage if your rate is low. It’s a good inflation hedge (both the mortgage and the house are good hedges), and it gives you the flexibility to do something else with your money.

    @Hoops – It depends on what your mortgage rate is and if you have any other plan for the money. If you plan is to let it sits in a MM account earning sub-inflation rate, then yes, pay off the principal.

    Have you thought about buying a second rental property with the money you have?

    @Marshall – Thank you. Buying anything with cash is generally a good advice if you can afford to do it. Most people I know can’t afford to buy a house with cash.

    @Chris – I understand your point about 10-year vs 30-year. Personally, I would go for the 30-year to maximize cash flow and try to save up for a second property. Even if you can’t take advantage of a second property, you can lock in a low borrowing rate for 30 years, which will probably cost you almost nothing after factoring in inflation.

  52. Pinyo..You really know what you are talking about and I appreciate your advice.Here is my situation and I am really torn.I own 2 houses in Az and I live in Ca. Bought both new. One is 9 years old in a very nice retirement community and I owe 165,000 k at 5.125.The other is 8 years old in a regular community and I just refin it at 5% no cost and I owe 169k.The ret community house is 2700 sq ft and worth about 325k or so and the other one is 2300 sq.ft and worth about what I owe. The combined rent for the 2 houses is 2850 and my combined mort pay is 2000, but mgt fees, prop tax and hoa and landscaping are about 900 plus the day to day issues that come up like a new whatever is needed. What I do not understand is how does one weigh in the tax deduction, depreciation and tenant paying down the principal when determining if these are good investments. Sorry for being so long.

  53. @hoops – It really depends on who you ask. The more experienced landlords that I speak to mostly agree that you should have a cash flow positive rental after all expenses (including the principal pay down) and before factoring in tax deductions and depreciation. However, I also know landlords that are perfectly happy with negative cash flow, but with net positive value after factoring in principal pay down, tax savings, and depreciation. It looks like you’re in the latter category and if you’re okay with it, I don’t think there’s anything to worry about.

  54. I currently own a rental property that is rented out to a family member. The only debt towards the rental I have is a $27,000 HELOC used for upgrades and repairs. I rent for $1100 a month and after paying ins, taxes and water I am left with around $750/month which I usually put towards the HELOC.

    I also own another property and the mortgage is $300k.

    I am just wondering if I should keep the rental property or sell it and stock the money away in mutual funds or if the return I get on my rental is great enough to hang on to it.

    I have had so many mixed comments on my situation. So many people tell me to sell the thing and invest and many tell me I would be stupid to sell.

    I am new to being a landlord. I have my worries but know that it goes with the business. Main thing I have learned is to really do your background checks on new tenants.

    Any advice for me?

    My rental is valued at $160,000 and it is paid off. All I owe is the $27,000 @ 3% interest. Which I could very easily pay off in 3 years. I do not use the HELOC for any consumer debt. It is only used for household upgrades I did on the rental property.

    • If you sell you pay for depreciation recaptured. If you have not owned the property long then the cap gains and depreciation may not be a lot. The question for me would be this: will the net profit be worth all the work I have done and is the alternative investment going to yield a better return. Personally I will not sell.I can alwAys borrow against my property if NEC. I get steady income and though rents exploded through the roof in Denver they haven’t ever dropped much for very long also as long as your interest rate is low I would never pay it off early. In fact if u can find great deals on rentals I would borrow more against your heloc to buy more. That is exactly how I bought 12 rentals over 10 years .

      • That’s amazing! I don’t know if I’m wanting more rentals but I still have the one mentioned above. Selling is not something I’ve taken lightly. And thankfully my husband talks me out of it everytime times get tough. The key is good renters. Screen screen screen 🙂 my heloc I had mentioned about in my previous post…3 Yrs ago is only half paid off. Did a few more renovations but I’m more comfort with the balance. And interest rates are lower now @2.5%! I keep wanting to dump my savings into it to pay it off but I think I’ll just pluck along as I have over the years and reassess every year end.

  55. @Amy – If you’re comfortable being a landlord, I think you’re in a great position. My wife and I just bought our first rental home. It’s cash flow positive at a decent mortgage rate. Since it’s already cash flow positive, we are not planning to pay it down.

    Personally, I’d continue the way you have been doing and just pay down the HELOC as you go. The property should continue to generate cash flow long after you pay off your HELOC and it will have value real value that is a good hedge against inflation.

  56. Getting ready to take early ss benefit at 62. Primary res paid for. Cannot decide on possible best route to take between a couple of options. Three rental properties, all with good equity but we just let the money stay in llc account for repairs as you all know as renters leave so does carpet or whatever. Possible options, sell gold coins pay off one property to have clear,borrow against primary to pay off two of the rentals.

    Problem I see with this is now I trade income for small deduction on primary, which we will be renting also as we are retiring in Mexico and mostly looking for scuba diving money
    I do believe it typically comes down to what people believe they are the most comfortable with. Myself it is having stuff paid for and as we got hammered last year when we sold a couple of the rentals and recapturing depreciation took the wind out of our sails. Problem with gold coins is you hold them to the bitter end. Ideas?

  57. i refi’d my primary residence from a 5.5% rate to a 30 yr fixed @ 3.875% in december of ’11.

    my monthly payment with escrow went from $715 per month to $550. that’s apprx a 30% reduction. this is in my opinion a very responsible use of leverage. the money i could use to pay a low rate off in full is put to better use, like buying more property for example.

    i bought a single family rental property in february ’12 with a 30 yr fixed @ 4%. the rental was 75k, i put 25% down. my monthly mortgage payment with escrow is $463. i get $950 per month from my tenant. the 20k i have in this deal earns apprx $5800 per year in positive cashflow, not including the increased equity on the property. this return on my intitial output is close to 30%. that’s an excellent return by anyone’s standards.

    the key to making this steady 25% plus cashflow is the low mortgage rate. it also hedges against inflation, because the bank is essentially stuck with a 4% rate even if inflation goes through the roof.

    i have enough liquidity in index funds to pay both mortgages off in full, but if i did i’d lose all the advantages of those funds – namely dividend income, and overall growth, which if kept in these equities through our economy’s normal growth/expansion cycles, will easily out perform the 4% rate on the leverage.

    i’d be much better off buying more property with these funds than paying off existing loans.

    besides that, investment/rental income is taxed at 15%, so the tax angle favors keeping the leverage working for me.

    it’s a knee-jerk reaction to avoid debt. we’ve all heard the “old timers” and conservatives denounce debt, but used properly and responsibly, leverage can be an invaluable tool to creating wealth. if the cashflow on the properties is sufficient, it’s really a no-brainer.

  58. I have really enjoyed reading along. This thread appears to be full of people in similar situations to myself.

    I go back and forth on paying extra into my properties. I have a paid for primary and a payed of single family home. I had no idea how to figure out the rent amount on the single family as the house as it is the house my wife brought to our marriage and we paid off completely after the sale of a couple Multi family units I owned. It turns out I am renting it below market, but I have great tenants for now that do not call and pester for little things. They may also buy the house in the future.

    I also have another multi family with 20 units. It turns out to be a cash cow. Plenty of cash flow and I constantly upgrade and up the rents when units turn over. The location is perfect in a college town, yet it is occupied with either young business professionals or graduate students. I receive calls every week of the year with people wanting to move in, in 4 years I can count on one hand the number of times I have had a unit sit empty for more than a week or two. I have a little over $400,000 in equity in it. In 2014 I will have owned it for 6 years and will need to refinance again. The current rate is only 4%. By then the remaining amount due will be around $614,000 so still too large for a traditional mortgage.

    I have been thinking about taking the income from the other rental and adding it into the pay off on the 20 plex. Hoping to bring down the mortgage to a point I can lock in a 10 year pay off. I just keep thinking these low rates cannot last for the next 15 years, which is what my pay off currently would be, if the rates stay low. I know this is a sweet position to be in since I have no other debt and plenty of income without taking anything out of the rent. I simply reinvest in property upkeep so that I can keep raising the rents.

    I currently have no desire to take on any more properties. I work full time and have 5 kids. And even though they all help me maintain the units (I pay them to paint, weed, etc.) we have a life with scouting and church and school, so no more properties are needed.

    Do I simply leave things the way they are and put extra money into the market, or simply pay this down and retire on the six figure income in 15 years? I am currently 44. Also, is there a different type of Jumbo loan that I could lock in and not worry about refinancing every 3-6 years? Just trying to make my money work as hard as I do. Thank you

    • Please tell me how you are getting a traditional mortgage on a 20 unit apartment building. The only loan you are getting is commercial or am I missing something?

  59. I own 12 rentals. I took out a HELOC on my primary and used it to buy the 12. I paid off the lowest balance first even though it had a good interest rate. I took the positive cash flow and any other cash I could to pay that off and continued to do so. It is always cheaper to pay taxes than it is to pay interest. I am not worried about saving for retirement because the rental income will fund my retirement. Handful of the properties are paid and all have raised in value. the change in value doesn’t matter unless I sell. I wont sell because of the depreciation recapture and cap gains. I will leave them for my kids.

  60. very happy i found this sight. im 23 own a home. my game plan is pay of this house in 5 years thin buy a 2 home and use the rent and all my money i can afford to pay off my 2nd home thin do the same on the 3rd home ext.. to 6 or 7 rentals and retire when im 40 in 17yrs. i just want to kick back and take care of my rentals. im det free other than my home i own now that i owe$103k on. i make ok money and im smart enough not to buy news cars and quads cause i know at the end i can buy what ever my young heart dezired.

  61. This thread has plenty of great information but there is one major oversight to many of the responses. That is the savings you experience by paying of a mortgage early. We recently had the opportunity to sell some stock (not 401K) and pay off our rental property that was on a 30 year note. By paying off the $89,000 balance, we saved almost $60,000 in mortgage interest. That super easy math! In addition, we are now cash flowing over $400 per month on the unit as well as enjoying the appreciation of the real estate market in our area. All calculations made, we are likely going to enjoy a ROI of roughly 8% into foreseeable future.
    Of course we can still deduct property tax and HOA fees from income. With all that added, it is likely approaching 10% annual return. The only people who do not think it is a good idea to pay off mortgage loans early are bankers. TRUTH

  62. Quick question:

    Among other assets (no liabilities) I have 2 homes w mortgages-
    1. Primary residence mortgage of 280k with a value of 450k
    2. Rental townhome mortgage of 92k with a value of 250k

    I have about $100k to invest and am thinking pay off the townhome? Another part of me wants to attack the primary. Thoughts?? Thanks!

    • @Mackey – I would buy another rental if you can find a good one that generates positive cash flow. Also what are the interest rates on the two loans?

      • If you paid off your rental property, you could take the profit from the rental and put it towards your primary, in effect, still paying it down quicker with one less mortgage. I do like Pinyo’s suggestion, but it would obviously depends on many, many factors on whether that is right for you or not. It just makes sense because interest rates are so low right now.

  63. We just refinanced an investment property. Between my escrow refund, not having an April payment and the impound account from my former lender, I should have about $3600. Should I apply it towards the principal balance of the investment property that we just refinanced? or our primary residence? ( both % rates are at 4.5%).

    • I would look at 4 factors:

      1. Current income (cash flow)
      2. Current and anticipated tax bracket
      3. Total Rate of Return of alternatives
      4. Plans on where you want to put the investment

      As this article mentioned, there is a delicate balance between quite a few factors but these are the 4 I balance when making the decision. If I have the cash flow I pay down dept in anticipation of paying everything off around the time I anticipate retiring. If I decide to pay off a rental it is usually because I want to place it in a LLC and don’t want to deal with the ‘sharks’ at the bank or mortgage company and to greatly simplify the process.

      I have been toying with the idea of increasing my dept load to increase tax deductions while using access to offset increasing contributions to a 401k (decreasing current taxes more). I can adjust course later as long a surplus cash flow exists. With that said, any strategy you look at should be through a fee based Certified Financial Planner. They may come up with an even better strategy.

  64. I paid off my rental property when I had enough cash. $188K. It was at 5.5%, so not a bad return these days.

    If you want to retire early, get rid of debt.

  65. I’ve enjoyed reading all of the posts on this topic. In fact, I found this site searching for an answer to this very question.

    I own 4 rental properties generating around $60k gross. I began systematically paying them off a couple years ago, and am glad that I did.

    I understand leverage, and have used it wisely. However, after putting a pencil to it, I’m better off having my cash in the homes and generating income than I am sending most of that income back to the bank and only hoping for appreciation.

    Example, if I owe $100k on a home worth $300k, and it generates a net $14k after taxes and upkeep expense (on $18k gross rent), by “investing” that balance of $100k per year entirely back into the home by paying off my loan, the net income generates around 9% positive net interest on that investment after figuring for depreciation, expense deduction, and taxes on that $100k investment. That rental income becomes a quasi-dividend on my principle investment.

    If I were to include the $70k in remaining interest I would have paid over the remainder of the loan, and the appreciation of the home value over time, my return is even greater. Plus, I am able to compile money, quicker, towards the downpayment on the purchase of my next rental when I’m not sending most of my rent to the bank in the form of interest.

  66. I have 24 renters in seven different properties. only three mortgages. I paid off a $189K mortgage last year, and an paying off another $160K mortgage before I retire.

    If you want risk, keep the mortgage. if you have a negative cash flow rental, sell it.

    I am able to generate a 6+ figure cash flow with my rentals, and it would never be that high if I had mortgages. Once bad tenant can wipe you out, if you do not have the cash flow to recover, you better have a good hob.

    With a non-owner occupied mortgage at 5%+, that’s a solid guaranteed return when you pay it off.

    • Quick question.
      I own my own home.
      I have investment property worth 300,000 have 200,000 to pay off.
      I have excess income available. Should I pay off investment property as quickly as possible with extra lump sum repayments or just pay the normal repayments and somehow use the excess money another way.
      Cash flow is not a problem.

      • I would pay a bit extra on the mortgage. Make sure your own bills and mortgage are paid. No car payments, no CC debt. No student loan debt.

        Split the amount, and put half on the mortgage and half in an index ETF.

  67. I have two rental properties and my primary home so three total homes. My primary is paid off and I owe 20k on one rental and 60k on the other. My “plan” since day one is to have paid all rental properties off and once paid off purchase another. With the rental income generated from the other homes pay off new home….once paid off again purchase another and do the same. My question is once homes are paid off I will not have the mortgage interest to deduct anymore so what can I do to supplement that. What are other tax deductions that I can use help me deduct from taxes?

  68. Hello all,
    I am writing to ask for your professional opinion. Okay here goes:
    I am 40 years old and have a house (paid off row home), and three rental properties. Of the rental properties, I owe 95k on the two duplexes (total) and 50k on the single family home (also a row home similar to my actual home).
    My questions to you?:
    Should I continue to purchase more properties since the interest rates are still low?
    Or should I try and continue to pay off the duplexes and row home?
    One other question: Is there a time frame that I can sell the row home and avoid capital gains tax? I bought it one year ago.
    Thanks!!

  69. Carl W, you may consider opening a retirement account that will offset income so you do not fall into a higher tax bracket. Then you could pay off the house or rental, or both!

  70. Thank you for lot of feedback here. My case is slightly diff than the ones I could read.

    In 2012 I rented my first home after living there for 8 years. I’m planning to sell it this year. After taxes, there should be easily $100K. I have another condo rental on which I have around 97K mortgage with an interest rate 4.5%. Right now after all the expenses, condo sucks around $100 from my pocket. On my primary residence I have around 360K balance with an interest rate of 3.875. Questions (1) How is tax calculated upon the sale of my first home (2) What is a better investment of that 100K? Options I’m contemplating are (a) Payoff condo mortgage and then refinance my existing mortgage to 15 years at a lower interest rate and then use the condo income to offset the increase in the new 15 year mortgage loan. When I payoff this, won’t there be tax on the rental income? (b) put that 100K into my primary mortgage so that I can pay it off much faster.

  71. Each decision will depend on what your plans for the future on investing will be. I like to keep investing in real estate to accumulate as many rentals and flips as i can. I try and buy at least 2 or 3 rentals a year. I pull out equity from my units after purchasing with cash so i can keep my money free to buy other homes. I only do that when there will be positive cash flow even with a mortgage. In my area homes are cheap and rentals are pennies on the dollar. Our rents received are less than most bigger cities but the out of pocket money and mortgages are cheaper as well. I buy rentals for 20 to 30k that rent out for an average $650 per mo. That is a huge return for a little investment. Subtract taxes and ins around=$125.00 then add $200 mortgage at 6% for 10 years totals $325. That’s still a $325.00 cash flow. No reason to pay off a mortgage as long as your using the equity for more profits.

  72. Hey guys, love this thread.
    I’m looking to retire from the Fire Dept in 6 years at the age of 54. At that time I’m thinking about paying off my 3 rentals using my 457k. I would need to draw 150,000 out of my 200,000 457k to do that.
    Any bought son weather I should touch my 457k to do that or not.
    Really struggling with this….

    • Do not take your tax deferred funds out. Make lifestyle changes and put the extra towards the mortgage.

      You can also use a HELOC to reduce the interest expense, if you have enough self control.

      I wrote about my payoff experiences on my own blog. I have paid off over $300K in the past 2.5 years.

  73. My rental is under $98k and I am eager to pay it off to and get the $1700 monthly ( excluding tax, etc.). Instead of liquidating the remainder from my stocks, I will make a 2-3 year plan make 3-4 smaller lump sum payments based on stock /dividend performance each quarter. That with the regular mortgage payments should allow me to reduce my portfolio by $70k or so. This depends of course if the market behaves and I must account for additional trading fees and capital gains tax (which would benefit spread over a couple years vs. all at once). The risk of staying in the mortgage or market really depends on the health of the economy, but no one said building wealth would be easy. Overall my instincts prefer my rental because it’s set in an established economic region that did well even during the recession.

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