Pay off rentals or primary home?

Question

Looking for advice on whether to pay off the mortgages on our rentals over the next 5 years or to pay off our primary home mortgage. Not sure if there are advantages to either option considering the new tax laws. The combined balances of the mortgages on the rentals equals the balance on our primary home. We are close to retirement and would have the option of increased cash flow if we pay off the rental mortgages or less debt payments if our primary is paid off. Not sure which direction to go. We are not interested in growing our rental portfolio. Any thoughts would be helpful.

Thanks,

Mike

Thanks,

Mike

Joe Villeneuve · Answer

THis isn't a question of preference, or anything else other than basic math.

Pay off your own home, and let your tenants pay off their houses.  Any money from your pocket that you put into your rentals, is money your tenants have to get back to you to catch up to even with.

Use the money you were going to pay off their houses with to buy more cash flow properties and increase your cash flow instead.

Jeff Richardson · Answer

Typically when you factor in interest deduction and depreciation you have little to no taxes on the income from a property. When you pay off/down a rental you no longer have the mortgage interest to write off on taxes so you'll find at the end of the year you are paying a lot more taxes. I would leverage as much as you can on rentals and if you don't want to buy more, move the money to a different asset class that is very safe that still makes you more than the 5% interest you're paying on your properties, this is not hard to find, there are annuities, HM lenders who will borrow at 10% paid quarterly, tax liens, etc.

Ali Boone · Answer

I agree with @Joe Villeneuve. You are paying the mortgage interest on your primary home, your tenants are [hopefully] paying the interest on the rental properties and [hopefully as well] also paying down your mortgage for you. So let them keep doing that and spare yourself all the expense of paying your own mortgage.

Are the rental properties cash-flowing?

Shawn C. · Answer

I think it really depends on your situation. For instance, in Texas a person cannot take your homestead. It also depends on your interest rate on your home versus your investment properties. I know a lot of investors that don't pay off their rental properties because its a form of asset protection.

Steve Vaughan · Answer

I paid off a bunch of rentals early last year, but they had higher rates (above 6 & 7%) and/or higher risk (callable and adjustable commercial) financing on them. My primary is fixed at 3.375% so my decision was easy.

All things being equal - meaning you have fixed 30yr financing at 4% or so on all properties, your 'return' will be equally bad.  4% or so.  Peace of mind is worth something, though. I can attest to that.

The other factors like taxes and liability put me in the @Joe Splitrock camp.  Pay off the primary if you can't easily beat your mortgage rate as a return somewhere else @Monique S.

If the sky falls and you lost all ability to pay, which would you rather have free and clear?  Most would choose their primary in a doomsday scenario.  With taxes and liability figured in, that's 3 fingers pointed towards paying off your primary over rentals.

Joe Splitrock · Answer

@Monique S. given those options, pay off our primary residence.

The interest rates are not important. On rental properties, you can claim the mortgage interest on your taxes to reduce your taxable income. Most people will be taking the standard deduction on their taxes, so will not have any deduction for personal mortgage interest. The deduction is going to out weigh any minor interest savings.

Another thing to consider from an asset protection standpoint, your personal residence usually has certain protections from bankruptcy and litigation. A paid off rental property becomes a target during litigation, because it is an asset that attorneys can go after.

Michael Delpier · Answer

@Monique S. this is fairly straightforward. Pay off the highest interest rates first. (Dave Ramsey appproach) focus all your payment on the highest interest rate loan until paid off. Then move onto the next highest rate, and so on.

From my understanding, the new tax rules still have a deduction for interest on your primary, but this means you have to have an income to deduct from. So this will depend on your income situation.

Pablo Mendez · Answer

If the market goes down badly  or you have some major emergency and you are pretty much in your worse case scenario... would you rather have a paid for house or a paid for rental?  Go with your gut feeling.

Jim Cummings · Answer

@Monique S.  Of your two choices - I would advocate paying off your primary residence.

Paying off your primary residence may not be Dollars & Cents Spreadsheet oriented the best approach - but you will find it extremely emotionally liberating to not have a payment on your primary residence.

There will be sufficient other emotional adjustments in the early months of "Retirement" that will challenge you. Gain the "Financial Peace" (Dave Ramsey term) of knowing you don't have a house payment.

Pay off rentals or primary home?

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