Pay down primary or save for first rental

[Andrew Thomas Vedder]

Q: Should I pay an extra $500 on my principal on my primary residence or save it towards a rental property? 

Overview: New homeowner, $120k income, ~7K monthly net income after deductions (Roth max, 401K, healthcare), 243K mortgage balance at 6.125% interest, monthly PITI on primary $1850.

If I add $500 to my monthly mortgage payment I can payoff my mortgage in 15 years. Currently have 22K in high yield savings account netting 4.85% interest. 

Thoughts on not paying down debt- inflation is here to stay. A dollar today will be worth 40 cents in 30 years. Save the $500 and put it towards a rental property to acquire cash flow rental that will appreciate over the years. 

Thoughts on paying down debt - An extra $500 a month will not break the bank and is arguably a safer play. Interest rates are not going to decline much (if at all) by the time I have a 25% down payment and enough of a safety net on a rental property. 

What would you do in my shoes bigger pockets members? 

[Nick Gober-Keller]

Hi there!

Firstly, congratulations on the analytical thinking you're putting into this decision. That's what's going to get you far in real estate!

Both your strategies have their merits and which way to go largely depends on your goals and risk tolerance. Let's look at both scenarios:

1. If you follow your first thought of saving for the rental property, over a 30-year period, you're looking at a total cost of around $531K for your current property. Plus, you would have accumulated enough to put down on a rental property in about 10 years.
2. Now, if you opt to pay the extra $500 per month, you'll be mortgage-free by 2039, cutting your total cost of loan to approximately $383K. By 2049, you'll have saved enough for a down payment on a second property.

Here's where it gets interesting: By 2053, with the first strategy, you'd have approximately $475K in equity across two properties, whereas with the second strategy, you'd have $373K in equity.

It may seem like the first option is the clear winner, but remember: this doesn't factor in the potential cash flow if you decide to rent out your first property after it's paid off. That cash flow could be channeled into paying down the mortgage on the second property, accelerating your wealth accumulation.

Personally, I lean towards paying off properties as fast as possible. Reducing interest is like cutting down on a silent but relentless expense. Think of each fully paid property as a loyal worker, tirelessly building your wealth.

Your situation might be different, and it's important to consider what's best for you and your family. Dive into the numbers, weigh your options, and make an informed decision. Remember, there's no universally right or wrong answer here, just the one that fits your situation best.

Keep up the hard work, your clear thinking and determination will undoubtedly bear fruit!