Paying off my personal home mortgage or saving for an investment property?

Question

Last year, I purchased a home with a 7% interest rate. I made a substantial down payment, so I could potentially pay off the house in about 4 years with my current income. I'm 23 years old and plan to use real estate for my retirement, but that's in the distant future.

My question is whether it's better to pay off the mortgage as quickly as possible or to buy a rental property as soon as possible.

My thoughts are that if I pay off my home, I'll have security and more money each month to invest, as I won't have to make mortgage or rent payments. Additionally, with a 7% interest rate, I'm paying a significant amount in interest.

On the other hand, if I save up for a down payment on a rental property, once I have enough to purchase the right property, it shouldn't require any additional money from me, and I'll be building equity without needing to contribute more.

Does anyone have experience with this? I would appreciate any recommendations.

Jeff Roth · Answer

Hi Jethro-

Great question and position to be in.

You purchased a primary home last year with a substantial down payment at 7% interest rate.

You want to know if you should pay off your primary house or save to buy an investment property.

My answer has two parts:

1. Depends on your risk tolerance. If you like paid off houses, as I do, paying off your house may make perfect sense as it is within your risk tolerance and will help you feel secure buying that investment property next.

2. On the other hand, if you can get a higher return on your investment property than the 7% you have on the mortgage or the mortgage interest rate on the investment property, then your money will be working harder for you in the investment property than paying off your primary residence.

The choice is personal and unique to you. You can't go wrong either way.

To your success!

Nathan Gesner · Answer

You are too young to worry about security. Keep the low mortgage and continue to make payments. The tax deduction is beneficial, and you can keep the extra cash for investments. The sooner you buy an investment, the better it will perform.

If you really need to see the numbers, sit down and do the math. See what it looks like if you pay off your house, then see what it looks like if you used that same money to invest in rentals. I think you'll see a significant benefit to investing the money.

Raymond Mehling · Answer

I’ll say this young man. There is nothing more that gives you the chance to say F U then having your primary house payed off. At 27 no less! The security you have when the 💩 hits the fan is priceless. When you start investing you’ll do it from the security of owning your primary. Sit back in a quiet room and think about it. Then make your decision. Good luck!

Jonathan R McLaughlin · Answer

quick question(s): how realistic is it that you will stay in this primary house for a substantial period of time like 10 years? Would the house make a decent rental property?

If its a decent potential rental as an SF I would consider staying on the heavy pay down path until it would be nicely positively cash flowing if you moved into another tax advantaged primary. No need to take it to zero. Then take stock and see.

Paying off debt at 7% is a pretty decent return

Zach Wain · Answer

I think this is a personal choice based on your investing appetite.  There is no wrong answer!  If you want to buy another home quickly, save money.  If you are buying a rental you get a better interest rate with 25% downpayment vs 20% down.  If saving more helps you put more down on the rental AND you want to buy quickly, consider that route.

If you are slow playing your next purchase, maybe you go a different route.

Personally, I do not mind being more liquid and collecting interest or investing in the market vs paying debt down, but that is me...

Mindy Jensen · Answer

I wouldn't be in a hurry to pay off my primary. 7% isn't ideal, but you can get more return in the stock market. (Although if you're looking to use this money for real estate in the next 3 years, I would NOT put it in the market.)

I'd be putting the additional money into a high yield savings account, and keep my eyes out for a great real estate deal.

If no great deal comes along, you can always throw it all at the mortgage down the road.

Alecia Loveless · Answer

@Jethro Stoltzfus I was able to pay off my primary which is a house hack duplex thanks to the sale of a business. It is super nice to not have a mortgage payment every month on it.

It’s your choice of how you want to structure your investing future. Maybe sit down and write out a plan with your future real estate investment goals and then plan from there.

Personally I would not really want to wait another 4 years before I could buy my next investment property.

Bunmi Joo · Answer

IMO, my principal resident(PR) does not give income persa, and it is at a high interest rate, so I will pay off my PR loan with extra income (let's call that outgoing interest). A reason for this decision is that currently, HYSA gives (between a 3% and 5% rate)—(let's call that incoming interest). Offsetting both interests, I will lower my interest paid out since it's more than my interest coming in. till I can refinance to a matchable interest rate.

Investment Property interest is a tax-deductible expense. I will not know the downpayment % expectation or your individual peculiarity,  for when you're ready. However, now it is at most 20%.

John Mason · Answer

Look at  appreciation using zillow and  see

Denis Ponder · Answer

My thought is more about time in the market and getting the snowball started now vs. 10 years from now.  If it takes you 4 more years to pay off your mortgage, how long after that until you have enough funds to purchase a rental property?  During that time, property will have appreciated, as a general assumption, so it's going to be more expense to purchase an investment property and you have lost out on appreciation, and possibly cash flow.  That's how I look at this.  I plan to purchase as many properties as I can afford and sustain with minimal down payments for the first 10 years of this business.  At that point, I will start to make some judgements about growth vs. payoff vs refi, etc.

You could use the money to continue to accelerate the payoff of your primary then get a HELOC on the equity to fund the downpayment of a rental property if/when you find one.

For me though, I'm making minimal payments on the mortgage and getting the investment snowball rolling as soon as I can.

Paying off my personal home mortgage or saving for an investment property?

Most Popular Reply