Pay off my mortgage or invest?
Wentzville, MO · Member since 2016 · 40 posts · 5 votes
I have 30 year mortgage (rate is below 4%) on my current residence where I've lived for about a year. I could pay it off (I owe $185,000) and have about $10,000 in emergency savings leftover. My family thinks I should pay it off then save because my wife and I are business owners without guaranteed financial security, but I read that with my low rate mortgage I could grow wealth faster with responsible leverage, but this is a hard sell to my family who has 0 interest or faith in REI. Should I pay off my entire mortgage and keep saving for a second investment property, should I pay down and refinance my mortgage and invest/save the rest, or can I start cash flowing enough to cover my living expenses without being a REI pro?
I read that book when I was in middle school. This is a concept I'm trying to get to resonate with my family (make money work for you). The problem is that I have no experience in REI and even after listening to podcast after podcast, article after article, I'm still playing pin the tail on the donkey as far as where to begin. People's answers are so contradicting when it comes to starting out. They say to use your own cash if you can, or never use your own cash. They say you can't start REI with $10,000 while others say that if you don't see how you can start with $10,000 then REI isn't for you. I cannot put together a game plan until I know the wisest way to use my money (or others money).
You can easily get 10-12%+ by investing. You could buy an apartment complex & have reserves left over with the cash you have. Or partner up with another investor.
You can certainly start with $10,000 either getting one great cash flowing rental or doing 3-5 land contract deals. $10,000 should get you $3,600- $12,000 per year cash flow in your market depending on the strategy you employ. I'm glad to help you as we are working in KC and St. Louis this summer. Reach out and I will help you get started if you are coachable and willing to put some work in.
When you say "Your Family", are you referring to your spouse or to some other members of your extended family? I won't tell you which one I think you should do. I think it's best you compare the two options side by side and decide for yourself. I will however give you a little piece of advice. If you're referring to any family member outside of your spouse (which it sounds like you are), their opinion is no better than mine. You and your spouse control your future. Unless your extended family is going to loan you money, they have no say whatsoever in how you spend yours. Just my $.02
On a public forum like this, you're going to get hundreds of different opinions and none of them are necessarily right or wrong. However, none of them matter until your family is on board. imagine going into something without her approval. As soon as something breaks, you'll get that "i told you so" look. She needs to be educated more on it and develop a big enough "why" to get her over her fears.
As far as answering your question- investing is part a numbers game and part a heart game. Some folks are going to tell you it's stupid to pay off the house and tie up all that money. Essentially you're getting a 4% return and have limited access to that cash short of a loan on the house. You can take that same money and get 8-10% ROI with minimal involvement (buying turnkey) or higher if you are involved more. At the same time, as a fellow business owner, there is peace of mind not having debt. I run my business more effectively not having the pressure of paying bills at home. In your current situation, I wouldn't do anything until you have a minimum of 6 months emergency fund. $10K is nothing now days and a few bad things at the same time eat that fast.
You should like a logical guy and I get you've beat your wife to death on the numbers and why investing makes sense logically. Unfortunately most people don't make decisions logically expect CPAs and accountants. Help your wife discover a why to investing. What would it mean to your family fi you had $2-3K or more a month coming in regardless of your working situation? How helpful would it be by the time the kids are in college (or we retire or ....) to have an extra $3-4-5K a month in residual income. I bet right now your wife feels pretty secure and safe with $195K in the bank. She doesn't have to worry about the business slowing down. You want to take the safety net away and risk it on something she doesn't know enough about.
Here's what I would do as a compromise: pay off all non-house debt, have 6 months cash set aside, take wife on a vacation; buy a local turnkey property. Local so you can be involved in it but turn key with property management so you have help getting your feet wet. Once your wife sees the fruit, the next ones get easier. Also- get her to talk with other wives. Find a local investor and take him and his spouse out to dinner. Good luck.
As others have said already, (and probably why you feel like you're getting a lot of contradictory information) a lot of this will end up being very specific to your situation.
For example, in my market:
This combination along with your stated 4% mortgage would lead me to one of two decisions:
I'd also be worried about the $10k in reserves. Feels pretty low to me, but that again is completely dependent on your personal situation. I also agree with @Adrien C. about helping your family find their "why." Diving into real estate can be terrifying. Finding a why that makes it worth the risk changes perspectives.
Just my opinions. Good luck!
I think you need 6 months reserves in cash before a payoff for emergencies. Then apply for a home equity line of credit on your paid off home. You can get 80-90% back out of it to use when you find another property. The interest on HELOC is currently 4%
When your business income wavers:
1) A paid off home will have no mortgage, but your lack of income means no insurance payment, no food, no utilities.
2) A good investment means you still have a mortgage, but your extra income pays for your mortgage, insurance, food and utilities (or at least contributes so you can ration and survive).
So... which one is "safer" for a business owner?
A blog i wrote for you to read: https://www.biggerpockets.com/blogs/8121/49059-do-...
ultimately it is up to you and your wife and what you feel most comfortable with doing, one scenario is to meet in the middle, pay half off and invest the rest in more income producing properties, with that available, you should have enough to put down payments on two houses i would think.
You do not have a choice if your family is not on board. If they do not come around investing is not in your future.
IF I were you I would pay off the mortgage, Keep paying yourself the same money you were paying on the mortgage and when your family is 100% on board take out a HELOC to invest along with all the money you have saved..
Thanks for all the input guys. My family I'm referring to is basically my fiance, who since reading all your great responses, has agreed that paying our mortgage would leave us nothing for a rainy day, and nothing to grow any wealth with (unless we used a HELOC). We've both realized that our interest rate is so low that paying it isn't really urgent, and we both like the idea of putting $50,000 aside for the rainy day much more than $10,000 (which disappears quick these days, especially if business goes south). If we use $90,000 to pay down half the mortgage and save $50,000, then we can invest $60,000 and still refinance and take out a HELOC. I guess my question becomes, "Can I create the cash flow I want fast enough with $60,000, or should I use more of the cash to get me where I want to be quicker?" As long as we have a healthy enough chunk for savings, the most important thing to us is the financial freedom that comes from more monthly cash flow.
Thanks for all the input guys. My family I'm referring to is basically my fiance, who since reading all your great responses, has agreed that paying our mortgage would leave us nothing for a rainy day, and nothing to grow any wealth with (unless we used a HELOC). We've both realized that our interest rate is so low that paying it isn't really urgent, and we both like the idea of putting $50,000 aside for the rainy day much more than $10,000 (which disappears quick these days, especially if business goes south). If we use $90,000 to pay down half the mortgage and save $50,000, then we can invest $60,000 and still refinance and take out a HELOC. I guess my question becomes, "Can I create the cash flow I want fast enough with $60,000, or should I use more of the cash to get me where I want to be quicker?" As long as we have a healthy enough chunk for savings, the most important thing to us is the financial freedom that comes from more monthly cash flow.
For every $100,000 you invest, you should aim to get at least a 10% return ($10,000 annually) divided by 12 months comes out to $833 in cashflow a month.
Also, refinance only gives you up to 70-75% appraised value back, so if you buy a property in cash for $60,000 then refinance after 6-12 months (minimum wait period), you'd only get between $42,000 and $45,000 back.
Good luck.
Thanks for all the input guys. My family I'm referring to is basically my fiance, who since reading all your great responses, has agreed that paying our mortgage would leave us nothing for a rainy day, and nothing to grow any wealth with (unless we used a HELOC). We've both realized that our interest rate is so low that paying it isn't really urgent, and we both like the idea of putting $50,000 aside for the rainy day much more than $10,000 (which disappears quick these days, especially if business goes south). If we use $90,000 to pay down half the mortgage and save $50,000, then we can invest $60,000 and still refinance and take out a HELOC. I guess my question becomes, "Can I create the cash flow I want fast enough with $60,000, or should I use more of the cash to get me where I want to be quicker?" As long as we have a healthy enough chunk for savings, the most important thing to us is the financial freedom that comes from more monthly cash flow.
For every $100,000 you invest, you should aim to get at least a 10% return ($10,000 annually) divided by 12 months comes out to $833 in cashflow a month.
Also, refinance only gives you up to 70-75% appraised value back, so if you buy a property in cash for $60,000 then refinance after 6-12 months (minimum wait period), you'd only get between $42,000 and $45,000 back.
Good luck.
Is it not true that appreciation "could" increase the amount that someone receives after a refinance? Appreciation is not a guarantee so I stress the word "could".
Thanks for all the input guys. My family I'm referring to is basically my fiance, who since reading all your great responses, has agreed that paying our mortgage would leave us nothing for a rainy day, and nothing to grow any wealth with (unless we used a HELOC). We've both realized that our interest rate is so low that paying it isn't really urgent, and we both like the idea of putting $50,000 aside for the rainy day much more than $10,000 (which disappears quick these days, especially if business goes south). If we use $90,000 to pay down half the mortgage and save $50,000, then we can invest $60,000 and still refinance and take out a HELOC. I guess my question becomes, "Can I create the cash flow I want fast enough with $60,000, or should I use more of the cash to get me where I want to be quicker?" As long as we have a healthy enough chunk for savings, the most important thing to us is the financial freedom that comes from more monthly cash flow.
For every $100,000 you invest, you should aim to get at least a 10% return ($10,000 annually) divided by 12 months comes out to $833 in cashflow a month.
Also, refinance only gives you up to 70-75% appraised value back, so if you buy a property in cash for $60,000 then refinance after 6-12 months (minimum wait period), you'd only get between $42,000 and $45,000 back.
Good luck.
Is it not true that appreciation "could" increase the amount that someone receives after a refinance? Appreciation is not a guarantee so I stress the word "could".
It is true that appreciation (or even DEpreciation) comes into play. That's how the second to last 'R' in Brandon Turner's BRRRR strategy works. Again, I stated that the refinance goes off of the appraised value- this is exactly how people who flip a property & rent it out get their initial down payment out & continue immediately investing.
https://www.biggerpockets.com/renewsblog/2015/04/20/how-to-100000-dollars-year-real-estate/