Mortgages: personal v invested homes. When to pay them off?

Question

Afternoon everyone!

In my old highschool, our personal finance class revolved around a curriculum from Dave Ramsey, who bad mouthed mortgages and everything. Is there a difference between having mortgages for your personal home v invested homes?

As in is it better to pay off your mortgage and not as important for your invested homes?

Account Closed · Answer

Thats a very good point about the two men!

Thanks for the article too, it helps understand "leverage" and the difference between mortgages on private and investments.

Account Closed · Answer

I am fairly new to this and have a question on the vocabulary. What exactly is meant by "leveraging" against banks and such?

What exactly is Equity and how can one "take it out" of a house?

Would these circumstances be very different if we were in a high interest rate atmospheres, such as the 1980's with 14% interest rates? Would that make it a higher priority to pay off mortgages?

As for Dave Ramsey, is the advice of going with 15 year FRM over 30 year FRM better? Also, are Adjustable Rate Mortgages a bad idea for invesments?

Account Closed · Answer

Alright, that makes a lot of sense. So, in a higher interest rate economy where you got a fixed rate mortgage during that time, would the mortgages on your investment be better paid off sooner rather than later, using extra funds that you would usually use to reinvest? Or should you not prioritize them and instead use the extra money each month to invest in other properties (consequently more mortgages.)

Thanks!

Account Closed · Answer

Not sure if you know the history of Dave Ramsay and why he advocates what he does.  He is a very sharp individual and built up a very large real estate portfolio.  From one day to the next, the bank called the notes on that portfolio and he had to file bankruptcy because he couldn't find funds to cover the note.

My opinion - If you can invest and have debt investing while being able to cover your notes, then debt is fine as long as you don't let your debt exceed your equity and you have an exit plan.  Remember the adage of "don't invest more than you can afford to lose".

With relation to your home mortgage I would say it depends on the rate of interest.  My current home is at a 3.65% interest rate with 6.5 years left on the note.  That's cheap money.  I don't plan on pulling any more equity out of the house.  I learned the hard way that your home isn't a bank and shouldn't be treated as such.

Ali Boone · Answer

Dave Ramsey is definitely not the guy you want to listen to if you want to max out real estate returns. I recommend Robert Kiyosaki for that instead. Dave Ramsey is more of the mindset of saving you money and less risk and all that.

The difference, potentially, with mortgages on your primary home vs investment properties is who is paying the interest on the mortgage. I don't recommend a mortgage on your primary home because you have to pay all of that interest. It makes the actual cost of your home insanely high. But if you have a rental property and the income it brings in is (hopefully) enough to cover all of your expenses, technically your tenants are then paying that interest. Obviously you'd be saving that much in interest if you didn't have the mortgage, but when you pencil out the numbers on a rental property in terms of how much income you actually make vs what you put into the investment initially, you'll see it makes sense.

Check this article out for details on the differences between leveraging (mortgage) a rental property vs. not having the mortgage-

https://www.biggerpockets.com/renewsblog/2015/04/1...

It doesn't address mortgages on your primary home, but a mortgage on your primary home just isn't the best option no matter what (if you can help it) because you are paying that interest.

Thomas S. · Answer

pay off your mortgage and not as important for your invested homes?

This is correct except in the case of the most conservative risk adverse investors. They would be better suited to keeping their money in the bank. The reality is that due to the high opportunity value of cash equity in a rental property reduces cash flow to the tune of approximately $833/month/100K in equity. It is important that investors understand how a income property actually generates the income.

Equity in a income property must be treated as a separate income generating stream on the property and there for draws income away from the property itself. Most income properties with high levels of equity actually have serious negative cash flow after paying a return on the equity. This creates a situation such that there is actually no point in having the property at all. The cash would generate better returns sitting in a mutual fund without the headaches of actually managing tenants and brick and mortar.

When assessing a property to purchase to determine potential cash flow you must calculate assuming 100% financing. If positive cash flow can not be achieved with 100% financing a property will never have positive cash flow. Any positive cash flow would need to be generated by the equity (cash) and not the property itself unless rents can be raised to a level where 100% financing will work.

Conservative investors prefer to ignore this reality happily moving along with the pride of being a successful investor. To which I say, all the power to you.

Christopher Giannino · Answer

I would think it's better to pay off your primary mortgage rather than your investments because by leveraging your investment properties, you are having your tenants pay down the mortgage for you.  The thought is to have the monthly rent to cover all your expenses plus give you a monthly cash flow.  By doing this, you are building equity in the property without having to put money into the property yourself.

Arpan Patel · Answer

Yes, I would rather not have a mortgage on my personal home as that is peace of mind. My investments, I want to have degree of leverage because borrowing is so cheap right now. Leverage is a sword - you can slay and be be slain with it. I don't want leverage on my home so I can take larger risks outside of my home with clear conscience that if it all folds, I have something to fall back upon. In full disclosure I rent because I like the optionality of moving but very soon I'd like to get a place of my own all cash so I can feel safer in the chances I take in my investments. I hope that helps a bit