Pay Down Current Mortgage or Save Money To BRRRR?

[Josh Hanson]

Hello everyone! My name is Josh I am 28 years old and live in the Cleveland, Ohio area and currently have been working hard towards saving to finance my first BRRRR deal. My goal has been to save up 100k cash in order to be well positioned on the first deal and currently have 40k saved up however, upon researching I came across and interesting strategy utilizing a HELOC to quickly pay off your mortgage. Which bring me to my question. Should I focus on building equity on my current home mortgage or continue to save cash to be ready for my first deal? With more equity I could access a HELOC to finance BRRRR deals in theory and also drastically shorten my loan length + interest paid on my personal home which sounds appealing.

My thought is currently my primary residence is a liability so the quicker I can pay it off the better. I have a 20 year mortgage with a 3.125% interest rate and still owe $200k. My home very recently appraised at $250k as I just refinanced. Currently over the course of my 20 year loan I will pay ~$70k in interest however if I where to inject 40k into my mortgage principle today I would shorten my loan from a 20 year loan to a 15 year loan and also decrease my interest owed from $70k to $40k (assuming I did not inject any additional money into my principle over the rest of the loan) This move alone would create 90k in equity and make me eligible for a reasonably sized HELOC to finance BRRRR deals and of course I would continue to inject additional income into my principle to continue to build equity in my home.

What are your thoughts? Do I keep saving up cash like I have been doing to grow my 40k into 100k over the next 2 to 3 years or build equity on my current home and slash away interest which would quickly make me eligible for a reasonably size HELOC?

[Chris John]

@Josh Hanson

Here's the typically unpopular advice I give on owner occ loans.  I literally don't think I've ever had anyone ever agree with me (although I don't run into property investors in my daily life, so hopefully some on this site will agree).  Anyway, I want the longest loan at the lowest interest rate I can get (and I want to borrow as much as they'll let me).  Of course I don't want to overleverage myself, but my theory is that if I can borrow money at 3% for 30 years, that gives me 30 years to invest that money into something yielding higher rates and making it a cash machine.  If you can borrow 100k at 3% and invest it at 20% you'll make 17k a year.

I get that people want the "comfort" of paying off their home, but I feel like there are two ways to pay off your home:

1.  The classical way of having no debt (although I'd argue that we never truly own homes due to property taxes, but that's another story)

2.  Having enough assets that kick off enough passive income to pay the mortgage.  If I have a paid off home, borrow against it and buy an asset that will pay the mortgage on the money I borrowed I still don't have to pay my mortgage (the asset is doing that for me) and now I'm buying 2 things instead of 1.

Here's where I think your question gets me.  It sounds like your strategy might be to pay off a loan early so you can acquire a new, different loan against the same property.  At that point, I'd probably want the cheaper loan (which I believe would probably end up being the one you have now).

I will say that I'm completely opposed to paying off a loan early (unless it's at such a high interest rate that you can't find an investment to compete.  For instance, paying 22% to a credit card or something like that).  The reasons that I wouldn't want to pay off a 3% loan early are:

1.  If money ever gets tight, the bank won't give you any credit for what you've overpaid, they're still going to foreclose if you start missing payments.

2.  Due to reason 1, I'd rather invest what I could be overpaying at a higher rate.  If money gets tight, I can tap into my investment money and not get foreclosed on.

3.  In theory, my investments should pay way more than 3% so if I really have to pay off my house early, I can just pay it off in year 15 (or whatever) with the extra investments I've been making all along.  In theory, I should've had added liquidity the entire time and I should have more money when I pay it off because my investment made more (hopefully 15-20% (don't forget about all the tax advantages, appreciation, debt retirement, etc. that comes along with real estate)) than I would have saved (currently around 3%).

I hope this makes sense, but I feel like I've been as clear as mud.  In the end, I subscribe to the theory that every dollar of equity you have in a property is a dollar invested at 0%.  Again, I definitely have some equity in my properties because I don't want to overleverage, but I do personally want to use some leverage.

I feel like if I had a lawyer, they'd want me to mention something about this "advice" being what you paid for it and "operate at your own risk" or something.  haha.

Good luck with whatever you choose!