Paying Off Loan vs Re-Investing Cash Flow?

Question

What are some thoughts on saving cash flow vs paying off mortgage faster?

Spoke with an older investor today who likes paying off mortgage faster. But could be bc he's been in the game so long he has excess cash flow (got started in 1976 in SF). He also doesn’t sell, he just rents out units.

Do you like to use extra cash flow to put towards other investments or pay down mortgage faster?

Looking forward to learning from a variety of perspectives on this topic.

thanks as always!

Aaron W. · Answer

@Rory Cox This is an often debated topic and you have strong support for both sides.

There are advantages and disadvantages to both. It comes down to personal preference and where you are at in the investment journey.

If you are looking for the highest returns for your money and scaling, then you'll probably want to reinvest everything you can.

If you are looking for stability and don't want to take on too much risk, then work on paying of the mortgages.

In the end, you can't really go wrong with either strategy. What is it you prefer and where are you in the investment journey.

Best of luck!

Rory Cox · Answer

Great analysis and approach! Thank you @Allen Wu

Allen Wu · Answer

@Rory Cox

What are your goals? How many units do you want to get to?

The answers to above determine the best path.

For example, I own 4 properties (5 units total). Pretty sizable loan, and want to pay them all off before I buy more (initially). However, after evaluation, I want to get to 10 units, will work for next 15-20 years. With inflation (my personal opinion), I will now save aggressively in cash until all my properties for at least 12 months reserves (mortgage, tax, HoA, cap ex, vacancy accruals, etc).

Then, anything north of 12 months, I’ll keep in cash. So, if inflation does kick in, in next 5-8 years (north of 4-5 %), for sure I’ll keep my properties as is and buy more real estate. If inflation stays at meager 2-3% (doubt it), I’ll deploy these funds to instantly pay off debt. Then, I’ll be super happy with my 4 rentals that are debt free. Finally, once paid off, any excess cash, I’ll re deploy in real estate, private placement reits, or some sort of private equity / small business investment play depending on which asset class has opportunity play.

Justin Phillips · Answer

@Rory Cox It's a Refiance, so the initial draw on the line of credit pays off your current mortgage. The line of credit is set-up attached to that ZBA account. From there, everything becomes automated. We have all of our direct deposits/income hitting that checking account, as well as all of our bill-pays. It's nice because you can set it up on auto-pilot, and avoid playing the transfer game. Instead of a monthly mortgage payment, it's just a monthly interest cost that's added to the balance the following month around the 21st.

Rory Cox · Answer

Interesting @Justin Phillips is this an automated system one sets up?

Justin Phillips · Answer

@Rory Cox Why choose? With a specialized Heloc, called an "Offset Mortgage" overseas, you're able to effectively do both. It's a 1st position Heloc that's tied to a ZBA (Zero Balance Sweep) checking account. So every normal deposit made into that checking account is swept directly towards your remaining balance, thus lowering your interest cost. So you're able to aggressively pay down your balance with normal deposits, and idle funds, which creates a snowball as the balance and interest cost drop together. So your property's cashflow increases every month, based off the lower monthly cost of the loan. You retain full access to every dollar you deposit, so you can be aggressive without any fear. As soon as a enticing deal comes along, you can simply stroke a check from your credit line, and purchase that next property in cash. Each property purchased on the line pays off faster than the last with the added cashflow. My wife and I took advantage of these current inflated values to get our line set-up on today's values. When the market turns, we'll use that to fund future deals. In the meantime, our "Lazy" money works much harder for us tax free!

Rory Cox · Answer

Great insights & advice. Thank you both!

Theresa Harris · Answer

I agree with AJ.  It also depends on what you are doing and if you can borrow more money.  If you can't borrow for another rental as you're at your max debt, then paying some down makes sense.  Similarly if you are nearing retirement and not planning on buying any more properties or you don't like a lot of debt, pay them down. At least the way the mortgages work in Canada, paying them down doesn't increase your cash flow as your mortgage payments stay the same until it is paid off.  Doing extra payments does allow you to skip a payment if you need without any penalty.

Paying Off Loan vs Re-Investing Cash Flow?

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