Should I pay off my primary residence mortgage or purchase a new rental property

[Justin Nwakacha]

Hi All,

I own a primary residence in Katy, Texas, still have about $325,000 to pay off. Interest is 2.85% (bought during COVID). I do own a rental property in Texas, interest rate is 4.8%, and it has a lower mortgage left to pay off. 

My question is, should I pay-off my primary residence mortgage to 1)Get peace of mind and some sort of security 2)Opportunity to borrow from my equity if needed 3) Extra cashflow to save and invest in another rental property in the future 

OR 

should I keep my primary residence mortgage (due to the low interest rate) and purchase another rental property instead? I have been debating this for a couple of months and have found conflicting recommendations online. I do plan to purchase more rental properties within the next 10 years (including commercial strip malls), and also hoping to pay off my primary residence within 10 years. I am just not sure which I should give higher priority in 2025.

Your advice would be very well appreciated.

[Theresa Harris]

There is no wrong answer.  You want to buy more rentals, so why not use the money to get started on that sooner rather than later?  As long your debt to income ratio isn't preventing you from borrowing more money, buy a rental and use the extra money you earn from that to pay down the highest rate mortgage first.  Financially, that is probably the better move.

If knowing your primary residence is paid for in full gives you a greater peace of mind, then do that.  You can then save the money that would have been used to pay your mortgage towards buying your next rental.

[Dan Rowley]

think of it as simple arbitrage.  If you can earn more than 2.85% with those dollars then you should NOT Pay off the loan.  And anyone can earn 3-4%+ minimum in savings account or money market (or treasury bond) with zero risk.

[Mark H. Porter]

Justin - i, like I imagine hundreds of users on this forum, have been in exactly this same position.  Though interest rates at the moment are high, the absolute smartest move for you will be to continue to use reasonable leverage to continue to purchase more and more properties over, as you say, the next ten years.  Keep that low interest mortgage on your home as long as possible.

As an aside, and to grow even faster, always keep the mindset that "everything is for sale for a price". I've done many 1031's with this mindset - in one case moving from a 3-unit to a 10-unit to a Walgreens to two strip malls. The sale of the 3-unit to the purchase of the strip malls took 6-years. And none of my personal money ever went into the purchases except for the first one with 3% VA loan. Anyone can do this.

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[Henry Clark]

I would bring your personal life into the discussion.  Don’t answer. 

  How secure is your job?  Do you plan to get married?  Will you be having kids or have some young ones already?  Is there any reason you might move?  If single or married no kids.  If you have or can build equity in your houses do the 2 out of 5 years as primary and sale tax free up to $250,000 per spouse.  Keep buying value add houses and fix up and move.  I would rather have cash investments on hand versus a paid off mortgage.  

From a business standpoint.
 If you paid off the house would you need to take a loan against it for future investments and have to take a higher interest loan out later? 
As mentioned difference between your interest rate and what you could make says keep the loans.  

You could also do ADUs on your current houses if it would add value.  If 2/1 make a 3/2.  

[Justin Nwakacha]

Hi Henry. I am married with 3 kids. My job is pretty secure but there is a chance of moving within the next 3-5 years. My primary residence was purchased in 2021.

Thanks for the advice.

[Justin Nwakacha]

Thanks Mark. 
Someone advised me to quit residential rental properties and focus on strip malls. The down payment and cost is much higher for a strip mall, so it means it would could take me an additional 2 years to save up to purchase a strip mall. From your experience, do you recommend I buy more residential houses first and then sell later to buy strip malls, or just focus on saving to buy a strip mall?

[Theresa Harris]

Quote from @Justin Nwakacha:

Thanks Mark. 
Someone advised me to quit residential rental properties and focus on strip malls. The down payment and cost is much higher for a strip mall, so it means it would could take me an additional 2 years to save up to purchase a strip mall. From your experience, do you recommend I buy more residential houses first and then sell later to buy strip malls, or just focus on saving to buy a strip mall?

 You do what you are comfortable with.  Lots of people will try to get you what they do because it works for them.

[Wale Lawal]

@Justin Nwakacha

Paying off your primary residence offers peace of mind, equity access, and increased cash flow, but may limit returns from investing in additional properties. A low-interest mortgage rate of 2.85% makes it a low-interest option. Balancing both goals can be achieved through a hybrid approach, where a portion of funds is allocated towards paying down the primary residence while also saving or investing in another property. However, a clear financial plan is crucial for flexibility and security. If financial security and peace of mind are your top priorities, paying down your mortgage could provide a sense of stability.

Good luck!

[Daniel Tanasa]

Hi Justin, 

A 2.85% interest is a crazy low interest rate that we probably won't see around for a while. I wouldn't pay that off, as some other people said before it's really easy to have a better return than that just keeping your money in a high yield savings account.  I would much rather have that money work harder for you in a rental property. 

Another option to look into is, maybe you can rent your primary and buy another house to move in. Today you will have a 6% interest rate and that one may be worth it to pay it down if that's what you decide to do for extra peace of mind. Just an idea, I know it could be a hustle to move. 

But unless you really love your house and it's very important for you to have your home paid off, I wouldn't pay off that low interest mortgage. 

You're in a good position, and there isn't really a universal correct answer. Just find what works for you. 

Good luck!

[Gustavo Delgado]

Keep your low rate. Maybe payoff the other rental or just use those funds for a new one.