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Updated about 8 years ago on . Most recent reply

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Sean Golin
  • Investor
  • Sunnyvale, CA
0
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When does it make sense to pre-pay mortgage?

Sean Golin
  • Investor
  • Sunnyvale, CA
Posted

I currently own an investment property and have been considering pre-paying the mortgage down to increase equity but not sure if this is the right approach.  My mind tends to focus on the increased monthly cash flow from the property assuming a paid-off mortgage - but I know I could also consider buying additional properties.  

Is there an alternative that is better than the other?  Any info would be appreciated.  I've included some details below:

Purchase Price:  $280K

Down Payment:  25%

Interest Rate:  4.75% (30-yr fixed)

Net Monthly Cash Flow:  Average of +$500 per month (after mortgage, taxes, ins, repair, vacancy)

Est. Current Property Value:  ~$310K

Thanks!

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Kevin Siedlecki
  • Investor
  • Madison, CT
458
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Kevin Siedlecki
  • Investor
  • Madison, CT
Replied

@Sean Golin

Whether it makes sense to pay loans off is a huge debate here. Some people will say it never makes sense, but it really depends on your strategies and goals. If you want to grow your portfolio, then put that money away towards your next down payment.

To me, it makes sense to pay off the loan early only in a very specific situation: 

You don't want to grow your business any more, because you recognize that paying off your current loans will give you enough cash flow to meet your goals, and you can get there quicker by paying down the loans rather than using the profit to buy more property. Or you just don't want to do the work of finding and managing more properties. Paying down the loan can get you to your desired cash flow with much less work than finding additional properties.

For example, say you want $5000 a month in cash flow. In your price range, that means you can either buy 10 properties that cash flow $500 each, or 3 that cash flow $1650 each with no loans. That means fewer houses to look after, same income. If your plan is to retire on your rental income, then you could either keep working to get to 10 properties, or start paying down the loans on 3. It's as close as you can come to literally buying time. Every extra payment brings that date of being able to retire closer. 

I'm guessing that's not the situation you are in, since you are even having the debate with yourself, so I would recommend holding on to the cash and using it to buy another place once you've saved enough.

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