When should I pay off my mortgages?

[Steve S.]

One of my goals has been early retirement. 2 of the rentals I own are going to help achieve that goal. Here's a quick summary of each:

1) 30 year mortgage, 4.125%, $1,350 / month rent, 30% equity

2) 30 year mortgage, 3.75%, $1,595 / month rent, 45% equity

I've owned both of them for < 4 years. I could pay off both in the next 2 years and own them free and clear.

What I'm trying to determine is how quickly should I pay off rentals. My goal is to cash flow gross $10,000 per month from my rentals. That coupled with other investments, 4% rule, etc will allow me to retire young at a level I'm comfortable with and allow me the time to focus on creating value through ventures other than selling my soul to corporate america.

Obviously, these 2 prroperties aren't going to gross me $10,000 per months, but if these 2 were paid off and i had 4 more like it (paid off), i'd be grossing about $10,000.

Thoughts on how best to decide when to pay down more quickly, especially with the markets generally being at new highs these days?

[David Singyee]

Hey Steve, great question. Here is my take on this but hopefully you get various opinions and get to formulate what you think is best for you and your situation. After all you know your situation and yourself better than anyone on BP's community.

Paying off these mortgages early is not the smartest thing to do for a number of reasons. First of all we live in a time where interest rates have been the lowest in all of our history. On top of that interest rates are only going one way in the future, up. You have a locked in interest rate for 30 years!! Leverage that. Second think about inflation. Your dollars you would use to pay off your mortgages today might give you that feelin of being debt free. But the small incremental cash flow you'd get from no mortgage payments would have to accrue year after year until you can buy another cash following property. And by the time it gives you that amount inflation would of depleted their value and you'd need even more dollars to get a property you could get today.

Instead of using your dollars today to pay off your mortgages early, utilize your capital to acquire more properties faster. After all your playing the CASH FLOW game not the DEBT FREE game. Put it like this: if I let you borrow money from me at a locked in 4% how much would you borrow and when would you like to repay all debts and interest? If you ask any big time investor out there they would answer as much money as I let them borrow and for an infinite amount of time to pay back the loan. That's because great investors know that debt doesn't matter as long as you can make returns above your debt. If you could cash flow 10% from that deal and make 6% returns off my money with me putting up all the risk for an indefinite amount of times and an indefinite amount of cash flow would you say no?

Well there's my two cents on your questions I hoped it gave you some value.
Cheers and good luck with your investing career!