Pay off Mortgage or buy Rental Property?

[Christopher Mitchell]

Good Morning BP Community!
I graduated from college about 6 months ago (debt-free), and have been lurking on the BP forums for quite some time. You guys inspired me to purchase my first townhome! Currently, I am using House Hacking and have a little less than 100k left on the mortgage. Over the coming months, I will be receiving an inheritance, (approx 50k) and was debating on whether I should use this money to help pay off the current mortgage, or take the money and use it as a down payment to purchase a rental property?

An additional concern that I have is:
Parents are telling me to pay off the mortgage, save for another down-payment, and purchase a Single family home in the future. This is solid albeit, very conservative advice, and I fear that by going this route I may delay my progress to reaching Financial FREEDOM!

I was interested in learning what the community might have to say about the topic.
I eagerly await your opinions!

[Sara N.]

@Christopher Mitchell --congrats on your 1st purchase of your townhouse! I assume you got a good mortgage rate for this property, espec. since it's your primary residence.  As a small RE investor w/just a few rentals myself, here's my advice: Unless that int. rate for your townhouse is so high, take that 50K and buy another property!  Like everywhere else, it's probably a competitive market in FL so it may make sense to look for a fixer upper, fix it up a little to make it nicer (so you can charge more), and find quality tenants who won't give you headaches. Make sure the monthly rent $$ is enough to cover the mortgage, ins., taxes, etc. and after that you still have a few extra hundred $$ to cover maintenance, pay extra into the principles, etc. (For markets like DC where RE is very pricey, bigger pocket rules of what % should be enough to make a profit for each rental doesn't make sense.)  Good luck! : )

[Anthony Gayden]

Paying off your mortgage is playing it safe. It is thinking small and limiting yourself.

You are on a real estate investing website so I would suggest buying real estate.

[Christopher Mitchell]

@Sara N. Thank you! It's a VERY low interest rate 3.5% I like your idea, of buying a place where the unit needs some TLC, just needed that second opinion of someone who believes I should jump onto a second property :) Thanks for the response!

[Christopher Mitchell]

@Anthony Gayden I knew that paying off the mortgage would be limiting myself, just needed that confirmation from someone, that I was in fact limiting my potential. Appreciate your input!

[Paul G.]

Did you buy your first property right out of college?  Or have you owned it for more than a year?

Is there a possibility you could buy another townhome like you currently did and move into it while you're renovating, and rent out your current place?  That should let you keep your current interest rate, and qualify for another interest rate that is lower than if you bought as an investment property right away.

[JD Martin]

How wealthy are your parents and how much real estate do they own? If the answer is "Not very" and "none other than their home", they're probably not the best people to ask for advice.

Paying off a mortgage is a guaranteed 3.5% return, most of which will be eroded by normal inflation. If you can't do better than a 10% return on real estate you would be better off investing the funds in another vehicle. A good stock index fund will average you 7-9% annually over time. 

[Anthony Gayden]

Originally posted by @Christopher Mitchell:

@Anthony Gayden I knew that paying off the mortgage would be limiting myself, just needed that confirmation from someone, that I was in fact limiting my potential. Appreciate your input!

 No problem. I came to the exact same conclusion not that long ago. I wanted to expand and grow and paying down the mortgage would have been counterproductive to that goal.

[Jess Slack]

I came here today to ask a very similar question. My wife and I are trying to decide what to do with the profits from rental property as we begin and move forward on our journey to financial freedom.  In general, does an investor make more money putting those profits toward buying more rentals or paying off a property to increase the cash flow from that property? I'm a newbie, but it seems to me that if you reinvest the profit in buying a new property, you make more money (assuming roi of 10-15%) . 

[Christine Kankowski]

You are on the right track.   Getting money/ loans is one of the hardest parts of real estate, so if you have one at a low rate, please don t pay it off.  This is the difference between good debt and bad debt.  The low interest loan is good debt!!

[Christopher Mitchell]

Thanks for all the great responses guys! I needed that affirmation that it is more profitable to engage a second property if the cash is available. Part of the reason fueling my desire to accumulate another property is definitely the low interest rates currently available! I really appreciate the responses the community offered especially since this is my first post! All the best with each of your real estate forays! 

[Katherine S.]

@Christopher Mitchell I wish I had been in your position at your age, or even had the interest 10 years ago.  BUY REAL ESTATE!!!

If you pay off that mortgage, all that cash is going to just sit there, doing absolutely nothing for you.  Put it to work!

[Steve Vaughan]

The math says to keep the cash for another opportunity.  No investor in their right mind accelerates long-term fixed rate money at 3.5%.  That's the math.

Mom and Dad (conservative like mine would be) suggest the peace of being debt-free.  I get that and would give more weight to their decision if they are also the reason I graduated college debt-free. 

If my parents were the reason I am debt-free after school, I would pay down the mortgage. Keep them happy and make them proud of you.  If not, no way.  

I am very debt-averse but still don't accelerate sweet long-term fixed rate residential mortgages.  All my others in the 6s+ and commercial loans are going bye-bye as we speak.  $22k/mo.

Congrats on graduating debt free!  How did you do that @Christopher Mitchell?  There's another thread now about student loans the size of mortgages.  They would appreciate your insight I'm sure!