Should you sell stocks to pay off a rental early?

Question

I have a rental house with 150K left on the mortgage, I have 200k in an after tax brokerage account invested in cash, stocks and bonds. Should I sell the investments (pretend we're in a non-recession normal stock market environment), and payoff the rental? Assuming 15% long term taxes owed I would have to sell 172,500K. The interest rate on the mortgage is 4.3%, 30 years.

How do you know if you should payoff the mortgage when you have the money, or not?

JD Martin · Answer

When any of the following is true:

1. Having any kind of debt keeps you up at night;

2. The stock account is tanking, you see no hope for it to return, and you want to preserve the remainder of the principal;

3. The increased cash flow would make such a substantial difference in your daily life that not paying it off would be foolish.

Outside of that, I can't see many reasons I would take a 15% tax hit to save 4% on a mortgage, which is really only effectively about 3-3.5% depending on your tax bracket. If you really don't want the stock account any more and are willing to take the tax hit, why not just sell it and leave the cash in your account?

What is your primary reason for wanting to pay off the mortgage?

Brian Ellis · Answer

In the long term you will make 6-8% return in the stock market. You already have a good chunk in the brokerage account, it will only snowball from here.

If you pay off your mortgage (which is a good interest rate), you will likely burn through that cash flow as it is more accessible, AND that money isnt working for you anymore (unless you reinvested it).

Account Closed · Answer

What portfolio allocation do you want between stocks and real estate? If you are heavy on stocks and want to balance sure, go ahead. I do 30% traditional (roughly split 50/50 stocks and bonds), 30% owned real estate and 30% non traditional (loans, syndications, PPM funds etc). Im happy with that. I also keep a fair amount if cash (10%). My philosophy is to take the minimum risk needed to achieve my lifestyle goals. So I carry effectively 0 debt.

Joe Splitrock · Answer

The 15% tax hit is a one time expense, versus 4.3% is annual interest. Comparing just those two things, you would save way more money in the long run by avoiding the annual mortgage interest. Of course there is also market opportunity cost to consider. You can expect annualized return of 6% or better in the stock market. In that comparison, the market is better. But... you also have to consider increased cash flow from mortgage pay off. You will build up cash on a monthly basis that could be used to invest other places either rental properties or the stock market.

My recommendation is none of the above. Take that money from the stock market and directly invest it in a leveraged rental property. In other words, take your $172K and leverage it into $688K worth of rental property. This will get you a better cash return and through the power of leverage, it will propel your net worth significantly higher in the coming years.

Daniel McNulty · Answer

@Eric L Conry

I would base it on your cash flow NEEDS, not wants. If you need the cash flow to live on and it will improve your lifestyle, then go for it. If you don't need it and or are still working, you'll make far more in the long run leaving it invested.

Jonathan Burmenko · Answer

@Eric L Conry I completely agree with @JD Martin.

Given your good interest rate of 4.3%, I don't see a big reason to pay the 15% long-term gain taxes on the stock portfolio.

Dave Ramsey of course believes in having zero debt, but the money you are borrowing was fairly cheap so why not continue to leverage it? Unless the cash flow you would get from paying off the assets would better your day-to-day life.

Nic A. · Answer

Curious the groups thoughts 4 years later and the following scenario.

A $51k loan at 8.125% with stock holdings that might be volatile next fewer years (big tech & big oil). Gains on the stock holdings are 50-100%. With cash flow of the paid off property at $480 monthly (post expenses)

Jai Johnson · Answer

The total mortgage interest paid on a $150,000 loan at 4.3% over 30 years would be approximately $117,231.

The total capital gains tax of $172,500 at 15% would be roughly $25,875.

Selling the investments, paying the capital gains tax, and paying off the mortgage would save you $91,356 over 30 years.

But...

The total appreciation of $172,500, assuming an average stock market return of 7% annually over 30 years, would be approximately $1,313,114.

The total appreciation of $172,500, assuming an average annual return of 4.3% over 30 years, would be approximately $609,984.

Jeff S. · Answer

@Eric L Conry you are essentially borrowing on your property to buy stocks. There is a reason banks don't make loans on stocks. Over the years the only place I have lost money is the stock market.

Should you sell stocks to pay off a rental early?

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