Paying off An Existing Loan

[Jim Cummings]

Questions for the smart Money and 1031 Exchange folks on the forum. 

Background: 

Property was bought via 1031 & is held in personal name (NOT LLC or S Corp:

Small mortgage  - roughly $42K. 

Current value around $300K. 

Current P&I - $285 / Month. In addition, I've been throwing  $1000 / Month toward the mortgage to accelerate payoff. The $1000 / Month are funds generated by other rental properties. So nothing coming out of personal pocket to accelerate the payoff. 

My objective (at my age) is to payoff the mortgage on this property. 

I have sufficient personal funds making whatever the abhorrently low Money Market Rate (0.25% ???) to payoff the loan without affecting my lifestyle. 

Questions:

1. Is this a smart use of personal funds to accelerate the payoff of the existing mortgage?  

2. For 1031 Experts: Would using personal funds in way complicate a 1931 sale of this property in the future?  

Appreciate your insights.

[Adam Odom]

Quote from @Joe Villeneuve:

Paying off a mortgage on a rental property, using your own money, is doing nothing more than increasing the cost to you.  You are not saving money since the mortgage is being paid for by the tenant already.  That's free money to you...that you are going in revers by taking your money and throwing it at the property at a rate of $1ooo/month. Why would you start doing it for them.

In this case though, you might just as well since based on the following numbers you've written here:

1 - PV = $300k
2 - Debt = $42k
3 - Equity = $258k...

This means your equity (potential cash/DP) only worth $300k in Property Value...at a cost of$258k.  That ratio is awful.  IT should always be closer to that 5 times it was when you put a 20% DP in.  That $258k in equity could (should) be worth close to $1.3M...not just $300k.

You are losing money exponentially, and have been for a long, long time.

 There's a lot to be said for paid in full vs debt up to your eyeballs too. I've made this point on previous posts but as a banker, I can tell you most of my truly "wealthy" clients don't have tons of debt. The math makes sense and I agree leverage can be a very useful tool but more times than not folks don't actually spend that money efficiently. I've done exactly what the OP does and socking away debt gives you more security, which in turn gives me more options when buying new property. You have to account for the fact too that if you have mortgages on everything, you might restrict yourself on traditional financing for the next project. It definitely is one of the more interesting debates we have on here, and I think there is a unique answer for just about each individual case.