Paying off loan on rental property with 6.8% interest
Member since 2023 · 7 posts · 3 votes
Paying off loan on rental property with 6.8% interest
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Lender · Fort Lauderdale, FL (Lending in FL CT GA MI PA) · Member since 2022 · 470 posts · 349 votes
3yWhat are your goals with real estate investing? Generally speaking, if you are looking to grow your portfolio, you do not want to pay the loan down early. It would be better to save the cash for a down payment on another property.
18 Replies
- Lender · Fort Lauderdale, FL (Lending in FL CT GA MI PA) · Member since 2022 · 470 posts · 349 votes3y
What are your goals with real estate investing? Generally speaking, if you are looking to grow your portfolio, you do not want to pay the loan down early. It would be better to save the cash for a down payment on another property.
- Member since 2023 · 7 posts · 3 votes3y
Thank you Ash ! The goal it to generate cash flow for long term. I also feel like this might be a good time to pay it off and start saving the profit plus save up over the next year or two until the interest rates are better to buy another rental/ duplex etc. I know it's difficult to time the market but paying this much in interest just sucks terribly bad. thanks again
- Lender · Fort Lauderdale, FL (Lending in FL CT GA MI PA) · Member since 2022 · 470 posts · 349 votes3y
I missed another important question - are you cash flowing or losing money each month? If you are cash flowing, even though the interest feels bad, the better answer would be not to pay it off. Leverage really helps with real estate investing growth and returns.
That being said, if it keeps you up at night to pay that interest rate and you have the cash, it's your call if you want to pay it off. Just be aware that it will slow your growth over the long term if you choose not to carry debt.
- 3yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Any mortgage will start with most of the money going towards interest. The amount going to interests decreases as you go. For rentals, typically the best is to get as long of a term as possible (eg 25 or 30 year mortgage) to keep the payments low. the tenants are paying the mortgage for you. If you want to pay it off early, you can. If you are planning on buying more homes, you can also save that money and use it for a down payment on your next rental. It is all a matter of what your goals are and what the numbers are.
- Member since 2023 · 243 posts · 199 votes3y
I get it. Paying interest is basically just giving 93k of your own money to the bank in 15 years…just because.
However, how long will it take to recoup the 154k via cash flow from rent if you pay it off now?
Another approach is to use that for a down payment on two more properties. From there, your monthly income greatly increases.
At that point, what should you do? Save to buy another house or take out a loan on property #2 to get property #3 for even more income? Or, do you use your monthly income from the two homes to pay them off quickly. Sure, you’ll pay some interest still but you will have 3 units where all the income goes in your pocket thereafter.
It is a philosophy that takes getting used to as we like being debt free.
The secret? Do the numbers for each option to see where you are at the top.
- Member since 2023 · 7 posts · 3 votes3yThanks Ash, I am losing about $350/ month right now. I wish I was cash flowing, that would have been a different story. Thank you for your input my friend. Appreciate it.
Quote from @Ash Hegde:
I missed another important question - are you cash flowing or losing money each month? If you are cash flowing, even though the interest feels bad, the better answer would be not to pay it off. Leverage really helps with real estate investing growth and returns.
That being said, if it keeps you up at night to pay that interest rate and you have the cash, it's your call if you want to pay it off. Just be aware that it will slow your growth over the long term if you choose not to carry debt.
- Member since 2023 · 7 posts · 3 votes3y
Quote from @Theresa Harris:
Any mortgage will start with most of the money going towards interest. The amount going to interests decreases as you go. For rentals, typically the best is to get as long of a term as possible (eg 25 or 30 year mortgage) to keep the payments low. the tenants are paying the mortgage for you. If you want to pay it off early, you can. If you are planning on buying more homes, you can also save that money and use it for a down payment on your next rental. It is all a matter of what your goals are and what the numbers are.
Thank you Theresa. The rates were better with 15 years, so I decided to go with that. But you're right, now that I think about it, probably would have been better with 30 years. I am not cash flowing right now, actually putting in 350/ month towards the mortgage. thank you.
- Member since 2023 · 7 posts · 3 votes3y
Quote from @Todd Jones:
I get it. Paying interest is basically just giving 93k of your own money to the bank in 15 years…just because.
However, how long will it take to recoup the 154k via cash flow from rent if you pay it off now?
Another approach is to use that for a down payment on two more properties. From there, your monthly income greatly increases.
At that point, what should you do? Save to buy another house or take out a loan on property #2 to get property #3 for even more income? Or, do you use your monthly income from the two homes to pay them off quickly. Sure, you’ll pay some interest still but you will have 3 units where all the income goes in your pocket thereafter.
It is a philosophy that takes getting used to as we like being debt free.
The secret? Do the numbers for each option to see where you are at the top.
Thank you so much Todd, I really appreciate you taking the time and write this nice post. I would love to keep my cash with me for now, the only issue is that I am not cash flowing, rather spending $350/ month adding to the rental to pay the monthly mortgage. That's the reason I keep thinking about paying off my loan on the rental. Thanks again !!
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes3y
If you are looking for long term, hold onto your cash. No reason to de-leverage. If you pay off the loan, you'll probably be back on BP asking how to get your equity out and/or what to do since you are cash poor.
You never know what the future will hold. Maybe in a few years rates will drop and you can refi. Maybe rents will continue to skyrocket... So, don't worry about "dripping in" the $350/mo. Better to use a bit of your cash slowly then "losing it" to illiquid real estate equity.
This is the point of the so called "power of leverage" in real estate where its actually "good" debt. As mentioned above, imagine having three properties free and clear in the future (with whatever might be their future value), as opposed to the one now...
Good luck.
- Member since 2023 · 7 posts · 3 votes3y
Quote from @David M.:
If you are looking for long term, hold onto your cash. No reason to de-leverage. If you pay off the loan, you'll probably be back on BP asking how to get your equity out and/or what to do since you are cash poor.
You never know what the future will hold. Maybe in a few years rates will drop and you can refi. Maybe rents will continue to skyrocket... So, don't worry about "dripping in" the $350/mo. Better to use a bit of your cash slowly then "losing it" to illiquid real estate equity.
This is the point of the so called "power of leverage" in real estate where its actually "good" debt. As mentioned above, imagine having three properties free and clear in the future (with whatever might be their future value), as opposed to the one now...
Good luck.
Thank you David ! This does makes a lot of sense. I liked the way you put it “Better to use a bit of your cash slowly then "losing it" to illiquid real estate equity”. Thanks so much.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes3y
Your welcome.
Oh, and i forgot to mention that if you use a brokerage account, the cash positions should be doing about 5%. So, one way to think about it (you can always come up with many points of view) is its only costing you ~1.8% to NOT pay off the loan... Or, your borrowing cost is ~1.8% (gross).
So, you are getting cheap money AND you have the liquidity to take advantage of another opportunity and/or cover other risks.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@M. N. Iqbal
I’ve got a few higher than 6.8%. I’d rather use my money to make much more than 6.8% by investing in more tax free cash flowing properties. Calculate your cash on cash down payment. When it comes to 5% appreciation, principal pay-down and monthly cash flow. I bet you’re getting closer to a 50% return on your 20% down payment. I used to pay mine off until I learned about the power of leverage. I paid off my first two rentals and even tried to pay off my primary. Dumbest thing I’ve ever done. Since then, I’ve used other peoples money to scale up to earn more than 6x’s more than I was making with just two paid off rentals. My cash flow went from 2k/month net to 13k/month after all my expenses by using other peoples money. I don’t care about my interest rates as long as they cash flow. I’ll refi out of them after 5 years anyway to buy more properties with the equity so I can live with 7 or 8% interest for a few years if they cash flow good enough.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
I paid off a few mid to high 6% mortgages early.
But I was done expanding and savings rates were about .5%.
We need to compare with alternatives available. If my mortgage was only 1.8% higher than savings/ money market rates, keep the cash. The tax deductible interest makes it a wash.
Congrats on having paying it off as an option @M. N. Iqbal !
- Member since 2023 · 243 posts · 199 votes3y
Quote from @M. N. Iqbal:
Having negative $350 requires looking at it from a different perspective.
This is where you have to sit down with the numbers to identify the best approach.
Also, there are a fair amount of variables:- Tax return from the interest. This goes down over time but you don’t have to take that into account. Does the tax return boost cover the $4200/yr loss? Note this goes down over time.
- If you get more properties, you would want the net cash flow to offset the $4.2k you are losing per year and beyond and for how long.
- Negative $350 also doesn't take into account any surprise repairs. You're not accumulating reserves.
- You can raise the rent per year to help, especially if the taxes increase.
- Consider refinancing now, even with the current interest rates. Calculate additional down payment you need to get the monthly note to a positive cash flow. Even consider changing it to a 30 yr.
Bleeding money is fine only for homes in an area with strong appreciation appreciation. I assume the home is in a Cleveland suburb so I speculate it isn't appreciating as fast as the loss.
If bleeding money is ok, how long should it occur? The 5, 6, 10 years? The life of the loan?Overall, I recommend calculating what it would take to stop the bleeding ASAP but no need to over do it and pay it all off.
- Member since 2023 · 7 posts · 3 votes3y
Quote from @Todd Jones:
Quote from @M. N. Iqbal:
Todd, thank you so much for an excellent review and feedback. The tax and interest tax break is around 6600/ year, so overall I am positive even with negative cash flow. I am waiting for the rates to come down a little who knows how long would that be, but will refinance to 30 years and that will bring down mortgage and put me in positive cash flow hopefully. Thanks again for writing on my post. Appreciate it.
Having negative $350 requires looking at it from a different perspective.
This is where you have to sit down with the numbers to identify the best approach.
Also, there are a fair amount of variables:- Tax return from the interest. This goes down over time but you don’t have to take that into account. Does the tax return boost cover the $4200/yr loss? Note this goes down over time.
- If you get more properties, you would want the net cash flow to offset the $4.2k you are losing per year and beyond and for how long.
- Negative $350 also doesn't take into account any surprise repairs. You're not accumulating reserves.
- You can raise the rent per year to help, especially if the taxes increase.
- Consider refinancing now, even with the current interest rates. Calculate additional down payment you need to get the monthly note to a positive cash flow. Even consider changing it to a 30 yr.
Bleeding money is fine only for homes in an area with strong appreciation appreciation. I assume the home is in a Cleveland suburb so I speculate it isn't appreciating as fast as the loss.
If bleeding money is ok, how long should it occur? The 5, 6, 10 years? The life of the loan?Overall, I recommend calculating what it would take to stop the bleeding ASAP but no need to over do it and pay it all off.
- 3yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
If you have other higher interest rate debt, I would focus on paying those off first.
I would factor the after tax rate of interest you are paying. If you are in a 30% tax bracket, you are really only paying 4.76% after taxes.
Best of luck.
Basit Siddiqi CPA4.979 Reviews - Rental Property Investor · Member since 2018 · 826 posts · 809 votes3y
@M. N. Iqbal put your funds into 4-week treasury bills and that will make you sleep better at night not paying off the loan - the 2% spread isn’t as painful as the 7%. If you plan to keep investing than preserve your cash for a future purchase opportunity.
- Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes3y
@M. N. Iqbal would you invest that money at 6.8%? because that is exactly what you are doing by paying of your mortgage early
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