Pay off Mortgage Early or Take advantage of low interest rate and

[Rik Patel]

Hi All! 

I'm curious to know people's opinion on this situation. I just closed on a duplex ($166,500) in ohio that rents for $1960 (section 8). I have a 30 year fixed mortgage at 4.87% , loan balance $125,000. I'm reading that if I make bi-weekly payments, I can pay off the mortgage faster and avoid paying more interest. However, this is also my first investment property in which I continue to grow with. Would you be more concerned with paying off the house early or continuing to leverage?

[Mike Roy]

@Rik Patel - This is definitely a personal choice.  One the one hand, responsible leverage will magnify your cash on cash returns and enable you to stretch your investment capital.  Leverage also enables you to diversify your holdings and, thus, spread your risk.  Many of the growth-minded investors here are going to echo this sentiment, especially those looking to achieve F.I. through cash flowing rental properties.  After all, the more property you own, the more you benefit from all of the ways real estate pays you. 

On the other hand, irresponsible leverage, especially in the commercial realm, can create significant risk to your holdings should cap rates increase significantly in the future.  Irresponsible leverage can lead to a negative cash flow position if rents drop.  Irresponsible leverage has resulted in investors losing their properties all together when they try to refi an underwater commercial investment.  There is definitely a crowd that "sleeps better" knowing their properties are paid off or have low leverage.

I think there is a happy place in between - one that lets you take advantage of the growth leverage affords, but has enough equity and cash flow to protect against downside risks that recession brings.