Pay off loan or reinvest?

[Allan Quintela]

Hey BP! Need some advice here,

Basically as the title says, should I use my cash flow to pay off my loan or save it for a down payment for a new unit? (Reinvest)

I have 2 rental property generating a total off $2,500 a month gross income. After HOA fees, escrow...ect...I'm left with just little over $1,000 cash flow. (Assuming I pay the minimum payment)

Question is, should I throw that money towards to principal or pay off the loan? I owe a total off about $110,000 on both of them together and pay about 5.5% interest.

If there are any other values needed to know in order to give me a proper response please let me know!!

Thank you

[Zach White]

Hi Allan,

I used to believe that paying off all debt was the way to go. But after just learning the basics about building wealth I learned there is little financial upside to paying off your debt compared to investing the money into more assets as long as the assets you invest in provide a larger cash on cash return than the interest on your debt. So if the mortgages on your two properties averages 5.5% interest, and you used your money to acquire more rental properties that gave you an 11% cash on cash return, the second option would be twice as effective at building wealth. I think the main appeal to paying off debt is the peace of mind it offers, which might be worth it. It depends on what you want. Brandon Turner's book on Rental Property Investing goes into paying all cash vs using leverage in detail.