Questions about paying off the mortgage

[Freeman Schultz]

Is there any advantages of paying off a mortgage for an investment property?
When should a mortgage be paid off.
The majority of people I have talked to have said investment properties should always have a mortgage, but I heard from
other people that it is best to pay off the principal or a significant amount because interest rates can always rise.

[Steve Vaughan]

Originally posted by @Freeman Schultz:

Originally posted by @Adam Martin:

I would say it depends on what stage in rentals you are in, right now I am in a growth phase so I'm in the camp leverage is king and I'll take any equity out I possibly can, cash on cash return is highest this way and it is what many of us will suggest.  Once I reach 10 houses though this is all I want, I have no plans for more and it will be time to start my paydown so my cashflow is higher without having to add the work of additional rentals.  My plan is pay down my primary first depending on the gap between that and my mortgage properties.  I'm looking for my personal to be free and clear with an open heloc so if I find something I absolutely have to buy I have this line I can tap.  From there the plan is to pay off 5 to increase cashflow.  For those that say that you are not paying the interest the tenant is this is true to an extent and I use this thought to justify my high use of leverage early on.  Remember in economics though there is no free lunch and everything has an opportunity cost.  Sure your tenant is paying the interest but if they weren't they would be paying you and you would have more money in their pocket.  For those that also feel like it is unwise to pay off the loan as you loose the interest deduction, this is also true but if you pay 10k in interest at a 22% tax rate you are still paying 7800 in interest, again money that could go to you.  To add another layer of complexity interest rates are incredibly low, do you think you could do better investing this money in something else that would yield a higher return, if so that may be a better play.  After this rant I'll leave you with a good solid maybe, it just depends on what your goals are and if you have any better uses for the money. 

Thank you for your response. You are not ranting at all, what you have said was very informative.

What I have realized that it is subjective. As you pointed out, it depends on the phase of the real estate investor and what they want. As you said it comes down to goals and any better uses of the money.

I paid a bunch off case by case for a couple reasons, usually higher risk, rate and hassles. 

Commercial assets need commercial loans.  Those bother you every year for your financials,  have calls and variable rates.  

Others were older and had rates above 6%. Others were seller-financed.  I don't bother paying off fixed long term residential rates below 5%. 

Another reason to pay some off may be that you're up against conventional loan limits of 4 or 10 or one is putting your DTI out of whack for more purchases. I had a 10yr private loan on straight am. The balance was pretty low but the payment was $1700. Paid it off to leverage another property.

Case by case, but not out of a general fear of debt or because your broke brother in law says so.