david greene's argument for paying down mortgage faster

[Brandon Taylor]

In David Greene's book "Long Distance Real Estate Investing" (which is awesome, btw) I saw an argument that I didn't understand fully, which is basically "you should overpay on your mortgages to refinance them faster for down payments of new properties". He said,

because every dollar that goes to the interest is a dollar lost. Your goal is to get as much of that payment toward paying down the principal as possible. This grows your equity, therefore your wealth, faster.

and then recommended overpaying on mortgages to build wealth faster. I also heard him on BP podcast 169 mention how he uses extra income from job or note investing to pay down mortgages faster.

My first instinct would be that a 3% mortgage locked in for 30yrs on a cash-flowing asset is a gift and you want to keep it as long as possible to basically short the dollar (betting on future inflation, meaning dollars you will have to pay the loan back with in the future will be less valuable). Not to mention, you can play arbitrage by getting a higher return on asset than what you borrow. I don't understand why you would want to pay off the mortgage early and lose these benefits.

However, I can see there being some next-level genius strategy that I'm not understanding of basically overpaying mortgage to build equity and refinance it faster to acquire more properties. The best I can imagine is that this is basically a way to give up cashflow now to speed up equity building, such that you would get more equity to borrow against for a down payment for next property faster than just saving cashflow. I don't understand why you would be able to come up with a down payment faster that way, though?

Is there anything I'm missing here?

Thanks for responses,

Brandon

[Don Konipol]

@Brandon Taylor

You’re correct. When you borrow at 3%, to invest at 6%, you’ve used arbitrage correctly to earn an income greater than without the use of leverage. The “theory” about paying down a low interest mortgage faster to have more equity would only be valid if you spent the cash flow, or invested it at significantly less than 3%. If you reinvest at 3% or greater you’re always better off keeping the low interest loan as long as possible.

The reason people believe these strategies that defy mathematical analysis is

1. The vast majority of people have no real understanding of debt, interest, equity buildup, etc.

2. People are programmed to think debt is bad and should be paid off as quick as possible, like credit card debt

3. People like to simplify and while debt analysis can be complicated the concept of paying off debt as quickly as possible is simple.

4. People are uncomfortable with debt and are psychologically more comfortable with no or little debt

5. Less debt IS less risky, unless liquid reserves are maintained