Paying off primary home to increase cash flow?

Question

Dear community,

So I have a really weird idea definitely not the normal "strategy" and Id like to hear the pros/ cons from everyone regarding this. I'm selling, yes selling! not cash out refinancing and maximizing my leverage full tilt to be the richest man in the graveyard, one of my investment properties. With the proceeds I have the ability to pay off my primary home. For some ballpark numbers I'll be making 70k after the sale and capital gains is paid for.

Now for my primary since I've held it for a while I only owe 70k. The P&I amounts to just over 900 dollars. That's 10,800 a year risk free folks.  I have a HELOC open for another 3 years with no balance, that would convert to a 15 year mortgage if anything comes along and a balance exists at the end of year 3.

Current investment opportunities for buying an investment property , from a cashflow perspective, will yield me roughly 5600 per year.  Assuming tenants pay, not assuming appreciation or increased rents over time.

I could also loan money at ~11 percent, so roughly 7700 per year.

To me it makes alot of sense to just pay off the primary already. I'm looking at strictly cash flow. What are some thoughts preferably from people who have done the same thing, but I'm open to hear everyone's opinion.  Anything I'm missing here?

Steve Vaughan · Answer

LOL.  Who itemizes anymore with such a high standard deduction?  The old keep your mortgage for the tax benefits argument no longer works.  I haven't itemized in a decade.

Dan, I've done this multiple times, including my own home.  I paid off 2 commercial loans with $65k balances but high payments like $1695/mo. The rates were only 5%, the mortgages were just old and on 15 or 20 yr terms.  I got rid of $3000/mo in PI payments for $135k.

Sounds like your payment may include taxes and insurance?  Keep that in mind, if so.  You won't be saving $900/mo. Maybe more like $600 or so.

But I'm all for it from a cash management perspective especially if you have an opportunity and emergency fund and a good income source.

Hunting for new investments in this market is a lot of work.  I've taken the known payment reduction as well before.  Clean, neat, guaranteed, but we do lose the interest deduction paying off investment mortgages .

Travis Timmons · Answer

Don't get cute - just pay off the house. It'll make you really happy. I'm a moron with a paid off house and it's wonderful. I don't maximize my return on my assets, but if the sky starts falling, I can support my family with any job. That security, to me, is better than any ROI that I can receive from an investment or property. And I have been able to take more risk in my career (leaving a well paid job to start a business) because the house is paid off and we can get by on next to nothing.

Alecia Bolton · Answer

From a purely cash flow perspective, paying off your primary makes sense, but it's not that simple.

I would look at your mortgage's interest rate.  If you pay off your mortgage, that's the return you're getting with the profit from the sale of your investment property.  Could you invest that $70k into something that has a higher percentage?

I'm assuming here that your current mortgage is a low fixed rate for 30 years.  Which is usually pretty cheap money.  So if you're borrowing the money at 3.5%, and you can invest in something that has 8% returns, then you're earning 4.5% returns.

You're also losing any tax benefits for deducting the interest from your mortgage.

Bob E. · Answer

Sounds like you are a decent person was well as a decent landlord.  I have meet a lot of investors that get so focused on the next deal, the next dollar that they give up some of their humanity.  I am based in Phoenix, every November the local REIA has a food drive.  For every can of food you donate you get a ticket, many of the vendors give out tickets as well nd there is a drawing at the end of the night.  A few years ago I donated $20 and they gave me a bunch of tickets (20/40).  I met another investor who was telling me latter about how he won the grand prize last year $1,000 cash.  This was someone that did not appear to need the money but he was so happy about winning.  All I could think of was "Wow, this guy won $1,000, from a food bank".  I am not sure I could ever look myself in the mirror if I took money from a food bank.

As part of this journey we all have to ask ourselves what is enough?  The answer is different for everyone but at some point you have your basic needs taken care of, then you have enough to live a good life.  Whats after that?  I know for us we are slow growing into an are where we can give more to causes we care about.  It's not a lot at this time but it is slowly growing and I am happy with that.

Dan M. · Answer

I have no W-2 nor do I see me ever going back to a traditional "job". 7 days from now is my 1 year anniversary. Currently I'm loosely employed as a Realtor mostly helping friends and family and having the freedom to do what I want literally everyday.  @Bob E. I'm selling one of 18 investment properties, 19 if you count my primary. I agree this isn't a great time to deploy money into investment properties the deals are all gone even in this low interest environment and there very well could be some uncertainty around the corner.

One thing people aren't talking about is property taxes, and really if your taxes are x an assessor could come around tomorrow ( and to all the newer investors getting into the game now ) and say surprise its x + 30% now, try to fight the evaluation. Years ago I could successfully find a deal and negotiate down the assessment. That's not going to fly anymore.

So I guess for me at the end of the day freeing up that extra cash flow by eliminating the mortgage is a hedge against increased expenses or additional property tax. My leases will lag one year behind any of these increases and generally speaking I try to keep my rents stable vs raising them every year.  I was a tenant once struggling and that's really not an enjoyable experience so I try to pay that forward.

Bob E. · Answer

@Dan M.  Asking that question on an investment forum tends to slant the answers towards maximizing return and growth prospects etc.  Here on BP when I see a question like this and everyone gets out their slide ruler to calculate return but nobody asks about goals and peace of mind.

I would encourage you to take a step back and ask what is important to you right now.  Do you have other investment properties?  How many?  Are you selling 1 of 2 properties or 1 of 10?  Given that we are likely on the edge of a recession how secure is your job?  How would you feel if you got laid off tomorrow and  you had sold and paid off your mortgage vs. still had the rental producing a few hundred $$$ a month?

I had a similar discussion with my wife yesterday, we have a rental that is finishing up rehab after a fire and that prompted the question, "what if I sell that and 1031 into something bigger..."  My wife said no.  Not because we don't want to grow the portfolio but we have 50 units and with all the uncertainty in the world we would rater stabilize the portfolio and smooth things out.  This in not 2009 where smoking deals where everywhere, prices are high, and may very well level off with the recession.

Remember "Risk is the likelihood of not achieving your goal"  Dr. Olsen MSU

Also "Be fearful when others are greedy, be greedy when others are fearful"  Warren Buffet

Jeff T. · Answer

@Dan M.

I’ve done this calculation a number of times and thought about paying off my house. For me and my payoff amount and interest rate I decided to refi and gained cash flow that way.

If I were in your situation I might have paid it off. It’s a pretty decent guaranteed cashflow/expense reduction for only $70k and no risk.

At this point I get excited about adding little bits of long term cashflow because that’s what pays bills and keeps me from having to use cash or investments for income.

Actually I’m pretty sure I would pay it off. But then I don’t know your whole financial situation, but my favorite real estate investor Bruce Norris says, he sleeps a lot easier with a paid off house.

I sleep easier with low expenses, which is pretty similar.

One last thing, don’t forget the ordinary income taxes you would have to pay on that 11% loan you would be funding.

Good luck with it all, it sounds like your are in a good overall situation.

Ned Carey · Answer

@Dan M. I agree with @Alecia Bolton. How much can you earn on those sale proceeds vs how much can you save is the calculation to make. However you also have to consider the value of peace of mind and lower risk that comes when your home is paid off.

This decision is in part, what stage are in regarding your financial life. Also a consideration is how tolerant of risk are you.

If you are in high growth mode go for the best return. If you are reasonable well off and clearly on track to reach your financial goals then go the route of less stress and risk ie: pay of the home.

Dave Skow · Answer

you  would likely be able to  invest the  70K   and  make a  decent return .......I am conservative and  I  would payoff  my primary mortgage...maybe  after  paying off the  mortgage - get a  decent sized HELOC  in place on the  primary home so that you can  access   these funds  if needed   in the future

Axel Meierhoefer · Answer

@Dan M. I also generally agree with @Alecia Bolton

One aspect that I am always looking at is work, in addition to risk. If you pay your mortgage you probably have to work for that money. If you use money from the investment sale and get a new investment property that money is working for you as it has in the previous investment property. That's why I always preach performance and making sure any investment hs positive cash flow form day 1. That way you can serve your mortgage without having to work for it yourself.

Equity sitting in your home is money not working for you but you working to serve it P+I.

I write a lot and talk a lot about performance in my posts and this is a variation of it. If you can use money and make it work for you in a well-performing investment rather than sitting dormant as equity in your house, I know what choice I make.

When it comes to performing, you will also have to keep things like inflation in mind. Alecia pointed out the literal performance of the money but keep in m find that we have 7.5% inflation right now. Your money is losing that in buying power, especially if it's just sitting around doing nothing. If your home increases in value by 7.5% and we have the same amount of inflation, you gained no buying power at all.

That begs the question: Who is taking the risk in a deal? As we live in high debt and high inflation times the lenders take a huge risk while you as the owner of the asset take the relatively low risk. If you're giving them the money back, you remove their risk and you live with the devaluation of your money.

In his latest book "Changing world order" Ray Dalio gives an excellent explanation about who takes risk when looking at assets and lending. I recommend it, even though its really long, but you pick and choose the chapters.

If you like to discuss it, please DM and we can schedule a chat

Paying off primary home to increase cash flow?

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