Pay off mortgage or buy a property?

Question

I'm being gifted $150K, should I pay off my mortgage (owe $175K) or buy a $150K house cash?

Andrew Syrios · Answer

You could loan the money to me... just an idea...I would need more info to feel comfortable with a recommendation, but I usually lean toward buying more. The biggest advantage to real estate is the ability to use leverage and still protect yourself by getting a good deal (which you can't do very much in the stock market). I mean, you may even want to get some loans and buy a few houses with that $150K.

Alejandra Creech · Answer

Thanks for the excellent replies. It sounds like most would invest in property. @Micheal Rogers we have a 30 year fixed with 3.5% rate so you bring up a great point that maybe giving that up isn't a good idea. My original thought was to buy a $150K house cash, rent it out and use that income to pay my mortgage. But doesn't sound like anyone would do that? Im not currently an investor nor do I own properties (I became a real estate agent this year) and it makes me a little nervous to become a landlord but my husband is a police officer...@Angel Rosado mentioned investing in a great deal, what cash flow is considered a "great deal?"

Jane A. · Answer

Really it depends on what level of leverage you are comfortable with: It is not very reasonable to pay off 3.5% interest 30 years fix mortgage as your 150K could make you a better deal secured by Realestate. 1) if you lend this money to conservative RE investor or partner with investor - you could get 5-8% return on cash and your money will be secured by rental property (I do this for my relatives and friends) 2) you could buy SFR for cash and get in rent about 1000-1300. Your return on cash is also 6-8% plus appreciation 3) you could buy a duplex with gross rent about 1600, your return on cash is still about 8-12 % as you will have higher maintenance 4) you could leverage - for example take 150K as a mortgage and buy 4plex. Your gross rent will be around 3000 per month and you return on cash will be more than 12% or so. Or you could buy 2 SFH with 50% leverage, cash on cash may be around 10 % but appreciation may be better. 5) you could take 75% leverage - put 150k down and take 450K from the bank - buy two 4 plexes and enjoy 6K gross rent and more than 15% cash on cash This is average numbers for goor areas around my location. It looks like you may be more comfortable with conservative strategy so you could just take some leverage and start building SFR portfolio in your area. You will get better quality tenants and less headache.

Hai G. · Answer

As others have said, it depends on your goal. Personally I would buy more if you have the means to get a conventional mortgage. I'm of the camp that interest rate today is as low as it gets, and locking myself in with a cheap loan is worth it over the long term (I'm a buy and hold type).

Mike Carino · Answer

why not leverage 150k and buy 5? Its all in your perception as an investor and your goals

Clayton Sneider · Answer

Assuming you have a low interest rate on your mortgage, and assuming that you want to purchase rentals, then use the money as down payments on several other cash flowing properties. Why pay off a mortgage that is only costing you say 5%, when you can invest that money and earn maybe 20% on it. I also would feel more secure with a mortgage and $150K in the bank, than with no mortgage, but no money. I understand the desire to be mortgage free, but it makes more sense to me to borrow as much money as I can at low interest and use that leverage to purchase cash flowing properties.

Pete T. · Answer

it depends on your goals, but I would use the money to purchase multiple properties. I don't see any benefit of a partial payment and would only pay it off if I was already grown to the point I want to be at.

Chris Seveney · Answer

Are you an investor / own other properties ? Do you wish to do buy and hold or fix and flip? This would make a difference. If your a buy and hold I would pay off most of my mortgage and use some money for down payment. If I was fix and flip I would keep more money for buy and renovation and put a smaller portion toward my mortgage

Angel Rosado · Answer

I mean who says you cant split the different pay half on the mortgage which would provide the security mentioned by @Jonathan Wilks and then use the remaining amount to invest in a few properties (but only great deals i.e. 1 in 100)

Michael Rogers · Answer

What are the terms of your current mortgage? If it is a 30 year fixed rate mortgage at a low rate I wouldn't pay it off.You might consider setting the $150k aside in a cash account and use the money for down payments on several rental property purchases. Most portfolio lenders will lend you 80% of purchase pricing. This means you need to come up with a down payment of 20%. That means you can buy $750k of real estate ($750,000 x 20%).