Should You Pay Off Your Loan Faster?

The answer to this question is not the same for everyone and is largely dependent on where you are in life and your finances.

Typically when you are in your 30’s, 40’s, and 50’s (the high income-producing years), you benefit from the leverage and the tax shelter of having as many homes as you can afford and using the mortgage interest you pay the bank as a tax write-off. As you approach retirement, it usually makes sense to begin paying off the loans in favor of increased cash flow.

Many of us find it challenging to get ahead when the state and government take so much out of our paychecks each pay period. As the saying goes, “The more you make, the more they take.” There are many investment opportunities out there, but only rental real estate offers the tax shelter benefits we all desperately need. Think of it as giving yourself a raise at work without having to ask the boss!

By investing in rental income real estate, you can legally create a tax shelter for your income, a way to re-coop some of the taxes they take out of your paycheck. While your employer will still take the taxes out each pay period, you will get a bigger refund when you file your taxes at the end of the year.

By purchasing rental real estate and using the tax code to your advantage, you can write off both the interest on the loans and the depreciation allowed by the IRS to help you build a tax shelter. Since it will vary based on your income tax bracket, we suggest you work with a CPA who is knowledgeable in investment real estate to prepare your taxes. Until you can put some of those tax dollars back to work for you, it is difficult to get ahead financially. Without tax shelter, you end up working the first 3 or 4 months of the year for the government. That’s 25% to 35% of your income gone forever.

During your high income-producing years, it makes sense to create shelter for your hard-earned dollars.

Create a plan with a Real Estate Advisor to purchase enough rental income property to shelter your income. Tailor the loans or adjust your monthly payments, so they are paid off by the time you plan to retire. This will give you maximum tax shelter for your income when you need it and maximum cash flow for your retirement when you need it. As a bonus, real estate in high appreciating markets can double in value every 10 to 15 years. For example, if you control a $500,000 portfolio of rental income properties in your 40’s and 50’s, you will very likely add $1,000,000 to your net worth by the time you retire.

If you are considering a 15-year fixed interest rate loan because you want a lower interest rate, be aware that the monthly payments will be close to double of a 30-year fixed interest rate loan. If you want monthly cash flow, it makes much more sense to go with a 30-year mortgage, and when you are ready, start paying off the principle when and how you want rather than being forced to make higher payments because that was the loan you chose upfront. If you are much more interested in tax benefits than cash flow, it might make sense to go with a 15-year mortgage so you can show a loss on your rental homes.

Investing in rental real estate is one of the best vehicles to create tax shelters while you are working. Your rental income will become residual income for you in retirement while building a lasting legacy of wealth for the future.

Do the math. Use conservative figures. Prove it to yourself.