Should I pay off my investment property mortgage? That’s entirely up to you. A broad answer, but let’s expand.
This question has caused an ongoing debate in the real estate market. Should I pay off my investment property mortgage early? Should I wait? And what’s the best way to do that? The short answer is simple. It depends on you. As finance expert Noel Whittaker put it, the answer “depends on three things: assets, income, and stomach muscles.”
Should I pay off my investment property using my retirement contributions?
Let’s start with a possible scenario. You have a property that’s already rented out. But, it makes a zero sum, for it breaks even with property payments (mortgage, etc.). You have the option to pay off the property within the next few years. However, in order to do that, you must stop your Individual Retirement Account and any other retirement contributions. Instead, you’d use those contributions to pay off the property. Is it worth it? It’s more cash flow, no mortgage to worry about, but less retirement savings.
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You’ll have more cash flow and no mortgage payment. The catch here is that you’ll have less retirement savings. For some, that’s a crazy idea. But here are the upsides of following this option. You can not touch your retirement savings until the age of 59 anyway. Once you pay off the investment property, you’ll reap the benefits right away. That in itself is also a retirement saving that you can utilize immediately.
You’re probably wondering, should I pay off my investment property mortgage using this option? Well, it works best IF you already have renters in your property. Once you’ve secured a renter (and hopefully vacancy), you do not have to worry about generating income from the property. It also works best if you’re more concerned with generating income rather than increasing your Return On Investment (ROI).
Should I pay off my investment property mortgage one at a time?
Here’s another scenario. You have multiple investment properties, let’s say three. You generate decent income from them. You have the option to use all the cash flow from the accumulated properties and pay off one mortgage. In just a few years, you’ll pay off one of them. With one mortgage gone, you’ll be able to generate more cash flow. So, you’ll be able to pay off the second mortgage faster than the first. And the third, even faster and faster. Should I pay of investment property mortgage this way?
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This is called the “snowball method.” And it works best IF you do not need to be saving your cash flow or building a portfolio of real estate investments. It works very well because most banks and lenders have a limit on how many mortgages you can have. It’s also better for your credit to not have many mortgages to your name. With that being said, make sure you have other sources of income in the beginning because it requires you to use up as much cash flow as possible.
Evaluate yourself…what is your financial situation?
So, should you pay off your investment property? These strategies are the most common scenarios in which investors pay off their mortgages. But it is best to answer this on an individual basis. What is your financial situation? What is your future plan? Are you nearing retirement?
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You need to evaluate all these aspects before making the decision. For instance, opting for the snowball method (purchasing multiple properties and paying off one mortgage at a time) will require some risk taking. Here’s what Brenton Tong, a financial expert, advises:
The decision to invest in another property when you already have a home loan is a pretty big decision because you’re taking on more debt – probably the most important consideration is your financial position at the time when you’re going to be looking at doing that – and the number one factor when you’re looking at your financial position is your cash flow.
If you’re asking yourself, should I pay pay off my investment property early, then know that you need to have a strong cash flow from other resources as well. If you don’t have enough cash flow to fund debts, then that will be an issue.
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Take your time in paying off your mortgage if you need to. If you’re not generating enough cash flow, and are approaching your retirement age, then you might want to wait out. If you are generating enough cash flow, then decide if you want to pay off debt or continue adding to your retirement.
The Bottom Line…
When should I pay off my investment property? When you feel comfortable based on your financial situation and goals.
Know that Mashvisor will always support you and offer you a thorough analysis on the investment properties your purchase whether paying cash or using a mortgage. So, begin looking for the best investment property now!