Moving to One Income: Payoff Rental Property to Improve Cash Flow?

[Senator]

While you may be 100% guaranteed to avoid a $960.35 per month mortgage payment, you are also 100% guaranteed to have less money because of the big check that you wrote to pay off the mortgage and a 100% guaranteed to NOT get the investment earnings on that money.

All true. With my lower monthly expenses, I can now have a higher stock allocation. So my investments have performed well this year. 17.94% 12 month return, 15.5% YTD.

So I have a smaller portfolio, but it performs better than a 60/40 mix.

It's really a matter of what makes you sleep better at night.

 

[pb4uski]

Agreed.... where you pay it off with the proceeds from fixed income and the impact is to increase your stock allocation then it makes more sense because you are essentially trading off receiving fixed income interest and paying mortgage interest with neither receiving or paying anything (depending on your mortgage interest rate). In the case of my 3.375% mortgage, even if I paid it off with fixed income money I would probably be even at best as I think my fixed income earns more than 3.375%.

 

[ERD50]

Going by historical returns, no one would ever get anything less than an interest rate only mortgage, for 30+ years. As soon as they had equity in their home, they would either refinance, or get a Equity line, and immediately dump that into equities. And they would never be less than ~80% for AA in equities.
...

Not true. I had a 17% mortgage in the 80's. So I wouldn't try to leverage that for equities. Although, even that might have worked, it was an adjustable rate, and quickly dropped to pretty low levels, had I held that mortgage (I moved) through the 90's boom, on average it might have worked.

But when fixed interest rates are low like they have been, I think it makes sense to give keeping a mortgage strong consideration.

That said, yes, there is a risk the market may under-perform. And if an individual is not comfortable with that risk, then pay off the the mortgage.

My point is always that this really isn't a big deal either way (unless it is done to extremes either way, like when a pay-off would greatly reduce your liquidity). I just don't like to hear the opinions that it is a slam-dunk for the pay-off.

-ERD50

 

[MarieIG]

All true. With my lower monthly expenses, I can now have a higher stock allocation. So my investments have performed well this year. 17.94% 12 month return, 15.5% YTD.

So I have a smaller portfolio, but it performs better than a 60/40 mix.

It's really a matter of what makes you sleep better at night.

I'm not as sophisticated as many on this forum. I am reminded of an old commercial where the customer in a fast food place says "Show me the beef." A bunch of well run, income producing properties, sitting on capital gains, while allowing business deductions seems like a lot of beef to me.

On an emotional level, debt makes me uncomfortable, and I was very glad to pay off our mortgage (early).

I did hear on one of those podcasts (can't remember if it was Wade Pfau) that a higher guaranteed income does allow for a higher stock allocation.

 

[calmloki]

I keep fighting myself to keep from paying off our northern house. Keep reminding myself that sub-4% money is CHEAP. We got started buying places back in the 80s and interest rates were never less than 8%, up to 4 points higher, during the decades we were buying. Through those times we pushed every spare nickle at the highest rate loan we had. Maybe there were smarter things to do, but saving the 8-12% sure didn't feel dumb. Come the 2008 real estate crash and the various stock market crashes and we didn't even notice as all the places were paid off and rents just kept chooking in. We could have been buying, but had all the rentals we needed - used some cash and bought a southern place for us in 2010. Tried to be smart and take advantage of the cheap money by borrowing against both homes but the reality is that has probably been a wash - we have too big of a security blanket cash-in-savings-accounts pile. Paid the southern place off again because I couldn't imagine the markets continuing to go up and didn't have anything better to do with the money. Next week a substantial loan we made is going to pay off and I'm going to be fighting myself to keep from paying off the northern house - I'll be admonishing myself that the 3% house loan can be offset by a 1.5% Ally bank no penalty savings CD and that having another deployable $100+k is worth the 1.5% difference.
I guess I'm in the don't pay it off camp - you have a cheap loan and deployable money can be real handy. You have an enviable problem - congratulations!

 

[flintnational]

OP, I see pros and cons to both options. IMO, it depends on what you want/need from your investments.

Payoff mortgage - lower percent returns, higher cash flow, lower risk

Keep the mortgage - higher percent returns (leverage), lower cash flow, higher risk

FN