Author Topic: Should entrepreneurs pay off their mortgages early?  (Read 1895 times)

El_Viajero

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Should entrepreneurs pay off their mortgages early?
« on: June 27, 2017, 02:14:27 PM »
It seems like a good idea to me. Having to pay a mortgage is just another cash outflow that inhibits one's ability to take risks.

Sure, you can increase your net worth faster if you don't pay down the mortgage early. Everyone around here knows that. But if you're determined to take control of your life sooner rather than later, not be a slave to the man, and start using more of your time the way YOU want to use it, doesn't it make sense to go ahead and eliminate your biggest monthly expense ASAP?

To somebody who knows he or she will be working in a salaried position until retirement, early mortgage payoff isn't as practical. You're going to put in 40 hours per week until you hit your FIRE date, mortgage or no.

But for a self-employed person, the calculus is different. If I lay waste to my mortgage, I can suddenly free up all the hours I was working to pay for it. For me, maybe that's 3 days per month. For you, maybe it's a week.

Whatever the case, the entrepreneur can use that extra time to pursue new business ventures, spend more time with the spouse and offspring, or... whatever.

SC93

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #1 on: June 27, 2017, 02:29:34 PM »
Didn't you answer your own question?

FIREby35

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #2 on: June 27, 2017, 03:02:41 PM »
I paid off my home. So, it's safe to say I agree with your thoughts.

Smokystache

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #3 on: June 27, 2017, 06:49:16 PM »
....  But for a self-employed person, the calculus is different. If I lay waste to my mortgage, I can suddenly free up all the hours I was working to pay for it. For me, maybe that's 3 days per month. For you, maybe it's a week.....

I'm just trying to understand. So as you get closer and closer to your target number, you're going to work fewer and fewer hours?

Here's the opposite view (and one that I generally agree with): I pay the minimum on my mortgage and contribute to my stash (retirement accounts and taxable accounts). If my self-employment goes poorly, I have a huge amount of money to tide me over until things recover or I start a new self-employment venture, etc. If things go poorly (in your scenario) before you have paid off your mortgage, then you will have much less of a cushion to recover with.

I personally don't see it as clear cut as you do ... But I fear this will just devolve into the "pay it early" vs. "pay it slowly & contribute to 'stache" discussion.....

El_Viajero

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #4 on: June 27, 2017, 07:59:13 PM »
Didn't you answer your own question?

Maybe. It was supposed to be a question that generated a discussion. I gave my take.

El_Viajero

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #5 on: June 27, 2017, 08:05:50 PM »

I'm just trying to understand. So as you get closer and closer to your target number, you're going to work fewer and fewer hours?

Here's the opposite view (and one that I generally agree with): I pay the minimum on my mortgage and contribute to my stash (retirement accounts and taxable accounts). If my self-employment goes poorly, I have a huge amount of money to tide me over until things recover or I start a new self-employment venture, etc. If things go poorly (in your scenario) before you have paid off your mortgage, then you will have much less of a cushion to recover with.

I personally don't see it as clear cut as you do ... But I fear this will just devolve into the "pay it early" vs. "pay it slowly & contribute to 'stache" discussion.....

No! I don't want this to devolve into the tired discussion about paying it early vs. contributing to your 'stache. We've all been there. We know that one.

This is about taking control + giving yourself more free time + enabling more risk taking, if that's what you want to do. It seems like paying the mortgage off early is a good idea if your goal is to achieve one or more of those things sooner rather than later. It also assumes you're doing something you enjoy as an entrepreneur/self-employed/small business owner so the whole "FIRE date" thing isn't as important as it is to someone with a 9-5 who doesn't exactly love having one.

Still, your point about throwing it at your stache is a good one. Having access to more liquid wealth is another way to enable more risk taking (since you've got a giant cash cushion). Tying it up in your home isn't going to give you that.

jooniFLORisploo

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #6 on: June 27, 2017, 08:07:47 PM »
For me, the answer was yes. I just wanted to be free and clear, know what I'm working with in any given moment, etc.

People who intentionally avoid paying off their mortgage are focused on an investment strategy (gaining more by putting the difference in stocks).

So, just different life strategies.

nara

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #7 on: June 27, 2017, 08:34:40 PM »
As an an entrepreneur...no. I prefer to take whatever extra capital I have to reinvest in my business. My mortgage is fixed and in 25 years my $1200 monthly payment will be reduced by inflation. Meanwhile, taking the extra money I would have thrown toward my mortgage and reinvesting it in my business is likely to produce a return far greater than my 3.75% mortgage interest.

jooniFLORisploo

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #8 on: June 27, 2017, 08:58:12 PM »
I like nara's post, and want to clarify that as a resident of Canada, I didn't/don't have that option for locking in low rate for entire mortgage time. So for me, the whole suddenchangingmortgagerate was too much of a wildcard. I was comfy with a certain number and type of wildcards only.

FIREby35

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #9 on: June 27, 2017, 09:58:28 PM »
Hmm, I don't like the idea of investing money back into my business with a significant liability on the other side of the balance sheet. I mean, I did it for five years while building my business to a certain level. But, as soon as a reasonably could, I paid off all debts.

I suppose if you are going to put your cash into index funds and compare it to paying off a mortgage that is one possibility. If you are talking about putting your capital back into your business then that is a different thing. It's true you get better return from a successful business than from index funds. "Putting it back into a business" can mean many things but (to me) it doesn't imply sitting on index funds that can be used when a cash flow issue rises up. So, I'd say no debt enables being able to invest "into the business" rather than simply in index funds and "into the business" will likely yield a higher return than index funds.

Again, don't get me wrong. I've got a bunch of index funds. We actually have a rule that for every 100k I have in index funds I can use 25k on a business opportunity. That is based on the assumption of no debt and a continued accumulation of index funds - which I consider pretty safe assets.

I have also seen people who just kept plowing money back into their business leveraging more and more and more and then when the damn thing came crashing down they had nothing. I've seen multiple attorneys get foreclosed on when their practices dried up. I'll tell you if my business flops then my personal assets, which are significant, are protected. I will have a home, index funds and multiple side bets based on the above described "rule."

I sleep pretty good at night.



jooniFLORisploo

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #10 on: June 27, 2017, 10:00:41 PM »
Yep, I let myself put a certain amount of my NW into new business schemes. It's fun :)

Kyle Schuant

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #11 on: June 27, 2017, 10:03:30 PM »
No matter what, debt-free ASAP.
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FIREby35

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #12 on: June 28, 2017, 06:37:39 AM »
Yep, I let myself put a certain amount of my NW into new business schemes. It's fun :)

It's part of the reason I can't really see myself "retiring." When I first found MMM I started counting my FIRE number like all the employees but only later realized, "Wait, why would I quit doing this. It's fun!"

Anyway, yes. New business schemes are fun.

CargoBiker

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #13 on: June 29, 2017, 03:47:50 AM »
It seems like a good idea to me. Having to pay a mortgage is just another cash outflow that inhibits one's ability to take risks.

I am not risk adverse.   This has created both wonderful successes, and some pretty dumb failures as well.

I like the idea of having a paid-off house, as a hedge against potentially poor decisions made by my future self.

With a paid off house, and no debt, you're kind of set for life. If worst came to worst, and my business crashed and I lost everything, I wouldn't have any pressure to pay bills.  Nothing that a random part-time job, or some craigslist hustling, couldn't pay.
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limeandpepper

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #14 on: June 29, 2017, 04:00:35 AM »
My partner is a freelancer and I think he definitely feels more secure with a paid-off property. Without a paid-off property i.e. if we are renting or if we have a mortgage, he would more strongly consider taking on a full-time job, this is something we've discussed before. But with a paid-off property with low outgoings, plus an emergency fund, he's not as concerned about the feast and famine aspect of the freelance lifestyle, and would be happy to keep freelancing.

jooniFLORisploo

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #15 on: June 29, 2017, 06:37:36 AM »
Quote
With a paid off house, and no debt, you're kind of set for life. If worst came to worst, and my business crashed and I lost everything, I wouldn't have any pressure to pay bills.

My cheap, paid-off house would still have cost me $8k in property taxes, insurance, water/sewer/garbage and other fees each year, not to mention maintenance (old house). My "lose everything" plan was to WWOOF. Now THAT'S zero bills :)     

Ultimately I sold and have opted to invest the house money, and spend $500-$650/mo on rent. That's been an ideal balance.

FIREby35

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #16 on: June 29, 2017, 06:42:40 AM »
Not that anyone particularly cares, I was thinking about this last night. I was doing my second quarter numbers and, because of our paid off home and significant safe assets, we are in the middle of a major investment into our business. We have invested significant money increasing our workforce (only from 2.5 to 4 people, lol), revamping our website, putting more money into other advertising, building systems and implementing new case management software. Our new average monthly costs before I make any money is at an all-time high, 22k a month!*

So, what does it have to do with this thread? I got to thinking that if the entire business totally stopped and never earned another penny but somehow I decided to soldier on for a year in that situation (an extreme hypothetical, I know) I'd have a paid off home, hundreds of thousands in index funds and my side bets still kicking. I'd be able to shut down the business and work part time at Wal-Mart with no problems. Actually, I'd message SC93 and learn how to flip washers and dryers :)

It was a liberating thought. Especially because we are investing significant sums of money back into the business at this particular moment and that can be stressful when you start with a "low overhead," MMM style mindset.

* Don't be concerned. We had our best two quarters ever. I'm not expecting that to continue and my particular type of firm's gross receipts fluctuate wildly based on when cases settle. Still it's been a very good two quarters.
« Last Edit: June 29, 2017, 06:44:29 AM by FIREby35 »

Kyle Schuant

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #17 on: June 29, 2017, 10:11:53 PM »
As others have commented: being debt-free gives you freedom.

We have one investment property, and our own we live in. We owe $180k on it. Essentially we spend $30k, are taxed $30k, and put $60k onto mortgage each year. So in 3 years we'll be clear of it all.

At that point we'll still need $30k pa income if we don't become more frugal or more spendthrift. We get $20k pa rental income, so we would need $10k more from work. In Australia where full-time minimum wage is $37k pa before tax, and about $30k after tax, that's not a big ask.

Even now we have $330k in our offset account, so if we didn't mind taking longer to pay off the debts, if one or both of us got sick of our work, we could stop it for a year or two, study or otherwise look for something different.

Whatever job or business you're doing will have stresses. These stresses are not as bad if you know that you can walk away at any time.
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CargoBiker

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #18 on: July 07, 2017, 09:52:22 PM »
My cheap, paid-off house would still have cost me $8k in property taxes, insurance, water/sewer/garbage and other fees each year, not to mention maintenance (old house).

Yeah, I know, that's what I mean.  8k/a year is basically nothing, and is not a risk.    Any job could be obtained in a week or two that could more than cover this cost.  Or, I could flip a few washer/dryer sets a month on Craigslist and still pay the bills.
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jooniFLORisploo

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #19 on: July 07, 2017, 09:58:04 PM »
^ Yep. If $8k (after paying the $130-$500k for the house itself) is nothing to a person, it can definitely be a fit. For me, $8k/yr after paying $130-$500k for a house sucks, so I went the cheap rental route.

Both are fair, and if someone was able to pick up a house for, say, $50k, all the better!

oneyear

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Re: Should entrepreneurs pay off their mortgages early?
« Reply #20 on: July 08, 2017, 01:44:00 AM »
I set my mortgage 10 years ago at 5.49% - yeah I didnt know how mortgage rates would go and needed assurance of outgoing costs. I started my business that year. Thankfully I was able to pay it of early and although the actual event of making the last payment was underwhelming, everyday knowing we will never need to worry about house payments makes up for the 80,000 extra I'd currently have in my vanguard account today.