Just sold $125k of stocks to payoff mortgage

[AlexK]

The mortgage is a rental property at 5.9%, refinance was possible but high closing costs has kept me from doing it. It seems reasonable to me to go for almost 6% guaranteed return as opposed to stocks.

Feel free to mock if stocks rally next week.

[Malaysia41]

Sounds wise.  I know that the conventional wisdom here is keep $ in ETFs and maintain the mortgage, which I mostly agree with esp at a 3% APR.  But 6% is more compelling.  In 6 months you'll either be laughing smugly, crying in regret, or still thinking, 'meh'.  Who knows! 

If our mortgage was at 6% I think I'd do the same as you.

[brandino29]

Maybe others would completely disagree with me here but my thinking is that you just locked in a lot more than 6% return considering how high the stock market has climbed in the last couple of years.  Assuming you were piling in cash into the Vanguard Total Stock Market index fund back in early 2009, you've more than doubled your investment, and you just locked in those gains by selling, plus you used it to pay off the 6% mortgage. 

The market could certainly continue to climb, but nobody knows the future, and now you have a paid off mortgage.  Win/win in my book. 

[Another Reader]

How much short and long term capital gains tax do you now owe to the feds and the state?

[AlexK]

How much short and long term capital gains tax do you now owe to the feds and the state?

About $2500. I'm guilty of trading this account too much in the past.

This was money I had been saving since 2011 to buy another rental property, however the prices in my area have gone up so much it's not worth it now (5% cap rates). Assuming that's true I should sell the properties I have. And then buy stocks? The hard choice we all have to make now is which overpriced assets to buy and hold.

[Another Reader]

You hit the nail on the head.  My conclusion is to hold the "overpriced" assets that produce a solid, consistent income.  I am taking the Warren Buffett view that day to day (or year to year) price fluctuations are interesting, but insufficient to divert my attention from the current income and the growth in both income and value over a long time.  Trading around in real estate costs you more in transaction costs than you can make up in short term improvements in cap rate.

Right now "cash is trash" because the world is awash in liquidity.  There is just too much money chasing too few assets.  In my view, the liquidity will drain out of the asset markets quickly at some point and cash will become a lot more "valuable" and useful.  Being an older and therefore more patient investor, I'm willing to hold on to some of that green stuff, even if I lose to inflation in the short term.

And if you have just too much green stuff, paying off a high rate mortgage is one of the better uses of cash.

[Malaysia41]

Maybe others would completely disagree with me here but my thinking is that you just locked in a lot more than 6% return considering how high the stock market has climbed in the last couple of years.  Assuming you were piling in cash into the Vanguard Total Stock Market index fund back in early 2009, you've more than doubled your investment, and you just locked in those gains by selling, plus you used it to pay off the 6% mortgage. 

The market could certainly continue to climb, but nobody knows the future, and now you have a paid off mortgage.  Win/win in my book.

Yes - bird in the hand.

[SDREMNGR]

Did similar.  Sold out of much of stocks and bought a house using it as down payment.  I'm still putting in about $2000/month into stocks in IRAs but glad I took the taxable stuff out and put it elsewhere.

[soccerluvof4]

There is the emotional value of being Mortgage free that has some much added value to some as well. As long as you still have some investments to remain diversified I think it was a good move.

[RapmasterD]

I would have done the same.

Don't look back. Don't second guess. That was a very high rate you were paying.

[AssetGrinder]

At 6% interest you made the right call. I woulda done the same in a heartbeat. If interest rates were 0-3% then its a different story

[Tyler]

Great decision, AlexK.  Congrats!  Paying off a mortgage is a great accomplishment.  Doing so with an interest rate near 6% is even sweeter. 

[clifp]

At 6% interest you made the right call. I woulda done the same in a heartbeat. If interest rates were 0-3% then its a different story

Yup me too. At 6% risk free absolutely yes, at 5% probably at 3.5-4% pick em and at 3.5% or less I'd keep the mortgage.

[Khan]

Can't argue with a 6% guaranteed return. Especially one which (presumably) makes you sleep better at night.

I know I'd sleep better at night without mortgage debt.

[kyleaaa]

Your guaranteed return isn't 5.9% unless you ignore the effect of taxes. And since you probably paid capital gains taxes on those stocks in order to pay off the mortgage, your guaranteed return is a LOT lower than that. You'd have to do the math, but your return for paying off the mortgage isn't anywhere close to 5.9%. Don't fool yourself.

[rmendpara]

Can't argue with that. A 6% guaranteed return is about as good as it gets, especially in a strong market where you were able to use some investment gains to help come up with the amount.

Hopefully you can hang onto the property, and start using the enhanced cash flow to rebuild some liquidity and start reinvesting where it makes sense.

Great news!

[Cyrano]

With the S&P earnings yield at 5%, it's hard to argue against your call.

[Bob W]

Individual real estate is such a risky headache.  I would have sold the property at the inflated rates and considered putting the money into a high quality REIT.   The beauty of a REIT is that they give you real estate exposure but they are super liquid.  Many of them are debt free and average 10+ % returns. 

PS.  I'm hoping that you own the real estate as a corporation of some sort  (even a LLC might help in your state?) and not as an individual with essentially unlimited liability??   I only ask this as you stated "you" took this action and not "my corporation."