Author Topic: Pay off the mortgage or invest?  (Read 6719 times)

eli2014

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Pay off the mortgage or invest?
« on: June 24, 2014, 10:19:41 AM »
I'm curious about opinions on what to do with 500K? We could pay off the mortgage on our rental property and have a bit left over. If we did, the rental property would start generating income (big part of our retirement plan). But the interest rate on the mortgage is really low (3.5%) so we are wondering if we should invest it instead. The appeal of paying off the mortgage is that we would end up with a passive income stream that would almost be enough to cover our core living expenses thus bringing us closer to our goal of early retirement.

Thoughts?

skunkfunk

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Re: Pay off the mortgage or invest?
« Reply #1 on: June 24, 2014, 10:55:29 AM »
I'd pay it off, but that's just me. That is a risk-free 3.5% investment with no tax liability, essentially. You can't get that anywhere else right now. A good hedge against equities, in my opinion. It decreases your monthly expenses, too, which is invaluable peace of mind in my book.

matchewed

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Re: Pay off the mortgage or invest?
« Reply #2 on: June 24, 2014, 11:03:28 AM »
My thoughts are that this will be up to you. Run the numbers and choose the path which supports your long term plans. What is the 500k in now? Was it a real estate sale? Did you pull it from investments? Why did you do those things (if you did) and how do they jive with your long term plans?

nereo

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Re: Pay off the mortgage or invest?
« Reply #3 on: June 24, 2014, 11:53:27 AM »
at 3.5% I'd invest the majority of the 500k in the market - maybe all of it. If history is our guide, chances are over the next 10+ years you will get more than 3.5%. 

Of course, either strategy is a decent place to put your money.  DO what is comfortable for you.

JDarnell

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Re: Pay off the mortgage or invest?
« Reply #4 on: June 24, 2014, 12:03:10 PM »
Where is the $500k now? 

JDARNELL

eli2014

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Re: Pay off the mortgage or invest?
« Reply #5 on: June 24, 2014, 12:59:19 PM »
It's sitting in a savings account.

bo_knows

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Re: Pay off the mortgage or invest?
« Reply #6 on: June 24, 2014, 01:06:36 PM »
It's a win/win scenario.  Do what makes you sleep better at night.

http://www.mrmoneymustache.com/2012/02/24/pay-down-the-mortgage-or-invest-more-a-winwin-question/

AssetGrinder

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Re: Pay off the mortgage or invest?
« Reply #7 on: June 24, 2014, 06:23:54 PM »
Very good question on what you should do. Given the market is overvalued right now and we are in a 5 year bull run the safe bet is to pay off your mortgage. Money is cheap to borrow right now and too many people are using borrowed money to play the market. History has shown when people over leverage themselves in the market the market yields often much lower during those periods.

But the good thing playing the market is that if you receive dividends which are taxed at a lower rate than your rental income if you were to pay it off.

Ultimately its a tough call. You could go both ways and it wouldn't be the wrong choice.

What I would do in your shoes? which I kinda am as well.
I would pay 50% of the mortgage off, use 20% to buy another cheap property and then invest the last 30% in the market. Once there if a good market correction then put more money into the market from borrowing against your first rental. I feel the US housing market will rebound in the next few years so now is a good time to buy I am thinking.

best of luck!

rmendpara

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Re: Pay off the mortgage or invest?
« Reply #8 on: June 24, 2014, 06:33:14 PM »
I'm curious about opinions on what to do with 500K? We could pay off the mortgage on our rental property and have a bit left over. If we did, the rental property would start generating income (big part of our retirement plan). But the interest rate on the mortgage is really low (3.5%) so we are wondering if we should invest it instead. The appeal of paying off the mortgage is that we would end up with a passive income stream that would almost be enough to cover our core living expenses thus bringing us closer to our goal of early retirement.

Thoughts?

Ignoring the effect of market timing (as in assuming neither stocks, bonds, or real estate have a significant bull run), you are *almost* equal regardless of what you decide to do.

If you pay off the mortgage now, you will have a ton of cash flow each month... which you will then invest.

If you keep the mortgage, you will have less cash flow each month, and you will slowly/consistently build equity until the mortgage term is over.

Mathematically, there is a benefit to keeping the mortgage if you think you can beat the return on your investments in the market, however, you're not really comparing apples to apples as a guaranteed 3.5% savings is NOT THE SAME as a 3.5% return at risk in the market.

In theory, you can outperform by levering up at the bottom of the stock market (i.e. 2001, 2009) and investing the extra cash, but since we are not wizards, there is no guarantee you will be right... only time will tell.

The opposite is also true, you will underperform if you lever up at the top of the stock market (i.e. 1999 and 2007).
« Last Edit: June 24, 2014, 06:35:21 PM by rmendpara »

waltworks

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Re: Pay off the mortgage or invest?
« Reply #9 on: June 24, 2014, 06:54:09 PM »
Your tax situation (ie mortgage interest deduction) would probably be worth figuring out. If I were in a relatively high tax bracket and itemizing, I'd leave the mortgage alone and invest in stocks. If not, probably mortgage just for peace of mind, though it's probably still not mathematically ideal.

-W

TomTX

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Re: Pay off the mortgage or invest?
« Reply #10 on: June 24, 2014, 08:13:30 PM »
Are there any other good rental properties available in the area? Could you buy one for cash?

How about buying two, with small mortgages and plenty of free cash flow left over?

GGNoob

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Re: Pay off the mortgage or invest?
« Reply #11 on: June 24, 2014, 09:23:06 PM »
Tough decision and I'll probably never have that problem.

Could look into Lending Club? Could generate you a nice stable income with 12-14% returns before tax.

I'd have a hard time investing that much money in the market all at once because I would not want to invest at the top of the market. So if I had a large chunk of money, I'd put it in Lending Club. Otherwise paying off the mortgage or buying a new rental property wouldn't hurt.


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TheSimpleLife

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Re: Pay off the mortgage or invest?
« Reply #12 on: June 24, 2014, 09:50:13 PM »
I'm curious about opinions on what to do with 500K? We could pay off the mortgage on our rental property and have a bit left over. If we did, the rental property would start generating income (big part of our retirement plan). But the interest rate on the mortgage is really low (3.5%) so we are wondering if we should invest it instead. The appeal of paying off the mortgage is that we would end up with a passive income stream that would almost be enough to cover our core living expenses thus bringing us closer to our goal of early retirement.

Thoughts?

First, you've been given some good advice above.  This decision will be heavily dependent on your personal risk tolerance, your goals, FI plans, etc.  It would be hard to give good advice without knowing more of your personal situation. Please share some of those details if you'd like more accurate responses.

I would suggest that you keep it in the savings account for at least a few months before making any decisions.  Something like "I'm not touching the money for 60 days until I give every angle of this decision a good scrub and consideration."  DON'T BE IN A HURRY AND MAKE A POOR DECISION!

You've also received some poor advice.  Unless the rental property is throwing off a loss each year and your income prevents you from taking passive activity losses, you are getting an interest expense deduction on Sch E of your tax return.  It has nothing to do with itemized or standard deductions.  So, you need to consider your marginal tax bracket X the interest expense taken on Sch E to figure your effective mortgage rate (assuming you are able to take the Sch E loss).

For the most important point which I bolded above in your quote, it sounds like this "rental property" is a poor investment.  At a low fixed rate of only 3.5%, if this property is not cash flow positive you paid too much for it.  You could be investing betting on speculation, but that is a fool's game IMHO.  If the property won't cash flow, consider selling it altogether rather than sinking a few hundred thousand to pay off the mortgage.

Again, please provide more info on how this decision impacts your overall financial picture to get better advice.

skunkfunk

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Re: Pay off the mortgage or invest?
« Reply #13 on: June 25, 2014, 08:24:45 AM »

Could look into Lending Club? Could generate you a nice stable income with 12-14% returns before tax.


Good luck getting that much money into lending club over any reasonable amount of time.

Bob W

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Re: Pay off the mortgage or invest?
« Reply #14 on: June 25, 2014, 08:50:49 AM »
There is a third way that is way less risky and generates more income.  Since you have all your eggs in this 500K investment property that seems very risky to me.   The third way, and what I would do,  is to sell the real estate.   

Whatever is left over (you didn't say the value or equity you have?) you invest in REITs (goggle and research best) and some EFTs or Vanguards.    If you have 200K equity you would generate around 14K in annual income to reinvest.   

The bonus is that you would have very little management duties or phone calls.  It would be autopilot city.   You would also be diversified hugely across markets.   Since REITs generally track different than the overall stock market your Beta would be relatively low.


GGNoob

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Re: Pay off the mortgage or invest?
« Reply #15 on: June 25, 2014, 09:33:32 AM »

Could look into Lending Club? Could generate you a nice stable income with 12-14% returns before tax.


Good luck getting that much money into lending club over any reasonable amount of time.

Yes, that would take a while. But with that much money, you could invest more into each note. Then as you get your payments, they could be re-invested in smaller notes.