Author Topic: Due to 8 Year Bull Market, Pay Off Rental Now?  (Read 1808 times)

quietgrit

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Due to 8 Year Bull Market, Pay Off Rental Now?
« on: August 13, 2017, 04:23:23 PM »
Here's our situation.  We are saving 60% of our income via:

Maxing out 2x 401K's
Maxing out 2x IRA's
Contributing to 3x529's
Paying $2000/month extra on our rental principal.

We owe 60K on a rental property and receive $1300/month from the tenants.  The PITI payment is $750/month. 

We get the math behind keeping a mortgage and investing in low cost index funds.  However, according to the MMM blog post "Great News: There’s Another Recession Coming", the post states now is a good time to pay down a mortgage.  We have an 8 year bull market behind us.  Because of this, we are considering stopping all the investments (except the 401K up to the match), and applying every extra penny towards the rental property to pay it off in around 10 months.  We just want to be done with it and enjoy the passive income the property will generate.

So, given the current market situation, does it make sense at this time to pay that mortgage down aggressively?

rab-bit

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Re: Due to 8 Year Bull Market, Pay Off Rental Now?
« Reply #1 on: August 13, 2017, 04:51:47 PM »
For what it's worth, we are doing the same thing for the same reasons, but I'm very curious to hear other opinions.

Kayad

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Re: Due to 8 Year Bull Market, Pay Off Rental Now?
« Reply #2 on: August 13, 2017, 10:17:14 PM »
Even if you have high confidence the stock market will swoon in the near future (I'll leave the market timing debate to others), I think you should at least keep maxing the 401ks for the tax benefits, even if you don't want to invest the contributions in the short term.

I am guessing that you are not in a low tax bracket, since you would be able to pay off a 60k mortgage in 10 months.  In that situation, the tax benefits to the 401k contribution almost certainly are much greater than your mortgage interest rate (maybe something like 25% in tax deferred savings versus ~4% mortgage interest rate?).  This depends to some degree on your particulars (when will you start drawing from retirement savings, what is your likely interest rate at that time, what is your mortgage rate, etc.), but I doubt it is a close call.

If you are really confident a market correction is impending, you could just shift your new 401k contributions into a money market fund or some low volatility option for a time.  A secondary consideration is that you only get so much space each year to shovel money into accounts that can grow tax free.  That space is valuable, especially if you won't make withdrawals for a while. 

Even if you decide to stop putting money into retirement accounts for a bit, the second question is whether paying down the rental mortgage is the best use of that cash flow.  I understand the psychological security of owning property free and clear, but that doesn't mean its the most economically rational decision.  There is a pretty good argument that a reasonable amount of low-interest mortgage debt is good debt:
-The mortgage interest is deductible against the rental income.  That's a remarkable government subsidy of your mortgage.
-A low-interest mortgage is a good inflation hedge.  Failing another housing market collapse, I look forward to paying the 2017 mortgage on my rental property in 2027 dollars I receive from my 2027 rental rate.

The question is , does it make more sense to save for a downpayment on another rental property or make some other non-stock market investment (any other debt?) rather than pour everything into this one mortgage? 

srad

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Re: Due to 8 Year Bull Market, Pay Off Rental Now?
« Reply #3 on: August 14, 2017, 08:15:34 PM »
Have you thought about what it would look like if you just refinanced that 60k on a new 30 year loan?  This would drop your payment to a whopping $250 a month (P&I) and allow you to invest that 60k into another income generating asset...  To me, id rather have mortgage debt now (while im still relatively young) and have more money free to place as i choose. Last year i cash out refi'd one of my rentals and purchased 3 more properties, that added 2k Net per month to my rental income.  Had i just paid that initial rental off, I'd of been netting around 1700 a month.  So yes, my debt ballooned, but my tenants are paying it, and like Kayad said, I can't wait to paying these 2017 mortgages with my 2027 Rent checks.

60k could get you one or two more properties which could increase your net by several hundred a month.


runewell

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Re: Due to 8 Year Bull Market, Pay Off Rental Now?
« Reply #4 on: August 15, 2017, 02:33:20 PM »
the post states now is a good time to pay down a mortgage. 
So, given the current market situation, does it make sense at this time to pay that mortgage down aggressively?

Actually, what he said was,

Quote
With the stock market at higher price-to-earnings ratio than usual, there is less harm in paying off your mortgage earlier

If you believe stocks are highly valued and that lower-than average returns are on the way, it can make the return on investment from a mortgage paydown look attractive.  Remember it doesn't have to be either/or.  If you are investing $1,000/month you could go $750 401k and $250 mortgage.