Author Topic: Pay Mortgage Off Early or Sit in my Bank Account  (Read 901 times)

swirleyDude

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Pay Mortgage Off Early or Sit in my Bank Account
« on: January 10, 2021, 01:57:43 PM »
I just bought my first property - a duplex. I'm considering buying a second multifamily, and I estimate I'll need $50k in cash to do that. Assuming I can save $2k per month, should I let that money sit in a bank account or pay off my mortgage early?

  • If I save $2k per month, that will take 25 months.
  • If I contribute an extra $2k to my mortgage per month, I'll have an additional $50k in principle within 20 month.

Option #2 looks better, but I think I might be over looking something.

SwordGuy

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #1 on: January 10, 2021, 03:01:22 PM »
I believe in the US mortgage interest on rentals counts double in your favor, once as an expense and once for depreciation.

Also, can you cashflow a bunch of major repairs in close time proximity.

swirleyDude

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #2 on: January 11, 2021, 05:28:23 PM »
I believe in the US mortgage interest on rentals counts double in your favor, once as an expense and once for depreciation.

Also, can you cashflow a bunch of major repairs in close time proximity.

Do you think I can save thousands of dollars by writing off interest?

RWD

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #3 on: January 11, 2021, 06:58:51 PM »
What's your plan for gaining access to the funds for the next investment if you use it to pay down the mortgage?

SwordGuy

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #4 on: January 11, 2021, 07:19:20 PM »
I believe in the US mortgage interest on rentals counts double in your favor, once as an expense and once for depreciation.

Also, can you cashflow a bunch of major repairs in close time proximity.

Do you think I can save thousands of dollars by writing off interest?

Sorry, wasn't clear.   If you invest that extra cash instead of pay down the mortgage, you're more likely to end up with more wealth over time.   The double-counting of mortgage interest for tax sheltering purposes just makes that easier.

That said, there are times when paying off the mortgage is a better choice.  Check out the Don't Pay Off Your Mortgage thread for a bazillion posts on the topic.

uniwelder

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #5 on: January 12, 2021, 06:35:10 AM »
@swirleyDude  It sounds like you really need to take a step back and learn about rental properties before buying more.  Getting a grasp with business expenses, deprecation, repairs, investment mortgages, and everything else that goes along with being a landlord, particularly understanding case by case whether rental properties even make sense financially.  I'm not an expert--- I do own a few and I'm still learning as I go, but understanding the basics is critical. 

Paying down a mortgage isn't useful unless you plan on getting a HELOC or cash out refinance to help pay for the next property.  It wraps up that cash you want access to and if for some reason its foreclosed, your extra equity in the property doesn't help you and is just more cash you'd lose.  If you were asking about paying off the mortgage in one lump sum, that would be different.

I'm assuming you rent out one side of the duplex and live in the other?  Mortgage interest is a business expense, but probably half, unless you're renting your side to yourself (again, not an expert).  Depreciation is based on the purchase price and is a fixed annual amount regardless of your other expenses/income.

Until you have a clear plan and better understanding, it sounds like banking the money is what you should do. 

srad

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #6 on: January 12, 2021, 08:52:24 AM »
Option 2 will not get you a second rental.  Have you tried to get a HELOC right now?  Very few banks are giving them out right now and the one I found wanted 7%, at a variable rate so its going to go up (eventually).. Refinancing with a cashout on a rental is also very expensive way to pull out money.  Be sure you are sitting down when you get your Initial Truth in Lending statement.  its going to shock you how much that loan will cost.

Not sure how much money you have in the bank but you need to have a pool of funds for repairs and potential loss of tenants payments, especially during covid.  As each month goes by, more and more of my landlord friends say they have someone not paying due to Covid.

swirleyDude

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #7 on: January 15, 2021, 06:03:42 PM »
Paying down a mortgage isn't useful unless you plan on getting a HELOC or cash out refinance to help pay for the next property.  It wraps up that cash you want access to and if for some reason its foreclosed, your extra equity in the property doesn't help you and is just more cash you'd lose.  If you were asking about paying off the mortgage in one lump sum, that would be different.

I'm assuming you rent out one side of the duplex and live in the other?  Mortgage interest is a business expense, but probably half, unless you're renting your side to yourself (again, not an expert).  Depreciation is based on the purchase price and is a fixed annual amount regardless of your other expenses/income.

Until you have a clear plan and better understanding, it sounds like banking the money is what you should do.

This makes sense. I think I'll just sit on the money

Not sure how much money you have in the bank but you need to have a pool of funds for repairs and potential loss of tenants payments, especially during covid.  As each month goes by, more and more of my landlord friends say they have someone not paying due to Covid.
I already have 25K set aside for emergency repairs, so the money I was talking about is outside of that.

terry1979

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Re: Pay Mortgage Off Early or Sit in my Bank Account
« Reply #8 on: January 16, 2021, 12:24:39 AM »
People are letting their mortgages ride with such low interest rates. And they are investing in the stock market. Which kinda explains why the S&P 500 is at all time highs even during this pandemic. And no sign of it going down!