Author Topic: What's a good way to think about this  (Read 316 times)

jnc

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What's a good way to think about this
« on: July 22, 2020, 04:16:38 AM »
I know that if you have debt, you're generally best served paying off the debt with highest interest rate first.

What about investment properties with a traditional fixed rate mortgage against them? If you had some cash and wanted to pay down some mortgages, would you still choose the one with the highest interest rate? Or would you not care about the interest rate and just choose the one with the best return on investment? Or perhaps something else altogether.

I am having trouble wrapping my head around the best way to think about this.... The reason for deploying the cash in this way is that I took some gains out of the stock market and would like to use them. Having increased cash flow is appealing because I am looking to FIRE in the near future.... Of course, there are many other options (such as buying a new cash flowing property for instance) but i'm just trying to figure out my question above.

Thanks!

matchewed

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Re: What's a good way to think about this
« Reply #1 on: July 22, 2020, 06:55:35 AM »
If the goal is increased cash flow in the near future will any of this money close out any of the mortgages? Paying off the mortgage will increase your cash flow. If it is competing mortgages then the one with the highest interest rate would be the best bet.

Just arbitrarily paying some off and not all will not do anything for increasing cash flow today.

srad

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Re: What's a good way to think about this
« Reply #2 on: July 22, 2020, 10:43:14 AM »
You pay off the lowest mortgage balance first.  As Match said, paying some but not all does nothing to your cashflow.  If you are young and only have one or two rentals, I'd say pick up more properties now vs paying off one.   Build a portfolio with debt, Then as you get closer to pulling the fire ripcord, start paying them off.

FWIW - last month I had some money left over from the sale of our primary residence and paid off my lowest interest rate mortgage.  It was at 3%, my highest rate is 4.5% (I'm currently in the process of getting this and all my other's refi'd) , but the balance on the 3% was around 90k.  Balance of the 4.5, 300k.  I'f i'd of taken my 90k and put it towards the 300k, i'd still have the same monthly mortgage payments.  Now I have one less mortgage and am really looking forward to the extra 1k I"ll be getting in cashflow each month.

waltworks

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Re: What's a good way to think about this
« Reply #3 on: July 22, 2020, 11:49:16 AM »
Look, it depends on whether you *need* the cashflow. Financially, you're better off paying the highest rate stuff first, though it's less satisfying that paying off the smallest loan first.

Remember that mortgage interest is deductible. You can cause yourself real problems (ask me how I know) by paying off a mortgage and suddenly having a lot higher income to deal with for income taxes/ACA subsidies/etc.

-W

jnc

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Re: What's a good way to think about this
« Reply #4 on: July 22, 2020, 02:52:20 PM »
Thank you for your replies. I do have 11 properties but up until now, I wasnít really looking to pay down any and would just try to buy new ones. Paying off the ones with the lowest balance makes sense. Thatís what I was starting to realize too.

Cheers!