The Reasons Why I Don’t Pay Off My Mortgage Balances
For a long time my mindset was always that the sooner you can pay off a mortgage balance on a property the better. A few years ago that view began to shift and now I’m fully on board with not paying it down ahead of schedule.
There are a couple good reasons why it is better not too.
The Reasons Why I Don’t Pay Off My Mortgage Balances
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Risk Mitigation
Seems crazy, but having debt protects you. And you don’t need to necessarily have a traditional mortgage balance to do this, you can take out a home equity line and the amount of that line will show as a debt, whether you have accessed the line or not.
Now, please note I am not a lawyer and you should seek advice from the correct counsel, but the above is something to ask about and consider.
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Leverage
Let’s say I have a $100,000 balance left on a rental property and just so happen to have $100,000 sitting in the bank ready for use.
I could use the money to payoff the balance and have a rental property free and clear, thus keep much more of the cash flow from it, but that is all I will have then.
No leverage being used at all in that scenario. If instead I use that $100,000 on down payments for four more properties that cash flow I have just more than quadrupled my rental portfolio and can bring in the same amount of cash flow between them had I just paid off the one.
Best part is I’m building more wealth as the additional properties are methodically being paid down by the rental income, thus creating equity!
The key component however is that the properties cash flow. This is why we must run the numbers through property calculators and perform due diligence to input reliable cost estimates.
We don’t need to worry if a market is going up, down or sideways. As long as the rent payments are coming in then the operating costs are covered and the cash flow comes in until the house is paid off from other people’s money!
This is why I preach that you must “buy right.” If you don’t know how to buy right then you better get to reading ScaredyCatGuide to Investing in Rental Properties!
In the upside down Bizzaro financial world we live in, you are indeed correct.
If the loan you got for a house was actually someone else's money that needed to be returned to them, then paying off the house is important and good.
But, when money is created out of thin air, getting the most thin air money (by mortgaging) is the way to do things. As soon as you pay off the loan, the money disappears. Everyone, especially you, are poorer.
This is why so many house people buy a house, fix it up, and then remortgage it for the new higher value. It pays for itself. It shows up better on the books. And the cash is not stuck somewhere it can't be used.
Can absolutely confirm this is the lawyer mindset... we're starting to take legal action on someone and our lawyer said that he never would have taken the case if we didn't also have a strong case against the guy's employer as well. We don't care about the employer ourselves, but he's after those big company insurance dollars to make it worth his while.
Not to make out that the lawyer is greedy. He's running his own business, and that business model is a gamble. He only gets paid if he wins... so his wins need to offset his losses.
Yep, it's all about figuring out people's motivation and then protecting yourself from it.
Part of what you are talking about is a concept called "the time value of money", or as they say "2 in the hand is worth 1 in the bush".
100,000 cash in your account is more valuable than a 100,000 more in rent revenues across 20 years. Because you have to wait 20 yrs for the rent income.
One more thing, are you at all worried about a major financial collapse and what that would mean for mortgage interest? Or for the rental market?
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Yeah, I am wary of the market as I think we are in the late innings of a cycle, but in the end we are still at historically low interest rates so now is a better time to lock in then later. As for the rental income I actually think recession are better for rental demand as you have less people able to buy (or hold onto) their homes.
In the end though, this is why I always have atleast 20% equity in my rentals and a nice buffer of cash flow. If I get vacancies a chunk of it is built into my calculations already.
I own one place, but I hear some people say, that the entire economy will collapse. Not just recession but de-dollalmk
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Yeah, I have been waiting for the dollar to collapse for some time. Odds are I will be an old man before it happens.
Wooow! That debt protection system is something that I would never think about... I guess it makes sense, why would the lawyer take a case that he would never gain anything.
That's a good idea, but there is such a thing as overleverage, do you do any math to know the max amount of leverage you can take?
I'm conservative. I always put 20% down so I have some equity in case I need the buffer. In the end though if it's a rental property and it cash flows that is the most important thing.
Good thoughts... I have a mental block about debt as I hate to owe anyone money! Also consider that leverage is also good for taxes as interest are deductible for tax purposes!
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Love them tax deductions!