The typical answer to the question above goes something like… “well, to be honest, this is a difficult question because everyone’s situation is different blah, blah, blah.”
I’m here to tell you while everyone’s situation is different, generally speaking, the answer to the question is a resounding NO, you should NOT pay off the mortgage on a rental property.
Though there are dozens of reasons as to why, here are my top 3.
1. Leveraged returns
Assume you have a $25,000 down payment and a $75,000 loan on a $100,000 home.
If the home appreciates to $125,000 over time the return on capital invested is not 25% of $100,000. Your return is actually 100% on the $25,000 invested.
2. Tax benefits
When telling me about her rental portfolio a client of mine stated “I love real estate because every nail you put into a house is a tax deduction.” That phrase has stuck with me to this day and whether it’s a nail or the interest on your mortgage, the tax benefits of owning real estate are nearly unparalleled.
3. Opportunity Costs
Imagine lining the walls of your investment property with dollar bills. What else could you be doing with those funds?
Do you have sufficient liquid savings or precious metals? How about diversifying into retirement funds or taking your entire family on vacation?
Don’t get me wrong. Being responsible and paying people what you owe them is a good thing. Also, a good thing is recognizing good debt vs. bad debt, a concept described in more detail by Robert Kiyosaki in his book Rich Dad, Poor Dad.
Managing emotions and becoming financially educated in today’s era of fiat currency is critically important.
In my opinion, being financially free (having passive income in excess of your expenses) beats being debt-free every time.
If you’d like to learn more, I’m happy to assist!
Our mission is to help passive investors become financially free by providing high-quality alternative investments — if we can help you in that way, it would be an honor to do so. Feel free to schedule some time for us to chat.
Until next time…