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
When you have a loan balance on your property you in turn show less equity. Less equity means there is less you have available to take. Lawyers do not like going after people that don’t have any money to take and are less likely to take on that slip and fall case where they only make a percentage of what they get out of you!
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.
I also used to think leverage was bad. Leverage isn’t bad, it’s the way people use it that is bad. Leverage can be one of our most powerful investment friends and I believe that holds true in real estate especially.
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!