Pay Down vs Invest

General Real Estate Investing
1

I currently have enough money to pay down 65% of a California townhome I plan to live in, but that money

could easily buy several investment properites in other parts of the country.

My uncle is a real estate agent who owns a property management company. He told me if I decided to buy

property in his area he could put me in contact with a birddog and set me up with some nice investment

property.

My question is, should I go ahead and pay down my house or buy rental property and let that pay my

mortgage?

2

verona,

wow great question.

the answer is…and you know this already…IT DEPENDS.

i’d say since you can’t pay it OFF IN FULL, you should at least consider using it to invest.

it depends on how comfortable you are with real estate and how much “risk” you’re willing to take.

remember this…in order to get the fruit you must go out on the limb to get it.

wax on…wax off… :stuck_out_tongue:

3

Invest. Invest. Invest.

By putting that money on your mortgage you get no benefit other than shortening your amortization period. It will give you no rate of return, and will not be liquid. You would be better off spreading that money out over a couple of investment properties.

4

You can’t spend the same dollar twice. If you pay down your mortgage, you have your house but you don’t have the investment property and you don’t have the opportunity that the cash provides you. If you buy an investment property with the money that investment property could pay your mortgage. If you do that you get both your house the investment property and the effects of paying down your mortgage. So buying an investment property is kind of like spending the same cash over and over again.

5

There is such a thing as good debt. Good debt being in an instrument such as real estate that is going to
#1 Pay the debt for you and
#2 Make a profit for you
If you pay down your debt all you have is paid down debt that does not earn you anything but equity.

6

The rate of return is by default the interest rate.

I do agree that you should invest but be careful about the “my investment property will pay off my mortgage idea”. Yes, some investment properties can generate some cash, but its not a free lunch. It will take some effort, some luck and picking out the RIGHT deal. REI is not for everyone, but you should try it as its a great way to make (or lose) some money.

7

I agree with the others - invest IF YOU CAN MAKE MONEY. Do some thorough research on cash flow and operating expenses. Then, you can accurately decide if the rental properties you are looking at are “nice” or not. Cash flow is EVERYTHING with rentals. Do a search on ‘cash flow’ and ‘expenses’ on this website.

Good Luck,

Mike

8

There is an awesome book out there called " Missed Fortune" by Doug Andrews. He talks about why you should not trap all of your equity in your home. His point is this. Even if you were to take out a 30 year loan and pay extra on that mortgage every month you would then have to pay a bunch of closing costs on a new mortgage to get that money back out. And you have to show proof that you can afford to pay back your own money. The other cool point of this book shows you how you can put that same amount of extra cash to work for you and make enough interest to pay the home off early anyway. If it were me… I would buy 10 houses a year that will give me $200 per month net cash flow. Thats $2400 a year per house and $24,000 total extra income by owning 10 properties. Now take the added benefit of reducing how much you owe the IRS every year because you now itemize your deductions every year.
And on top of that the renters are paying down the mortgage on the property you own.
I love investment property. It makes me giggle.