Paying off mortgages

Would it be a good idea to pay off rental house mortgages (200k) with 401K money? I would like to use the cash flow (2200k/mo) for retirement income. I am 55 years old without traditional defined pension.

Normally, you would want your rental income to pay off the mortgage.

If you can borrow for as little as 5%, does it make sense to pay that money off?

Can’t you make more than 5% investing in more property with your cash?

Otherwise, if its a wash, then it makes no difference.

There’s so many influences here and things to consider, but again it’s usually more profitable to leverage yourself into as much income property as possible, and let your tenants pay it all back.

Personally, I would not put more equity into a property than it took to control it.

My question back to you is why are you considering paying off an investment loan with your own cash? What is the purpose/advantage?

A 401k is a saving vehicle. You are expected to save a big pile of money and then retire. Piles of money don’t retire you cash flow retires you. I would prefer you turn the 401k money into income buy buying real estate. But what I would do is use the $200,000 to put down payments on 10 other houses instead of paying off that one house. If that house goes down (tenant moves out or stops paying) you are dead in the water. If you have 9 other houses you are nonplused and can go on with your retirement.

As we have seen, the real estate market can be quite volatile, I would never risk my 401k to purchase investment properties. Follow javipa’s advice, make your tenants pay for your investments. Your out of pocket money should pay for the equity only.

By using the power of leverage (bank financing), you can get more properties and get a higher return for very little cost because of the low interest rates. Here is how leverage can help:

You have a property worth $100,000 which you paid cash for it and it rents for $1,000 per month. We will set aside 50% for vacancy and all expenses. This gives you a net profit of $6,000 a year or 6% cash on cash ($6,000 / $100,000).

Now, take that property and refinance it at 20% equity. You now have a $100K property which you paid $20k (not including loan fees which for the sake of simplicity we will leave out). Let us create a 30 year mortgage at 3.6%. Your monthly payment is $363.72. Your cash in pocket at the end of the year is $1,635. You now have a cash on cash return of 8.2% ($1,635 / $20,000).

Take the $80,000 you pulled out of Property #1 and invest it in 4 more $100,000 homes under the same cash flow scenario. Now you own 5 properties with the same $100,000 investment. Your annual cash before tax now totals $8,175 ($1,635 x 5 properties) and you are getting a 8.2% cash on cash AND now have 5 properties appreciating.

You have to love leverage!

This is a current income question. You don’t have a pension and will depend upon your investment income to meet your retirement lifestyle costs. We are assuming you are asking this question because your current investment income plus your current rental income is insufficient to suppport your retirement lifestyle.

If the cash flow from a free and clear rental unit is greater than the cash flow generated by your 401k plus your current rental income, then it does make sense to pay off the mortgage. Be aware that when you withdraw your 401k funds, the amount of the withdrawal is treated as taxble income. Make sure you save out enough money to pay the IRS.