Should I Pay off My Mortgage? Is it a Great or Bad Idea to pay off My Investment Property Early?

Video Closed Captioning:

good morning good afternoon good evening

folks michael zuber one rental at a time

uh if you don’t know something i love

doing every week is saturday morning 8

a.m pacific time

i go ahead and do a live stream live q a

for 60 minutes

right on youtube you can go back and

look at the playlist i think it’s called

live q a

i’ve now done probably

50 or 60 of them so lots of material

there for you to binge watch

this particular video actually goes back

to a question from yesterday i’ve been

asked this question a lot

so i thought i would give you my

four-step thought process to

when you should focus on paying off your

mortgage right

again in this example excuse me in this

example we will assume this is an

investment property

not owner occupied okay it’s a different

thought discussion in my opinion if this

is owner-occupied verse investment

property

and we’re going to really probably do

this in two segments

because i do believe it is based on who

is asking the question

in this example i will do my best to set

the variables for the question that came

yesterday and then i will tweet them

for a different outcome

before we get into this example let me

be very clear

if getting a mortgage

an investment property mortgage

keeps you up at night

it is telling you something

i don’t care who you are what

circumstances you are i do not believe

an investment of any time

should keep you up at night

whether it’s stocks or crypto or yes

even investment real estate even one

rental at a time if it keeps you up at

night and it’s because of the mortgage

you know in that example you should pay

it off so if that’s not the case if you

are legitimately thinking about hey what

should i do with excess capital

these are kind of the four situations so

first off if i remember yesterday

the question came from a

34 year old so you’re 34 years old

you’re employed

right you don’t need

the cash flow to live on in this example

you have a 3

mortgage

fixed for 30 years

and the asset cash flows so again

option one and we will change this in

this video later but option one 34 years

old

early stages of their investing career

they are employed

right so they have a day job that are

paying the bills

and they have a 30 year fixed rate

mortgage at 3

so yesterday during the live stream

i basically went into a little bit of a

rant that basically that 3

here is an asset and an asset that needs

to be appreciated but what i want to do

here is kind of break down four

questions i ask myself

so question one and i have my notes in

front of me that’s what i’m looking at

question one

does the asset cash flow let’s actually

change colors here

let’s just change it up we’ll go back

here does it cash flow

with

debt

so you have an asset maybe you bought an

alligator maybe you overpaid maybe you

did a bad deal

if it doesn’t cash flow with debt even

at three percent

then i suggest paying chunks of that off

because again rule number one of one

rental at a time is no alligators we

don’t do bad deals but sometimes bad

deals happen

and if this asset does not cash flow

with the debt structure in place

pay off the debt

okay that’s rule number one that i think

about

rule number two

uh what is

cost of new capital

and i’ll just write the dollar sign

what is the cost of new dollars new debt

right you have a three percent mortgage

in this case

let’s just pretend that new debts nine

percent

right what what are you gonna do in that

situation well

you probably would save your money right

because again why would you pay off

something at three percent when you

could build cash and then use it instead

of nine percent debt

right because one thing you have to know

about this three percent mortgage is you

can deduct it on your taxes again this

is an investment property

so tax wise it’s more like a two percent

loan or maybe 1.8 because again you’re

writing off mortgage interest because it

is in investment property at least

that’s how my accountant does it for me

go ahead and check with yours and make

sure your situation does that as well i

don’t want to get in trouble

next what is the return on capital

right what does your market return for

the next deal

right does your market return two

percent

well

then paying off a three percent debt

might be more efficient does your market

return 10 percent

well ten percent

is higher than that uh and again the

last one is what is your plan

are you done right are you 34 years old

and you don’t want to own any more

investment properties if so you’re no

longer growing so it doesn’t really

matter

then pay it off if you’re still planning

to grow recycle capital do all of those

things

again lots of options so in this example

we assume their plan is to keep growing

uh we’re going to assume their return on

capital in the in new new capital or new

investment what i call yield is above

eight percent

we’re going to assume cost of new

capital is six percent

and we’re going to say yes the building

does cash flow with existing debt here

so in my world with this four scenario

if this was me

i would not focus on paying off the

mortgage i would take that extra build

it let the income snowball take over

and allow me to buy another asset this

three percent mortgage is going to be an

asset for the next 30 years in my

opinion

so let’s change this up

let’s make this person 84. let’s see if

i can do this

84 years old

and let’s make this eight percent

mortgage again let’s just cheat oh look

at that now it’s eight

how about that doesn’t look great but

here you go so again

just changing the game we’re changing

two variables no longer 34 you’re 84 and

the mortgage is eight percent not three

same example

does it cash flow with debt

maybe not if it doesn’t pay it down

let’s say it does

what is cost of new dollars right what

does it cost to raise that capital what

are you going to do

is is it suddenly

is new money seven percent six percent

this is debt right

is it lower than eight if so go get that

what is the return you can expect if the

return in your market is six percent

pay off the debt

right if your return is 16

well maybe you go and get the next deal

but again if the return is six percent

paying off the debt is better and then

finally the plan

hey you’re 84 years old you’re gonna

live to be let’s say 120 maybe you’re

done right maybe you’re gonna live to

100 who knows but maybe your plan is not

like a 34 year old but you are done and

you are looking to just

keep what you have and move forward so

again in this example uh

maybe it doesn’t cash flow pay it off

costs a new capital it doesn’t really

matter for you because you’re done

growing

return is six lots of reasons to pay off

debt so

in my world there are plenty of reasons

to pay off debt in my world there’s a

plenty of reasons not to pay off debt it

really depends on your situation but i

want to close with this video how we

started

if

having a mortgage on an investment

property keeps you up at night that is a

sign

and i am totally okay with you paying it

off even if the rate is three percent

even if the rate is one percent if it

keeps you up at night it doesn’t matter

what i think it only matters what is

happening between your ears and if it

keeps you up

pay it off totally okay hopefully that

makes sense let me know what you think

leave comments below ask questions

hopefully you enjoy these whiteboard

discussions bye bye

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