*Below is just to show an example in a particular situation. In real life, you may have to consider your unique situation and consult with an appropriate professional.
Let’s say you just got $200,000 mortgage for your primary residence and right after that inherited $200,000, should you pay off your mortgage?
The answer may surprise you, but if you are reading this, which means if you are interested in real estate investing or already know how to invest, you should consider keeping the mortgage. You may wonder how paying $160,000 (in this example, this is the interest amount you will end up paying in 30 years with $200,000 mortgage) over the life of the loan is better than paying off the mortgage. There are many reasons for it. I will go over one at a time.
Cash Flow is King:
If you pay off your loan, you will save/earn $160,000 in 30 years or $5,333 every year. Let’s see how much money you will earn if you do NOT pay off the mortgage and put the money to a bank earning 2%. That’s $4,000 (2% of $200,000.) Just looking at this, it sounds better to pay off the mortgage and save/earn $5,333 than earn $4,000. However, what happens when you invest the $200,000 to buy rental properties? Many assumptions need to be made, but it could look like this.
$100,000 Rental Proeprty
20% Down payment or $20,000
$5,000 Cost to purchase
$400 Principla & interest monthly payment
$1,000 Rent per month
$70 Property insurance per month
$3,600 Property tax per year
3% Appreciation per year
1 Month vacant every year
$150 Average repair per month
Let’s run the numbers and see how it looks.
+$1,000 Rent
-$400 Mortgage
-$70 Property insurance
-$120 Property tax
-$150 Repair
-$83 Vacancy
= $177 Cash-flow
Since the total cost of the purchase is $20,000 down payment + $5,000 purchasing cost = $25,000, you can buy 7 more rental properties, which means your monthly cash flow will be $177 cash-flow x 8 rental properties = $1,416 monthly cash-flow or $16,992 yearly cash-flow. All the sudden it looks much more attractive than the $5,333 that you save from paying off the mortgage or $4,000 that you get by putting the money to a bank. The best part is this is just the beginning. I’ll explain more reason why buying a rental property is attractive.
