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At some point in every real estate investor’s career, they will be confronted with the choice to either use their capital to pay down existing mortgages or reinvest in new properties. There are strong arguments on both sides, but which option is best in the long run? The answer depends on a lot of different factors. You have to consider your unique situation carefully before deciding what to do with your extra cash.
Outlining the problem
Anyone with a mortgage on their home and an interest in real estate investment has two distinct goals, which often work against each other. Your first goal is to pay off your home and live debt-free with no mortgage. Your second goal is to become more financially diversified—usually by investing in new properties for additional income via renting or reselling.
Paying off your mortgage gives you the security of knowing your home is all yours. Even if you lose your job or suffer a financial hit, you won’t have to worry about losing the roof over your head to a missed mortgage payment. If you invest in new properties but keep your mortgage, you increase your profit potential and could secure an early retirement or a more aspirational lifestyle.
Both of these things can be positive for real estate investors. But, if you only have the means to achieve one of these goals, it’s challenging to figure out what the best path forward is. Let’s consider the factors that you should consider when you’re trying to decide:
Value of your home
If you’re thinking about refinancing your mortgage, it’s important to consider your home’s value. If your home has appreciated and you’ve built up equity, you may be able to get a significant amount from refinancing that you can put back into your investment portfolio.
Throughout a 30-year mortgage period, you may be paying more in interest than you think. Even cutting down your mortgage term by a few years can make a big difference when it comes to how much you pay. Depending on how high your mortgage interest rates are, this can be an even more significant cost difference. If you’re locked into a mortgage rate you’re unhappy with, it’s probably worth it to pay off your mortgage to avoid excessive expenses.
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There’s no way to know for certain what kind of returns you’ll get by investing in real estate. But, you can make conservative estimates based on market trends and property values. There are a lot of resources and equations to help estimate what your returns may look like when investing in various real estate opportunities. Take advantage of these resources to get a better idea of what you can realistically expect from a given investment.
Weighing the profit of an investment against the potential savings on your mortgage interest will help you put this conflict into perspective. From there, all you need to do is make an informed decision.
Know your risk tolerance
At the end of the day, this issue comes down to risk tolerance. There is a potential for great benefit from keeping your mortgage and reinvesting your money, but if you don’t have the risk tolerance for it, it’s not a good idea.
If you’re a conservative investor, you’re nearing retirement or you’re in a low tax bracket with a high mortgage rate, you should do everything you can to pay your mortgage off. The security of owning your home and being debt-free will offer you much more certainty in the long run. However, if you’re an aggressive investor, you’re young or you have a low, fixed mortgage rate, investing may be the right choice for you.
Every individual is unique. You will need to crunch the numbers and consider your circumstances carefully before you can make the right choice about investing. If you do choose to invest your money into real estate, make sure you’re careful about where you’re putting your capital. Try purchasing rental properties or homes with minor renovation needs before reselling, so you can turn your investments around for a profit as quickly as possible. These investments will pay off rapidly, building your capital and enabling your goal of living mortgage-free.
Always keep your goals top-of-mind when deciding what to do with your liquid cash. You may even decide neither of these options is good at the moment! In this case, build cash, so that when the right opportunity comes along you’re ready for it.