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To Pay-Off the Mortgage or Not?



Ah, the age old question... to pay off or not to pay off your mortgage. A question that many have stumbled across with varying degrees of certainty and at times fervent conclusions not to be challenged in their responses. Should you or should you not pay-off your mortgage? This simple question is anything but simple and is made even more challenging when the property in question is a rental property! Nonetheless, there is a right and wrong answer and we're going to look at it.


Spoiler alert, there is no right or wrong answer... "Wait what? You just said..." - The fact is there are many answers to this question all of which could be exactly right or horribly wrong depending on many key factors, some of which include; your age, your goals, your investor profile and yes, the type of financing for the property. One thing is for certain however... this is a good problem to have. We'll look at this question through the eyes of an investor and try to see where it makes sense.


The Assumptions

Let's assume a few things... oh boy, we know, we know your mother told you to never assume but, let's assume a few minor details to setup the scenario.


  • First, let's assume that you are an investor and have a property which is cash-flowing as a rental.

  • Next, let's assume that you have leverage through a mortgage of 15-30 years.

  • Lastly, let's assume that you have not reached financial freedom quite yet, meaning that you still depend on a job to earn enough income to support your lifestyle and want to continue to grow your investment portfolio.


There...that wasn't so hard.


Should I pay my rental off?


Well it depends... it depends on whether or not if by paying the mortgage off your remaining cash-flow, which would be your rent + the principal & interest you are paying now but will later go in your pocket after paying off your mortgage, is 'life changing'. What do you mean by life changing? - I mean if you pay off your mortgage is the increased cash-flow that your paid-off investment will kick out going to change your life so that you are closer to financial freedom or any other goal you have?



In the case of a member of ours, it wasn't. A few years ago, his cash-flow would have increased dramatically if he paid off his one single-family rental but that alone was not life changing, meaning that he would still have to go to work and still do all the other things holding him down. Sure, he would have had more cash monthly, but no financial freedom. He decided instead to cash-out refinance which has produced 4 other single-family rentals, a 12 unit apartment building and now he is looking for a 20-30 unit apartment building.... for him now, it is where he is on the doorstep of financial freedom, and yes all of the properties are leveraged safely.


Leverage after all is one of the key elements that makes real estate a dominant investment in its own class, without it, financial freedom would be far, far away and for some, too far way to be able to enjoy the freedom gained while still being healthy enough to enjoy it. You see...unless you have unlimited resources, paying for an investment property without some form of debt leverage is a very safe 'feeling' but, you grow very, very S-L-O-W-L-Y.


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If you are a growing investor (which you are unless you've reached financial freedom) the key is growth and speed. It does no good to have one amazing safe investment if you have to wait 10, 20, or even 30 years to either pay it off or save up enough money to do it again - financial freedom awaits you. You've heard successful investors say it before - 'use other people's money' - let me introduce you to: leverage - in this case the 'other people' is the bank.


So Then, Does It Ever Make Sense To Pay It Off?


Again it depends...if it's life changing and you get financial freedom to pursue other interests or even continue to pursue real estate full time...probably, but if it's not life-changing; Will you be able to continue to purchase investment properties by keeping the money locked in the real estate investments you have? and if so, at what rate... every year, every 5 years, every 10? So it depends, for many real estate investors if paying off the mortgage on their rental is life-changing AND it allows them to be financially free while still allowing them to continue to grow their real estate portfolio, it would likely be a good idea, but if not... paying off the mortgage on a rental property would probably not move you faster towards freedom, you would instead continue to grow faster with leverage so long as you do it responsibly.


Yes, but There Has to Be a Stopping Point!


Sure, all good things must come to an end - well technically you can pass on your real estate investments - but, we get what you mean. There are multiple ways to achieve your financial freedom through real estate; some are conventional, some are not, some relatively safe and some risky. We are not financial advisers - can you say, disclaimer - but we are successful real estate investors and know what works and what doesn't. So let's look at one example out of many, that is relatively safe and that would apply to most investors that want to gain that all elusive financial freedom:

"Sometimes numbers and ROI (Return On Investment) are minimal if what you are about to do is life-changing."

The formula is simple,

  • First, determine your 'freedom number' - the amount of income that is needed for you to live the life you want to live, in other words: life changing income.

  • From there you work backwards. For instance, let's say you determine that you need 20 units to be financially free, that's a start.

  • But why not keep going until you hit 25 or 30 units AND then stop? It would allow you to turn around and sell off the extra 5 or 10 units to pay for the 20 units you initially planned on. But, who knows... plans change, life happens, and your needs and wants change as you go along the way, so you have to factor that in (the long-term goal vs. your long-term needs).


Sometimes numbers and ROI (Return On Investment) are minimal if what you are about to do is 'life-changing'. For instance, maybe along the way you are stretching your investment dollars for the highest returns and may even be targeting a 20% or 30% ROI with as little of your money on down-payments as possible. Although the money you personally have involved in your investments IS extremely important, if you are at the doorstep of a 'life-changing' action or a purchase which will change the game as you know it... you better believe that ROI and other numbers become minimal at that point.


Related: Higher Rent Equals Higher Returns... Right?



Goals and Lifestyle Are Key Drivers


As an investor, if an analysis shows that by putting 30%, 40% or even 50% down on an investment it will decrease the ROI to an embarrassingly low 5-8% BUT by doing so will increase the cash-flow of the investment to such a point that it will boost your cash-flow past the financial freedom line, of course that would do it - that may very well be life-changing for you - and would be well worth considering regardless of the ROI but it all depends on your goals. A lot has to do with your age as well and your current lifestyle, for instance, if you are single but one day want to get married and have kids, your need for income will grow as your family grows and so although a few income properties may do for now they may not produce enough income for you in the future.


The good news however, is that most things can be 'course corrected' along the way, so it all has to do with your future goals and current needs. Hopefully, this article has shown you that there are many right answers but most of those answers go beyond the 'numbers' - the answer as to whether or not you should pay-off your investment property is directly correlated with your life goals and your 'vision' of what a 'perfect' life is for you. One thing is for certain however, so long as your investment property is rented, cash-flow positive and has a healthy reserve in place...you are well on your way towards financial freedom and can take a momentary pause to reflect on your options.



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About Ricardo Reis

Ricardo is a member of G3 Management & Investments and a real estate professional. He has been a successful property manager and real estate investor for over 10 years.



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