# Paying off Mortgage or Not (Rental Property)



## Solidify (May 8, 2017)

Hello everyone,

This is a continuation of this post... somewhat.

The building in question is a quadplex in which I occupy one apartment and am leasing out the remaining three.

I would like to know how can I determine whether I should pay off my mortgage ASAP or keep it there? We have the funds to pay off the principal entirely. I've been told that you shouldn't pay off a rental property's mortgage as fast as possible (for various reasons: tax purposes, keeping income close to 0).

But I would like to actually crunch the numbers with your folks to determine which option is losing me more money in the end.


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## Just a Guy (Mar 27, 2012)

You're right, not every situation is exactly the same. The general principle is that you want to use other people's money to pay off the rental as opposed to your own after tax dollars. Your case is a bit more complex, since you technically own 1/4 as a principal residence at least. You may have other things which apply to your specific situation which you haven't disclosed on a public forum and may not want to.

This is why we invented the accountant though. These are people who can look at your entire financial situation and give you personalized advice based on your specific case. The best part is, because you own rentals, their services may be a tax deductible expense.


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## Mortgage u/w (Feb 6, 2014)

I think you already know the advantages to keeping the mortgage vs paying it off. Crunching numbers will simply leave you with the same question at the end.

What you should be asking is if the money you have to pay off is generating a greater return invested vs eliminating a tax deductible debt. The answer to that is very subjective because there are countless ways you can invest your money and mange your finances. There is no 'one size fits all' solution. It is very unique to your personal situation.


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## Solidify (May 8, 2017)

Mortgage u/w said:


> What you should be asking is if the money you have to pay off is generating a greater return invested vs eliminating a tax deductible debt.


Does that really even apply though, considering the fact that the building's mortgage is being payed almost entirely by my rental units?

I don't mind sharing finances but the short version is: the income generated from the rental units is enough to pay the property taxes, municipal taxes, mortgage payments (principal and interest), and home insurance payments, and at the end of the year there is about 1-2k remaining in the escrow account. This is without covering utilities and energy (heating and cooling) costs and doesn't take into account maintenance and repair costs for the building.


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## Mortgage u/w (Feb 6, 2014)

Solidify said:


> Does that really even apply though, considering the fact that the building's mortgage is being payed almost entirely by my rental units?
> 
> I don't mind sharing finances but the short version is: the income generated from the rental units is enough to pay the property taxes, municipal taxes, mortgage payments (principal and interest), and home insurance payments, and at the end of the year there is about 1-2k remaining in the escrow account. This is without covering utilities and energy (heating and cooling) costs and doesn't take into account maintenance and repair costs for the building.


So what is your question really? Why would you consider paying it off if its paying itself off already? What do you want to accomplish? I don't need to know your finances but your question is rather vague.


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## Solidify (May 8, 2017)

Sorry for the confusion. Let me rephrase my concern.

While it is true that the mortgage is entirely paid by our tenants, it is the interest on top of the principal that is my concern. Even though the interest on the mortgage payments are tax deductible, I still see it as "lost" money, money that could have otherwise gone into my pocket had there been no mortgage to begin with. 

The money that can be used to pay the mortgage in full is currently in a TFSA in a balanced mutual fund earning on average 6% each year. How do I determine whether or not the tax break that the mortgage interest is providing for us is wiser than not having it at all? Mortgage Annual credit rate is 2.89%, however, it is my understanding that both interest rates cannot be compared like apple and apples since the mortgage rate works a bit differently through amortization.


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## Just a Guy (Mar 27, 2012)

Think of it this way, what could you do with the money otherwise? Can you put it to work elsewhere, or would it just sit there collecting dust?

The good thing about borrowing money is you can use the money which would otherwise be tied up in equity (dead money) to buy more investments. If you pay it off, that money is locked up. 

For example, you could own one place for 100k that's paid off. If it generates $1000/month you only have minimal expenses, say $200/month to manage it, giving you $800/month profit. 

Now, imagine instead that you took the 100k and put 20% down on 5 properties worth $100k each. According to numbers I just ran for a different thread, you could conservatively make $1250/month in profit (total on all 5 properties after paying the mortgage and all other expenses) not including the principal paydown on 5 properties. So, even though you're paying interest, you have more money working for you, so you make more profits. 

In 20 years you'd have $500k worth of paid off real estate generating $5000/month minus expenses vs. $100k in real estate generating $1000/month minus expenses. This doesn't include the extra $450/month you would have made over those 20 years as well. 

The money in real estate comes from leverage, not from ownership.


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## Solidify (May 8, 2017)

> The good thing about borrowing money is you can use the money which would otherwise be tied up in equity (dead money) to buy more investments. If you pay it off, that money is locked up.


Yes, but then there's no mortgage so the rental income goes into my pocket as opposed to the mortgage...


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## Just a Guy (Mar 27, 2012)

Yes, and all the equity you have is tied up doing nothing. In 20 years you can have the same amount of stuff, or you can have 5x as much while putting more money in your pocket each month. 

You could put $800/month (using the example numbers not yours) instead of paying the mortgage, or you could put $1250/month in your pocket even after paying the mortgage. 

Read my post again until you understand what I was saying.


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## Solidify (May 8, 2017)

OK, I understand now.


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## Just a Guy (Mar 27, 2012)

Again, it depends. If you pay off your mortgage and then buy stocks, your equity is locked up. 

If you keep a mortgage, you have more money to buy stocks. 

So, using the example above, you buy a property with a 20% down payment and make say $250/month profit (plus your principal pay down), then you invest 80k in stocks, so you technically have 180k earning money. In 20 years you'll have 180k (I'm not factoring in appreciation and/or losses for simplicity) worth of assets as opposed to 100k of assets had you paid off the mortgage. 

He problem with stocks is you can't leverage them usually, and not to the extent you could with real estate, so you make less than half (remember you'd have 500k of assets with real estate) over the long term.

Now, as you pointed out, not everyone is cut out to invest in real estate, it's work no doubt about it, but the rewards are also different. 

You have to find out what investments work for you, it doesn't matter what works for others. I know some successful day traders, which I'd be dismal at. They,in turn, don't do well in real estate.


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## Solidify (May 8, 2017)

So we won't pay off the mortgage and keep in it mutual funds meanwhile.


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## Just a Guy (Mar 27, 2012)

I'd suggest an etf over a mutual fund since they operate the same way and have lower fees, but to each his own.


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## Dilbert (Nov 20, 2016)

Just a Guy said:


> I'd suggest an etf over a mutual fund since they operate the same way and have lower fees, but to each his own.


+1


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## mikep (Mar 13, 2017)

there's got to be a point though where it doesn't make sense to refinance the rental property to invest in the stock market. 
lets say mortgage rates are now 4.5% and you're making 6-7% investing in mawer balanced? 
when is it better to trash the debt?


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## Solidify (May 8, 2017)

Just a Guy said:


> I'd suggest an etf over a mutual fund since they operate the same way and have lower fees, but to each his own.


Well what I have is called a "Balanced ETF Portfolio" and it's in Mutual Funds.


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## Just a Guy (Mar 27, 2012)

So you over pay an MER for someone to "manage" something you could buy directly yourself? Man, I chose the wrong career...I should have been a broker, I'd be rich.


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