To Pay-Off the Mortgage or Not?
- Jun 2, 2019
- 5 min read
Updated: Mar 23
Ah, the age-old question: Should I pay off my mortgage early or continue leveraging debt for investment growth? Many real estate investors wrestle with this dilemma, especially when the property in question is a rental property mortgage. Some swear by eliminating debt, while others argue that real estate investing strategies favor reinvesting rather than paying off loans. 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, but still... which approach makes the most sense? Should you pay off your mortgage or invest the money elsewhere? Well, the answer depends on several factors, including your financial freedom goals, risk tolerance, and long-term investment strategy.
The Assumptions
Let's assume a few things to set up the scenario (yeah we know, beware of assumptions):
You’re an investor with a rental property mortgage that generates positive cash flow.
Your property is financed with a 15-30 year mortgage.
You haven't yet achieved financial freedom through real estate and want to continue growing your real estate portfolio.
There... that wasn't so hard. With these assumptions, we can now dive into the question: Should you pay off your rental property mortgage early?
Should I pay my rental mortgage off?
Well, it depends. If paying off your mortgage would increase your cash flow to a level that is life-changing—meaning it allows you to quit your job or significantly alter your lifestyle—then yes, it might make sense. But what if paying off your rental property mortgage ties up capital that could be used to buy more properties?
Take one of our investors as an example. A few years ago, he debated whether to pay off his mortgage early on a single-family rental. The result? Even though his cash flow from rental properties would have increased significantly, it wouldn’t have been life-changing. Instead, he took a cash-out refinance, similar to the one explained in-depth by Bankrate, then reinvested the equity, and expanded his portfolio. That one decision led to four additional rental properties, a 12-unit apartment building, and now he’s searching for a 20-30 unit deal.
For him, keeping his rental property financing in place allowed him to scale his portfolio and get closer to financial independence.
The Power of Leverage in Real Estate Investing
Leverage is what makes real estate investing so powerful. Without it, the road to financial freedom is much longer—sometimes decades longer.Instead of using all your capital to pay off your mortgage early, you could take advantage of rental property financing to acquire more income properties and boost your cash flow from rental properties.
It does no good to have one amazingly safe investment if you have to wait 10, 20, or even 30 years to either pay it off or that same time to save enough money to buy it in the first place... heck.. financial freedom awaits you, will you still be around?!? This is why successful real estate investors often say: Use other people’s money. Of course, leverage as detailed by Forbes, must be used responsibly, but done right, it can significantly accelerate your wealth-building journey.
When Does It Make Sense to Pay Off a Mortgage?
Okay here goes: If paying off the mortgage on a rental property is life-changing and grants financial freedom while allowing continued real estate investment, it’s likely a good idea. However, if it doesn't offer such benefits, maintaining leverage may facilitate faster growth, provided it's done responsibly. Paying off your rental property mortgage early makes sense:
If eliminating the mortgage would produce life-changing cash flow.
If you’re nearing retirement and want zero debt real estate investing.
If your strategy is focused on debt-free real estate investing.
If debt causes anxiety and eliminating it allows you to sleep better at night.
But if paying off your mortgage locks up capital that could be used for investing in rental properties, then it may not be the best choice—especially if you’re still in the growth phase of your investment journey. Consider whether you can keep purchasing investment properties with funds tied up and at what frequency.
Related: How to Analyze a Rental Property
"Sometimes numbers and ROI... are minimal if what you are about to do is a life-changing upgrade."
A Strategy to Balance Growth & Stability
There are multiple real estate investment strategies to achieve your financial freedom; some are conventional, some are not, some relatively safe, and some risky. Many real estate investing strategies involve a mix of growth and stability. There’s a way to find a middle ground between growth and financial security. Here’s one approach:
Determine Your "Freedom Number" – Calculate how much cash flow from rental properties you need to quit your job and live comfortably by using resources like ChooseFi's financial independece calculator.
Grow to That Number Using Leverage – Continue investing in rental properties and scaling your real estate portfolio.
Pay Down Debt Strategically – Once you've built enough cash flow, sell off excess properties or reinvest profits into mortgage paydowns.
Sometimes, your freedom number needs assistance: If you need 20 rental units to achieve financial independence, why stop there? Grow to 25 or 30 units, then sell or refinance a portion to pay offdebt and secure your long-term passive income.
Author's Note: At times, numbers and ROI (Return On Investment) may be minimal when you're about to make a 'life-changing' decision. For example, you might be maximizing your investment dollars for the highest returns, aiming for a 20% or 30% ROI with minimal down payments. While the money you have invested is crucial, if you're on the verge of a life-changing action or a game-changing purchase for the better... ROI and other figures become less significant in these instances.
Goals and Lifestyle Are Key Drivers
The decision depends on your personal financial freedom goals. If paying off your mortgage early helps you achieve those goals faster, then do it. But if investing in rental properties and using rental property financing allows you to build wealth more efficiently, then keeping leverage in play may be the smarter choice.
The good news is that most things can be adjusted as needed, depending on your future goals and current needs. Whichever path you choose, the key is to make a strategic decision based on your long-term vision, risk tolerance, and lifestyle goals. Deciding whether to pay off your investment property is linked to your life goals and your vision of a perfect life. As long as your investment property is rented, cash-flow positive, and has a healthy reserve, you are on the path to financial freedom and can pause to consider your options.
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About the Author Ricardo Reis - Learn About Ricardo
Entrepreneur, Inventor, Investor, Military Veteran. Ricardo is a member of G3 Management & Investments a division of Great Lakes Real Estate and a real estate professional. He is a real estate professional and a successful real estate investor for over 15 years.
NOT INVESTMENT, FINANCIAL, LEGAL, TAX, OR OTHER ADVICE: This blog is for informational purposes only and not a substitute for professional advice. We do not offer advice, solicitation, recommendations, or endorsements. You are solely responsible for evaluating the information's merits and risks. Always consult a qualified professional before acting.
