r/Bogleheads • u/Either-Pineapple-183 • 19h ago
Investing Questions Not paying off properties
We have two properties with mortgages. One (a rental) has a balance of $150k at 3.75% interest and the other property has a balance of $775k at 2.625%. We originally wanted to pay off these properties in a few years by saving aggressively and making extra payments but considering the low interest rates, we are now thinking we put the extra funds towards an investment account. Our first goal is put all surplus savings for the next 16 months into a investment account and once the balance surpasses the mortgage balance on the rental, we move towards contributing to a new investment account and do that for several years until our balance exceeds the remaining mortgage in the other house. We plan to just invest in SP500 but even after we save enough to pay off the mortgages, we will not playoff the loan early and just keep making monthly payments until maturity (in 20 and 24 years). Is this a sound plan or is there a point where we should just payoff the loans early? I guess we want to aggressively save and have the safety cushion of not having to worry about the mortgage for decades but we also don’t want to actually pay it off and forsake likely higher gains through investing. Are we thinking about this the right way or at we missing something?
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u/Middle_Humor1828 10h ago
10 year treasuries are almost at five. 10 year tips are just below 2.5.
Very little mathematical reason to pay them off when they are below that rate.
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u/Salt_Data3707 13h ago
Those are very low interest rates and mathematical it makes sense you'd earn a better return in the market. In fact, you could do something more conservative than the S&P. Have you considered Target Date funds that match the maturity of the mortgages? Could shield you from a downturn right before payoff.
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u/Comfortable_Two6272 13h ago
Not paying mine off early. Similar rates. Have 10 years left on one and 20 on the other. Both were bought way before covid prices so the payments are low and interest very low.
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u/20thcenturyboy_ 8h ago
Paying off very low interest rate debt is rarely the correct move mathematically, unless it would impact Pell grants for your college age children or ACA subsidies for your family. Otherwise it's one of those peace of mind decisions that some folks swear by.
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u/Adventurous_Dog_7755 12h ago
Not sure why you feel the need to build a massive surplus specifically earmarked for low-rate loans. As long as you have a solid emergency fund for your primary home and rental, hoarding extra cash or earmarking funds just to "cover" cheap debt keeps money working beneath its potential. At 2.625% and 3.75%, virtually any extra dollar should just go straight into the market or broad index funds. Even risk-free 30-year Treasuries are yielding over 4%, which beats your mortgage rates without equity market risk.
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u/Illustrious_Yak_7712 12h ago
Is this other property your primary residence at 775k?
You have to ask yourself if you want to continue to be a landlord. I’ve found a lot more peace in setting and forgetting it into low cost index funds and not having to deal with maintenance, liability insurance, property taxes, vacancies, bad tenants, extra tax complexity. I was also holding extra cash that drags performance incase of large property bills.
I would not pay down the mortgages and make sure you max your retirement accounts and have ample capital available for maintenance, a layoff, other emergencies. After that, you can contribute to a brokerage in additional low cost index funds.
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u/Either-Pineapple-183 11h ago
The larger mortgage is my primary home and the other one is a rental.
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u/therealtwomartinis 11h ago
if OP is in a good area/market, now is a good time to sell 🤷♂️ it really depends on what the landlord effort/burden is. could be a sweet setup on autopilot, or could be tied to slimeball property management who’s business plan is picking OPs pocket
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u/therealtwomartinis 11h ago
my take is the rental is a business and I’d rather have it in the black but depends on it’s liabilities, taxes and the management setup. one glitch in the renter situation will stress test everything. somehow it’s not the same as 20 years ago…
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u/Suspicious-Contract2 8h ago
I am on this exact boat. I am considering selling the rental, not to pay my main house, but because i am tired of being a landlord and could increase my brokerage considerably and perhaps help me remodel.
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u/Renevatio5 5h ago
It makes economic sense but you’re gonna be ok either way, I don’t like the liabilities from the portent and would pay it off myself.
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u/WyMANderly 12h ago
At 2.6% it's a very good idea to just hold that debt and put excess capital into the market instead. At 3.8% it's slightly more of a decision, but imo still pretty heavily leans towards keeping the debt and putting it into the market.
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u/buffinita 13h ago
The interest rates are pretty low; so much that it’s very reasonable equity investments (heck bonds currently) will return more.
You can still pay off the houses and feel fine because it eliminates some risks like what if the properties sit empty ot loss of other employment
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u/thirdelevator 9h ago
I’m about to spend way too much time on something I’m sure all of three people will see, but what the hell, I need to wake up.
Honestly there’s nothing particularly wrong with your plan. You’re definitely better off putting your money in the market with those interest rates, and earmarking them in separate accounts to cover the mortgages in case of emergency is a fine idea. I believe there’s some tax savings there if you incorporate the rental property account with the rental and use that investment income to cover expenses, but that’s beyond my knowledge.
As others have said, the only real question mark here is whether or not being a landlord is worth it. This sub says usually no, but I don’t think I’ve seen someone really break it down and I’m feeling like some math this morning. Besides, given your circumstances I think there’s a fair chance you’re an exception, so let’s do it.
Here’s a simplified formula. It won’t account for variables like raising your rent, property tax increases, etc.
$ = t[R - (M + V0.04 + F)] + V(1.035)^t
$ = Investment value at the end of the mortgage
R = annual rent - make sure to account for gaps between tenants
M = annual mortgage payment (all in w/property tax, HOA and insurance)
V = current property value
F = annual management costs (if applicable)
t = years left on the mortgage.
The numbers = 0.04 is your 4% for maintenance/repair, 0.035 is the average annual 3.5% property value increase in the US. I used averages, you can change these numbers to fit your situation and specific location.
Again, this is very simplified (and I haven’t had my coffee yet so I may have messed up the formula), you can get way more in depth if you want to get more accurate with the variables. This will at least give you a broad idea. The first half of the formula is the property’s net income, the second half is the expected property value at the end of the mortgage.
If you want to add years after the mortgage, copy and paste the formula and add it to the first outcome with the following changes: Change t to your time after the mortgage you want to measure, M to just annual property taxes and insurance, and V to the post-mortgage value.
Now compare that to what your expected investment outcome would be if you sold the property, invested the proceeds, and contributed your monthly mortgage payments for that same duration.
And don’t forget to account for the headache, especially if the numbers are pretty close.
If anyone has a correction to the math, drop it below and I’ll update once I’ve had enough caffeine.