Should I pay off my mortgage? I hear a lot of people talking about this, trying to accelerate paying down there mortgage. I think it is a great idea, and way to build equity in your property. If we make the minimum payment and stay in the same property for 30 years (this is rare), you will have effectively paid the bank back in principle and interest about 2.5 to 3 time the original purchase price.
I fully understand the comfort level we get when we have the mortgage paid off and own the property free and clear. I don’t want to dissuade you from paying off the mortgage, let’s take an alternative look at how our money can work for us. This example is somewhat static, and simplistic, but it will illustrate the power of using all the principles of real estate.
So the example is your property is worth $200,000 dollars when you buy it. Let’s assume you are in a very fortunate situation and you have the full amount. So you have no mortgage. The only principle of real estate working for you is appreciation. Let’s assume that the property appreciates 3% per year for the next 30 year. So, the money you have invested is growing at 3% not bad, but not as good as the stock market over a long haul. After 30 years your property is now worth approximately $485,453 dollars, great right?
But not so fast, what if all the principles of real estate were at work for us? So let take the $200,000 dollars and buy 10 properties at $200,000 dollars and put 10% down on each one. And let’s also assume that we did our due diligence and bought these properties so they would give off a small cash flow say $100 dollars per month. Now we are growing our money at 3% x 10 (properties) or 30% per year. So we know the stock market can’t return 30% per year for 30 consecutive years. Remember the tenant is paying the mortgage or building equity for us. We have used leverage to get a bigger return on the money invested, in this example 30%. So after 30 years the 10 properties are worth $4,854,530.
I know this example may seem a bit extreme but it should illustrate the power of leverage plus equity build up though rental income; plus appreciation in value. The other factor to consider is that if you property is paid off there are only two way to get your cash, one is to sell the other is to go back to the bank and ask for your money in the form of a loan that you will pay interest on.