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Even though people say not to, I’ve paid off my first house and now rent it out. The second house will be paid within 5 months. If you can, i really recommend i

Even though people say not to, I’ve paid off my first house and now rent it out. The second house will be paid within 5 months. If you can, i really recommend it for the freedom of mind, even if it’s not the best financial decision.

overcast 9y ago
Yep, if you want to put up with renters, it's a great way to rack up cash.
- hanoz 9y ago
  What does putting up with renters involve?
  - klipt 9y ago
    Tail risk. Some renters are terrible and will trash your house. The repair costs can easily wipe out years worth of rent.
  - richardknop 9y ago
    Depends on renters. You can be lucky and get some nice couple or young professionals who will take care of the property and when they leave the property will be in fine condition and will only need small repairs. On the other hand, you could get some party animals that will trash the property and when they leave you will have to spend lot of money to repair the damage. They might also cause other problems like annoying neighbours etc.
bananaboy 9y ago
Curious: why (and where) do people say not to pay off your house?
- ronnier 9y ago
  Random conversations, Reddit personal finance, podcasts. Reason is, the interest is low and by investing the money elsewhere you can get a higher rate of return.
  - royce 9y ago
    For most people, a house payment also represents a direct impact to their ongoing cash flow. If your house payment is $2000 a month, paying off your house automatically increases your cash flow by that amount. What else could you do right now with that cash flow - not only in direct alternative financial investments, but in indirect investments in your own well-being and quality of life?
- StillBored 9y ago
  In theory you can make more by putting the money in something with higher returns. Plus, you get to deduct a portion of the interest from your taxes, and in theory putting the excess money somewhere else is additional diversification. AKA instead of paying your mortgage at 4% interest, you invest it in something that make 5.5% and gain an additional 1.5%-a few percent in taxes+a few tents of a percent in taxes on the 4% interest. Frankly, its a good theory, but given the volatility of the markets, its hard to guarantee your going to actually come out ahead. Particularly since interest rates are generally computed by people who are looking at the risk/reward factors, and the interest rates have to be high enough to attract the risk adverse capital. The one thing that is for sure, is that you should never really be sending early payments to your mortgage company despite all the financial advisors telling you to to do so. If you want to pay your mortgage off early your better off putting the money in a low risk investment and then paying it off when the outstanding mortgage balance falls below the value of your savings. That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.
  - royce 9y ago
    Another option, once you have some cash built up and are otherwise diversified, is to occasionally request that the loan be recast. https://www.bankrate.com/finance/mortgages/what-is-mortgage-recasting-and-why-do-it-1.aspx https://www.bankrate.com/finance/mortgages/what-is-mortgage-... Recasting works sort of like refinancing .. but your rate doesn't change and neither does your mortgage term. Instead, a lump sum that you provide is deducted directly from your principal. Your monthly payment is then recalculated based on that reduced principal amount. The financial institutions usually impose limits (minimum lump-sum amount, how many times per year you can do it, etc.) And they don't advertise it or make it easy, because there's no money in it for them. And since the principal/interest ratio is front-loaded (so that much of the money that they make from you is in the first seven years or so of a 30-year loan), then if you can recast early in the life of the loan, the benefit is increased. (And that's the real reason why the industry advises upgrading every seven years - that 30-year, front-loaded clock gets reset in their favor.)
  - 9y ago
- matwood 9y ago
  Given that we just left a period of very low rates, paying off a low interest mortgage might not make the best financial sense if you can put the money to work elsewhere. There is also a diversification problem. Paying off a mortgage could tie up a large part of someone's wealth in their house. Related to the point right above, paying off a mortgage ties up a large portion of cash in a fairly non-liquid investment.

overcast 9y ago

Yep, if you want to put up with renters, it's a great way to rack up cash.

hanoz 9y ago
What does putting up with renters involve?
- klipt 9y ago
  Tail risk. Some renters are terrible and will trash your house. The repair costs can easily wipe out years worth of rent.
- richardknop 9y ago
  Depends on renters. You can be lucky and get some nice couple or young professionals who will take care of the property and when they leave the property will be in fine condition and will only need small repairs. On the other hand, you could get some party animals that will trash the property and when they leave you will have to spend lot of money to repair the damage. They might also cause other problems like annoying neighbours etc.

bananaboy 9y ago

Curious: why (and where) do people say not to pay off your house?

ronnier 9y ago
Random conversations, Reddit personal finance, podcasts. Reason is, the interest is low and by investing the money elsewhere you can get a higher rate of return.
- royce 9y ago
  For most people, a house payment also represents a direct impact to their ongoing cash flow. If your house payment is $2000 a month, paying off your house automatically increases your cash flow by that amount. What else could you do right now with that cash flow - not only in direct alternative financial investments, but in indirect investments in your own well-being and quality of life?
StillBored 9y ago
In theory you can make more by putting the money in something with higher returns. Plus, you get to deduct a portion of the interest from your taxes, and in theory putting the excess money somewhere else is additional diversification. AKA instead of paying your mortgage at 4% interest, you invest it in something that make 5.5% and gain an additional 1.5%-a few percent in taxes+a few tents of a percent in taxes on the 4% interest. Frankly, its a good theory, but given the volatility of the markets, its hard to guarantee your going to actually come out ahead. Particularly since interest rates are generally computed by people who are looking at the risk/reward factors, and the interest rates have to be high enough to attract the risk adverse capital. The one thing that is for sure, is that you should never really be sending early payments to your mortgage company despite all the financial advisors telling you to to do so. If you want to pay your mortgage off early your better off putting the money in a low risk investment and then paying it off when the outstanding mortgage balance falls below the value of your savings. That is because overwhelmingly your just giving your mortgage company an interest free loan due to the fact that they apply the over-payment to the final payments and don't adjust the amortization schedule.
- royce 9y ago
  Another option, once you have some cash built up and are otherwise diversified, is to occasionally request that the loan be recast. https://www.bankrate.com/finance/mortgages/what-is-mortgage-recasting-and-why-do-it-1.aspx https://www.bankrate.com/finance/mortgages/what-is-mortgage-... Recasting works sort of like refinancing .. but your rate doesn't change and neither does your mortgage term. Instead, a lump sum that you provide is deducted directly from your principal. Your monthly payment is then recalculated based on that reduced principal amount. The financial institutions usually impose limits (minimum lump-sum amount, how many times per year you can do it, etc.) And they don't advertise it or make it easy, because there's no money in it for them. And since the principal/interest ratio is front-loaded (so that much of the money that they make from you is in the first seven years or so of a 30-year loan), then if you can recast early in the life of the loan, the benefit is increased. (And that's the real reason why the industry advises upgrading every seven years - that 30-year, front-loaded clock gets reset in their favor.)
- 9y ago
matwood 9y ago
Given that we just left a period of very low rates, paying off a low interest mortgage might not make the best financial sense if you can put the money to work elsewhere. There is also a diversification problem. Paying off a mortgage could tie up a large part of someone's wealth in their house. Related to the point right above, paying off a mortgage ties up a large portion of cash in a fairly non-liquid investment.