Don't Pay Off That Property!

Go to a traditional financial planner and they will tell you to put as much money as you can in qualified (tax-deferred) plans, start young, and make extra payments toward your principal on your primary residence so you can become debt free.



This may not be the best plan for your retirement! Let’s say you follow this plan, pay $6,000 every year toward your qualified plan (non-ROTH IRA/401k) which, $6,000 off your taxable income at a 33% bracket will save you approximately $2,000 a year in taxes. You do this every year for 30 years while at the same time you pay off your mortgage(s). Now, when you are ready to pull out that retirement money you no longer have mortgage interest to write off, no kids in the house to write off which may put you at the same tax bracket you were at while contributing, except now you are not just pulling out $6,000 a year, you are pulling out some of the COMPOUNDED amount which will add up quick and in the wrong, yet probable, circumstances could have you paying all of that 30 years of tax savings back to Uncle Sam in less than 5 years into your retirement! Say it isn’t so!

What are your options? Equity in your property(s) has no rate of return, no security and is not liquid. Would you take a big chunk of money and hide it in your mattress to earn 0% interest? No? That is exactly what you are doing if you do not pull out the equity in your property(s) often. Do you think you are safe when you make that last payment to the mortgage company on your house? Does this make you debt-free? Maybe, but think about this, If you go into hardship there is a good chance that lenders will not lend any money to you on your property. Wouldn’t you prefer to have accessible cash on the side in the case you may need it? Doesn’t that provide more security than simply not having a mortgage payment? Keep your equity liquid and invest it. If you pay 6% interest on an equity line or loan do you know of a vehicle that can earn more than that? Plus, with the interest tax deductible on mortgage loans, aren’t you really paying less than 6%? So, NOW, do you know of an investment vehicle that can earn you more than 4-5%? I hear Real estate can be lucrative and has its own levels of tax benefits…



Let’s say you have a primary residence with 100k of equity in it that you can pull out. You do an interest only loan at 6% and pay an annual total of $6,000 in interest that year. As that interest is tax deductible, you save approximately $2,000 off your taxes for each year you make those payments. So, you are essentially paying 4% interest. (Bear with me; I know these figures are not exact). Let’s say you take that 100k, and put 10k down on 10 duplexes, this includes insurance, down payment, closing costs, everything and by leveraging you gain 10 duplexes worth 100k each, or 1 million dollars. Now, should you put that much down on these duplexes? No, but let’s be pessimistic here. So, these duplexes are not in the most desirable place but earn 3-5% appreciation, but also cash flow a modest $100 per unit (after PITI and property mgmt fees), that’s $2,000 a month. So, with paying $4,000 in interest a year on your primary residence, you are now bringing in roughly $24,000 a year but wait there’s more. Take your depreciation, interest payments, repairs, travel expenses out (that are tax deductible) and how much of that 24k will you pay taxes on? Very little, trust me. But wait, there’s more! Remember that appreciation bit? Let’s again be pessimistic. 3% of 1 million dollars is $30,000, 3% of 1 million, 30 thousand is $30,900. So by year two you will have another $60k to play with…and of course any appreciation in your primary residence in those two years! Now, I realize these figures may not match your area, or my investing strategy may not match yours, but the point is…USE THAT EQUITY!



Happy Investing!



Ray Higdon

SWFLA Investments and First Integrity Mortgage



Some of the ideas contained in this article came from the book called “Missed Fortunes” by Douglas Andrew, whereas I don’t advocate the investment engines that Mr. Andrew recommends, I do think his ideas on equity management are solid.