- 14 Aug 2020
- Rich Financial News
- House Purchase
- 8,770 views
A rental property should be considered an investment. While real estate investments are great for generating cash flow, you are increasing your equity in the property with each monthly payment you make. Even if you collect monthly rent, there is still a monthly payment on the mortgage. For those monthly payments, you give away about 5%, give or take, in interest, per year. That is money that you lose and you will realize just how much that 5% extra would impact your finances.
Paying off the mortgage saves you from paying that 5% yearly interest on your money. You save about 5% interest per year. Over 30 years, that can translate into a lot of money. As it may sound like a good idea to pay off your rental property mortgage, it is not the most ideal financial decision.
A better alternative is to continue with the monthly payments and use the money you would have used to pay off the mortgage and invest it into the stock market. An index fund like the S&P 500 would be the best choice since it is a bet on the US economy. Also, historically speaking, the S&P 500 had an average yearly growth of 9.8% over the past 90 years. This means that you make more money investing into a well-established index fund that what you would save by paying off your rental mortgage.
On the other hand, not everyone likes to invest their money in financial instruments. If that is the case for you, paying off the mortgage early will save you money and will help you become debt-free earlier than anticipated.
The worst choice would be not to pay it down your real estate loans early and not to invest in the stock market. If you have extra cash sitting around or your finances allow you to set aside some money each month, you should at least consider paying off the mortgage as fast as possible if the stock market is not something that you would free comfortable with.