Don’t Pay Down the Mortgage on Your Rental Properties

As a landlord of rental properties, when things are going well, sometimes the overwhelming urge to pay down one or more of your mortgages strikes. Bonus Commissions would like to make our best case for why you should resist the temptation! It makes sense though, doesn’t it? Conventional wisdom tells us that paying down a mortgage is a good thing and that’s exactly why you shouldn’t because conventional wisdom is rarely right.

To understand why it’s not a good idea to pay down a mortgage in today’s economy (and for the foreseeable future), we first must understand inflation. Inflation undermines the value of money in an economy. The end result is that any cash-based asset loses value in real terms while inflation is present. The difficulty then becomes in finding a non-cash asset. Do those even exist? They most certainly do and we call them mortgages. A long-term, fixed-rate mortgage tied to rental properties is the best way we know of to increase your wealth during inflationary times; the reason is that while inflation erodes the value of cash, it also reduces the real term value of mortgage principal you ultimately pay off. The longer period of time you can delay paying off your mortgage, the better it is for your pocketbook. That’s why we suggest going out at least 30 years when arranging terms, longer if you can find a bank to do it.

Consider that the current inflation rate is about 10% a year – don’t believe the doctored 4% number the government likes to use because food and energy aren’t part of their calculations. That means the amount of stuff you can buy with a dollar decreases by about 10% a year, a fact that completely upends your financial plans if you’re holding cash-based assets like stocks. But as the holder of debt, the real amount of money you owe the bank decreases by about 10% a year, which is an amazing investment if you have the insight to go after it.

Keep in mind that you’re cashing monthly rental checks from tenants all the while, so you’re not even really having to come up with money to make the mortgage payments. We also think you should cash out your property every seven years or so, essentially refinance everything, buy more rental properties and take on another long term mortgage but that’s a discussion for another day.

The Bonus Commissions Team

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