My hubby and I are in a fun financial position at the moment. By the end of September we will fully fund or emergency fund. Which means we will have 6 months of expenses specifically set aside for job loss or other unexpected event. We will then take the money we are currently saving into our e-fund and move it over to our Roth IRAs. Doing that will mean we will also be maxing our our Roths. ($5,500 annually per person) Which is amazing!!! I’m so excited.
With those two things handled it frees up our “extra” money to focus on building wealth outside of retirement accounts. I’ve decided I want to invest in real estate.
My gut reaction was to put all extra money towards the $60,000 mortgage on our rental house. If we do that we could have that house paid off in three years or less. Sounds like a no-brainer, right?
Here’s the kicker: the principal and interest payment on this house is only $246 per month. (The whole payment is only $411 including taxes and insurance.) So when we pay the house off it will only increase our cash flow by $246 per month. I’d be spending $60,000 to make an additional $246 per month. That makes no sense. I can use that $60,000 for something else that will give much better returns.
It’s a tough choice. I’ve been going round and round with it. Should I work to get out of debt or should I maximize my returns. Risk vs. Reward.
To help make the decision I went back to my long term goals. Ultimately, I want to be totally debt free when I retire in 10 – 15 years. I was thinking I could only pay what I need to pay in order to have both houses paid off in 10 years, and then I’ll invest anything left over in additional real estate.
Doing so leaves me with about $460 left over of “extra” money per month. Pushing my payoff date to 15 years, rather than 10, would make a difference but I’d rather play it conservatively. I like having a built in safety net so if something goes wrong I can still hit my goals.
$460 a month is not that exciting to me. I’m not going to conquer the world with that. Plus the thought of NOT paying off the rental mortgage makes me sad.
So, after much thought and discussion I have decided to focus on paying off the rental mortgage. I’ll take my guaranteed 5% return and stay on the safer side of risk. Besides, if I change my mind I can always take out another mortgage. Getting into debt is always easier than getting out if it!
Photo Credit: MarkMoz12