The Successful Landlord Blog

This is a guest post by the Calgary mortgage specialists at the Purcell Mortgage Team.  For mortgage related tips and tricks, check out their weekly-updated mortgage blog.

The real estate market has had its ups and downs, with the end result being plummeting rents and massive foreclosure rates.  For the savvy investor, this also means sweet deals on respectable properties.  This, of course, leads us to the question of the hour: should you pay off the mortgage(s) on your rental properties, or do you leverage the equity you’ve built in them to purchase new ones?

Understandably, it’s a tough call.

Paying Off Your Mortgage – Pros

It doesn’t take an accountant to figure out that a property without a mortgage is inherently more profitable.  More of the money that your

tenants pay you go into your pocket, making a mortgage-free property an ideal situation for many.  Not only that, but paying off your mortgage is also much easier to do when the property is rented out- if the tenant is paying the mortgage, you really have nothing to lose aside from a little sweat equity every now and again.

This may all seem quite basic to anyone with a bit of financial know-how, but have you really considered all of the finer details?

• Little/no mortgage payments - Using the income derived from your tenants to pay down the principle owing will lower mortgage payments.

• Lower overall overhead -  Reducing mortgage payments and/or interest payments reduces your financial overhead, making it easier for you to obtain profitability.

• More equity available if necessary - Obtaining loans at an excellent interest rate on the value of a paid-off property is surprisingly easy (it’s amazing the value that financial institutions put into debt-free assets).

Paying Off Your Mortgage – Cons

Many people reach this far and say “really, there are cons to paying off my mortgage?”  Well, in fact, there are.  Quite a few of of them actually.

If you’re the financially creative type, paying off your mortgage does indeed reduce your overhead.  It also increases your profitability for each property, and increases the amount of cash flow that you may wind up having to pay taxes on.  There are many tax loopholes that exist for properties that are still mortgaged, and those options start drying up once there is no lien against the property.

As well, using your working capital and income to pay down your mortgage on your rental properties also means that you have less liquid assets available to you for immediate financial purchase or investments.  For some, this will not be a big problem, but for others it can outright stall their investment plan.  Talking to a certified accountant that specializes in real estate accounting is always a good option in determining which road you should take.

Some advantages to keeping your properties mortgage are:

• Constant new cash flow - In rare instances where the market plummets this can be a problem (owning a home worth less than the mortgage is never a good thing), but for the most part a sound property investment will grow in value.  Leveraging the equity in your rental properties via HELOC’s or traditional mortgages can provide a steady, relatively low-risk influx of cash.  Someone else’s cash, as well.

• Tax breaks and profit reduction - For most people it doesn’t make sense to reduce profit, but for those seeking low-risk tax shelters, an investment property is a great way to tie up cash in an appreciating asset.  Homes that are mortgage offer more in the way of tax credits as well, so talk to your account to see what applies to you.

If you are willing to accept some risk in your investment strategy, leveraging the equity of your current rental properties to purchase some new ones can be a great way to increase your investment portfolio.  There are many landlords who have dozens of rental properties, each remortgaged when their mortgage comes up for renewal.  As always, ensure that you think your financial strategy through before making any decisions.

Good luck out there.