Hey, what’s up, John Sonmez from simpleprogrammer.com.
I got a question recently that—it didn’t come via email, but someone had commented
on this YouTube video.
I did this video on actually someone else’s channel on Engineer Truth.
He interviewed me about my real estate investments and someone on there asked a question of should
I pay off my house.
I’ve gotten this question a lot doing real estate investment.
I thought I’d finally answer this question.
By the way, if you’re interested in my videos on real estate investment you can check out
the playlist I have here.
I recently released or actually it’s still on pre release at the time that I’m recording
this video, maybe it’s on full release, a course on real estate for software developers.
You can check that out here as well.
Let’s get to the question here of should I pay off my house, how do you know if you
should pay off your house.
I think this is a really important question.
A lot of software developers kind of get to this point where you’re making some money,
good money in your career and you’re thinking, well, I’ve got a big mortgage on my house.
If I paid that off I’d be financially free.
I’d save myself a couple of thousand dollars a month or whatever your mortgage is, but
does this make sense to do?
Or would it be better to invest that money?
Should I pay off my credit cards?
All of these things.
I’ll give you a rule of thumb that’s going to apply to more than just paying off your
house but just in general on where to allocate your money when you’ve got extra money.
Basically it comes down to this kind of really important question of should you invest your
money or should you pay down debt.
We’ll look at the how specifically but you can apply this to credit cards and everything
else which is basically this.
Let’s look at—let’s say that you have a house and you’ve got a mortgage on that
house.
Let’s say that the mortgage on that house is what is now a ridiculously high rate but
used to be a really good rate, let’s say 8%.
That means that you basically—if you were to take some money, let’s say that you take
$10,000 and you were to pay down your house by $10,000 you’re getting an 8% return on
that investment of $10,000 because you’re not paying 8% interest on the 10,000.
Does that make sense?
Do you see what I’m saying?
So you’re getting a return on that money and every year that you have that $10,000
paid off you’re not paying 8% interest on it.
You can think of that every year that’s how much you’re not paying.
It’s the same thing as making that 8%.
In order for you to not pay off your house in that case you have to be able to find an
investment that’s going to make you more than 8%, but not only make you more than 8%
because there is investments that can make you more than 8% but after the taxes on that.
Because let’s say that I said, okay, if you give me $10,000 I’ll give you 10% interest
on that.
If I give you that $1000 what’s your tax rate?
That $1000 that you might get at 10% you’re going to—maybe let’s say it’s 30%.
Now you’re only going to get $700. $700 is what interest rate?
What’s the real interest that you’ve got?
You’ve got to figure out your real return after taxes.
That’s going to give you an idea.
We can take another scenario here.
Let’s say now that you have that same house, but instead of having an 8% interest rate
on the house you’ve got a 3%.
That’s doable nowadays.
I think I just bought my house and I got a 3% interest rate.
At a 3% interest rate there’s a lot of investment.
Now you’ve got a lot more room.
Now if you can find something that’s going to yield you 5 or 6% like even just straight
investing in the SMP over the last 50 years there are average yields of higher than that,
especially if you’re being able to take advantage of something like a 401K or IRA
if you’re going down that road.
I’m not the biggest fan of those.
You can watch my video on making choices on retirement and why I don’t like 401Ks necessarily
but if you go down that road.
Anyway, there’s a lot more opportunities for investment where you could probably make
that money.
Real estate investment is a great one.
I can guarantee you that in most cases if you invest successfully in real estate you’re
going to be able to beat a 3% interest rate on your house.
It won’t make sense to put money to pay off an interest on your house that is only
3%, instead it would be much smarter if you had that $10,000 instead of getting 3% interest
by paying off your house.
Take that money and put it as a down payment on your rental property where maybe your return
on that investment might be 10 or 15%, your expected return on that.
If you’ve got some leverage, you’ve got a lot of opportunity especially.
You’re going to have tax advantages when you invest in real estate.
Again, if you’re interested in all that stuff check out the real estate course where
I talk about all that and I go into all of the details.
I just want to cover the basics here which is should you pay off the house.
That’s what it really comes down to.
Can you take that money, can you put it somewhere else and make a higher rate than what—you
could think of your house as this or any debt that you owe, it’s a guaranteed return.
It’s a guaranteed return on your investment.
There’s not too many places you can get a guaranteed return, but if you owe money
and you’re being charged interest, I guarantee you that if you pay down that amount and you’re
not being charged interest on that you’ve got a guaranteed return.
That’s what you should think about.
Same thing goes for credit cards and whatever you’re considering if you’re trying to
make that bigger choice between should I pay down debt or invest.
It’s not a yes or no answer.
So many people would tell you, “Oh, pay down your debt first.”
Not true.
If you have a house that only has a 3% interest rate or if I gave you a no interest loan it
would be stupid to pay down that debt first.
Take that money and use that money to invest where you’re going to get a—whatever the
difference is that’s what your yield is.
If you’ve got a 3% mortgage and you find an investment that gives you 6%, you’ve
made 3% on the money essentially that the bank is loaning you if that makes sense to
you.
Anyway, good question.
This is definitely one that I think a lot of people struggle with but that’s how I
think about this.
It can be hard because you’ve got that—the security of paying off your house feels like
the right thing, but if you’re talking about it from a purely financial perspective, what
is going to be the most profitable in the long run it’s always going to be to look
and see where you get the highest yield on your money.
Like I said, you look at your debts, you look at what you could do with that money if you
didn’t pay off the debt.
Essentially what you can think off with that debt is borrowing money for an investment
if you can have a higher yield in the investment.
Anyway, if you like this video, if you’d like to get more real estate, financial personal
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Take care.