A friend sent me a note asking if I thought he should pay off his primary residence. He had just bought a new house for an insane deal and saw his options as turning his current house into a rental with an estimated monthly income of $1,300/month, or selling his current home to pay off his new one and be debt free.
The right path here will vary based on who you are, where you are in life, and how you make your money. But I know this guy, he’s an entrepreneur and makes a ton of money building short-term rental units. At 35 years old, he’s really in the peak earning years of his life.
My question in return was asking him how much equity it would take for him to make $1,300/month, and how much he would make if he sold the house instead. He said he would expect to net $381K after all costs if he sold, and it’s easy to calculate that $15K/year in rental profit isn’t a good cash flow for having $381K tied up. That’s just a 4% return, not at all a good investment.
So I told him I would sell the house, but my answer was even more controversial than that. I told him that I’d also rather have $381K in a checking account than have my house paid off. In my opinion, having cash on the sideline is a small price to pay to derisk yourself and be able to take advantage of a great opportunity.
Having your house paid off does not protect you if you face a liquidity crunch. If you need cash, you’re going to have a hard time accessing it, and there’s a big disadvantage to not being liquid. Having all that money tied up just to make $15K/year at a 4% ROI is a terrible investment, and puts you and your family at risk.
My vote is to sell the house, take the tax-free money you gain on your primary residence, and put it in your checking account. People will worry about inflation, but to me, that’s the cost of doing business as an entrepreneur. Cash will act as your get-out-of-jail-free card. There is one rule to real estate: do not run out of cash.
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