Heroic Investing
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Don’t Pay off that Mortgage!

As we’ve said previously in these postings, buying an investment property with a fixed-rate mortgage is a sound investment for retirement income. And although it may seem counterintuitive, that mortgage is one of the reasons this type of real estate investment is such a sound strategy for secure retirement income. For a number of reasons, paying off a mortgage early can be a bad idea – especially in a period of inflation.

Not all debt is bad for you, though some kinds clearly are. Obviously, the kinds of debt that leave you with things that depreciate in value over time and can’t be leveraged for more income are pretty bad. That includes credit purchases for things like cars, stereos and trips. Over time, items like these lose value – you’re not likely to ever recoup that original purchase price if you resell them. And intangibles like travel and restaurant meals clearly offer no return on your original investment.

But so-called good debt – the kind that leads to owning something that actually increases value over time – offers one of the best and most stable avenues for a secure retirement. That’s why real estate investment is considered a very good kind of debt indeed. A long-term fixed rate mortgage on a piece of property capable of producing income sets the stage for an ongoing return on the investment for steady income.

So why can paying off the mortgage sabotage the whole strategy? A fixed rate mortgage on an investment property –- the type recommended by Jason Hartman and Heroic Investors – offers significant protection against inflation. Not only that, tax laws in the United States provide a number of benefits for those who own investment-producing real estate.

Current tax law allows owners of income property to deduct interest on the mortgage loan as well as for depreciation on the property itself and even for normal expenses for repairs and other kinds of ongoing expenditures. With a cash flow provided by the property’s tenants to cover the mortgage payments, the investor may reap a rate of return approaching 20% or more.

If the property is continuously occupied, tenant rental payments can pay the mortgage off completely. This strategy can create new opportunities for leveraging the value of the property, which can provide additional benefits for investors. One option is to refinance the property with an equity loan, which creates another source of income for the property. An investor could also sell the property and reinvest the funds into one or more additional rental properties to keep the cycle going.

Although conventional wisdom advises that staying out of debt is always the best option, a fixed rate mortgage on an investment property creates the kind of “good debt” that allows an investor to take advantage of current tax breaks and opens doors to new investment possibilities. (Top image: Flickr | Steve A Johnson)

The Heroic Investing Team


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