People are greatly divided on the topic of early mortgage pay off some say its a good idea, others disagree. This topic is highly debatable because there are so many factors to consider, and even a slight change in one of these factors could swing the answer in one way or another. In any case, a reader by the name of p3keith left an interesting comment with a different twist on this topic should you pay off mortgage early on a rental property?

Heres the question:

Not to take this rabbit down a different hole, but I have a similar question on mortgage prepayment that involves a rental property. A little background on my situation. I am 35 years old and six years away from my military retirement. I am looking for my rental property to generate some additional income when I retire (it is zero sum right now, breaking even between rent income and mortgage payment), so I am considering paying it off in the next six years. To do this, I will have to stop my IRA and other retirement contributions.

Is it worth it?

Once it is paid off, I could start with the retirement contributions again, but I am not thrilled with the idea I can’t touch my retirement investments until I am 59 1/2. A paid off rental property is in effect a retirement savings that I would immediately reap the benefits of once it was paid off. I know my ROI drops with every dollar I pay into the property, but I think I am more concerned with cash flow than ROI. The cash flow from the property couple with my retirement would make a decent living in the area I want to retire in.

And heres the first answer from another reader, Gene:

I’m in a very similar situation as you. I have a rental property that is zero sum as well… breaking even between rental income and everything I owe on the house monthly. I’m considering paying off the property so I can pocket the income (minus taxes and homeowner fees).

Taking everything discussed here into account if one can pay off the mortgage on a property that in turn generates income immediately, the decision is heavily weighted towards paying it off. For instance, I owe $100,000 left on the rent house and I have about $110,000 in mutual funds that are liquid if I pay off the rental house, it not only immediately saves me 5.8% in interest but generates a net profit of $1,000 a month which is which is a 1% a month gain on the “investment” of paying off the mortgage (the rent is actually $1,400 but 400 is spoken for via taxes, homeowner fee, insurance).

Does anybody have any input for us when it comes to paying off a home that currently has renters? I can’t see any additional drawbacks, but I do see an extra 10% on an “investment” in my mortgage being paid off…(PS: I’m military also and have very secure employment – 10 years away from full retirement if I stay in…). I also have $50,000 in a Roth IRA and max the contributions every year, so that $110,000 in mutual funds isn’t my only retirement fundage.

Heres my take on this:

I think the problem is quite intriguing. Without going into all the fuzzy math and simply compare the two possible scenarios:

1. Own a positive cash flow rental property, no mortgage, and has less in retirement savings, or
2. Own a zero cash flow rental property with a mortgage, and has more in retirement savings.

I think the answer is self-evidentI would choose #1 over #2 any day even if it means I have less wealth in the end. Why? I think there is a lot of value in the peace of mind that comes with scenario #1.

If youre in this situation, what would you do?