Should I pay off a commercial loan principal monthly or invest the extra capital?

I own a real estate investment property that, after expenses, has a net cashflow every month of about $1,500. I have a mortgage principal balance of approximately $375,000 with a fixed interest rate of 4.5 percent until January 2026 when I have a balloon payment of $262,000. Is it better for me to use the excess cash to pay down the principal by $1,000-$1,500 per month so that when my balloon payment is due I owe much less? Or is it better to take the cash and invest it for the next seven years so I can use that cash to payoff the loan in seven years? Which option would give me a better return?

Debt, Estate Planning, Investing, Real Estate
Answers
Sort By:
Most Helpful
6 days ago

Without knowing specifics on this property, the market, or your other investment opportunities, I tend to think that you should take the money out of the property now in the form of profit and dedicate those funds to other investments or for a rainy day. In paying down the loan balance you are putting your cash back into this investment and not diversifying away from it. 4.5% debt due in eight years doesn't sound so bad in the world of commercial loans for a cashflowing property. 

The best case scenario with healthy real estate is that your down payment is the total amount of YOUR cash invested. From that point on, all expenses are covered by the tenant and you recover your investment through cash flow, appreciation and debt paydown (all paid by rents). 

While the balloon might seem daunting, so long as you have solid tenant cash flow it shouldn't be an issue to refinance the property when the balloon comes due. Either way, it sounds like you have options and there's no perfect answer here. Perhaps hedge your bet with paying a little extra, socking some away, and investing some elsewhere hopefully above a 4.5% annual return. 

3 days ago
1 week ago
4 days ago