Paying off the mortgage early versus buying the next property is a question that looks like personal finance but is really a spread trade

Six percent cap in most secondary markets right now barely clears 7 percent debt at any reasonable vacancy assumption.

The framing here is right and the spread trade structure is the correct way to think about it. The assumption doing the most work is that 6 to 8 percent cash-on-cash, because that range is doing a lot of lifting and the width of it matters. A 200 basis point range on a 60k deployment is $1,200 a year in real dollars, which is not noise when you are comparing it to a 2.6 percent guaranteed cost of capital.

A few places where that range tends to compress in practice. Insurance replacement cost is the one you named, and it is the right call. The other two are vacancy underwriting and property management cost. A lot of small multifamily pro formas circulating right now assume 5 percent vacancy in markets where trailing actuals are running higher, and they exclude management either because the current owner self-manages or because the buyer intends to. If the deal only pencils with your own labor as an input, the real return is lower than the spreadsheet says.

The leverage point is worth sitting with. A 5.5 percent cap rate against a 7 percent mortgage is negative leverage before you add the tax wrapper. The equity return is higher than the cap rate only because the loan is amortizing and you are capturing appreciation, neither of which shows up in year-one cash-on-cash. That does not make the deal wrong, but it means the cash-on-cash number is partly a financing artifact, exactly as you said.

The balance sheet argument for paydown is underrated in this thread. If the next deal requires a debt-to-income calculation that treats the existing mortgage as a liability, eliminating it may expand borrowing capacity by more than the spread arithmetic suggests.

What does the trailing 12-month actual operating history look like on the specific property, not the pro forma? That is where this question actually gets answered.

The insurance non-renewal line is the one I'd push on hardest. I had a note go sideways on a Scottsdale property in 2021 partly because the underlying borrower got dropped by their carrier mid-year and scrambled into a force-placed policy at roughly 3x the original premium. That single line item collapsed their DSCR and suddenly I'm dealing with a workout I didn't underwrite for. On my Memphis duplex I budgeted $1,800 a year for insurance when I bought in 2022. I'm at $3,100 now and the replacement cost rider is still probably light. That's not a rounding error on a 60k equity deployment, that's the difference between 7 percent cash-on-cash and 4.

The leverage amplification point the post makes is technically correct but I'd push back on how it gets used in practice. A lot of people run the spread trade logic and stop at cap rate minus after-tax mortgage cost, which ignores that the 7 percent debt you're taking on in the new deal is full recourse personal liability in most small multifamily scenarios, while the 3.5 percent mortgage you're contemplating paying down is already sitting on an appreciating asset you sleep in. Those two debts are not the same kind of exposure even if the math treats them symmetrically. What market are you actually targeting, because the spread math is very different in a Midwest rust belt market trading at a 7 handle versus a Sun Belt secondary at 5.5?