BiggerPockets

Greetings Everyone!
My name is KB and I am currently serving in the military. I have 2 rentals (one I previously lived in and converted into a rental, and the other purchased as a rental) Question: Does it make sense to put forth as much $$ as possible toward the two rentals...in order to pay them off within the 6yrs of active military service I have remaining....to more effectively (recieve 100% rental income from both rentals) supplement my retirement?? Or should I concentrate on building my portfolio by trying to accumulate more properties. (by saving up for down payment, or by rerfinancing). Your experienced opinions are greatly appreciated. Thanks in advance for your help! :D

Thanks for your quick response Nationwide! I know I have lots to learn, but is paying off a rental something I would "ever" focus on? Meaning applying both principles: Aquiring more and more properties, but pay off the older ones .....to help pay for the newer ones. Is that possible....does this make good realestate investing cents??

Greetings, KB...best of luck in your investing activity!

It might help to keep in mind a simple fact: Mathematically, paying down a loan which bears interest at X% is identical, in terms of net economic value, to investing that same amount at X%.

Putting it another way, if you have Y dollars available to employ somewhere, just think of 'loan paydowns' as one more investment possibility, among your other options.

Suppose, for example, you could either use your discretionary Y dollars to pay down a 6% loan, or could instead deploy the Y dollars into an 8% investment. Paying down the loan is economically equivalent to investing at 6%, making it (obviously) the inferior choice in this particular fact set.

Without a doubt, you MUST also evaluate other factors. You might, for example, want to de-leverage your personal balance sheet for other reasons (risk; too much leverage; anticipated future financing), and this might override the simple "rate of return" rule of thumb I've described.

Nevertheless, it's a simple, and usually valuable, rule of thumb when evaluating your options.

Cheers!

...it was early and I was full of no coffee...

KB, by your explanation, you don't have "true cash flow" on your rentals. Rent less mortgage paymnet taxes and Insurance does not equal cash flow.
Read into the forums involving the 50% rule and the landlording forums. They will give you great insight into calculating cash flow properly.

That said, paying down your mortgages in 5 years certainly gives you X rate of return on those funds, but a better return would most likely come from putting that X money into a third rental, and then a 4th and so on. Let the tenants pay down the mortgage and let your cash work for you.

David, great post. It was only your 2nd post and it was right on. You appear to have the knowledge and experience to speak guide others. Stick around and participate more. We are glad to have you. I voted for your post as it was an excellent one!

KB, the question is, why are you negative cash flow on them? If it is due to a bad loan, then doing a refi could help. If it is due to you paying too much upon purchase, then you really have only two choices, sell or eat the negative cash flow and do better on your next ones. Don't add into what is already a negative property. Move on to a better one and sell the first or at least make enough cash flow on the next few to even out the score.

You are 2 steps ahead of me Nationwide! The negative cashflow is due to me paying too much for the property. I have a fixed rate, biweekly, 30yr loan.

I guess I was thinking that I could add money to this negative and turn it into a positive by paying them off.... oh well!

Thanks Nationwide,
I think because of the area the house is located in.....it may be a challenge to get it sold at retail, but I will definitely look into a wrap mtg a little more.

Any advice on purchasing an owner occupied then converting to a rental in say 3yrs? Would the process be different from reading the numbers and using the 50% rule??

Thanks for your help!

KB,

To calculate the cash flow in the real world, subtract the mortgage payment (P & I only) from 1/2 of the monthly gross rent.

As an example, if the rent was $600 per month and your mortgage payment is $400 per month, here's how that calculation would look:

Gross rent: $600
Operating expenses: $300
NOI (1/2 of the gross rent): $300

Less Mortgage Payment: $400

Equals Cash Flow: -$100 OUCH!

In the real world, operating expenses run 45% to 50% of the gross rents (plan on 50%).

If the properties you have are losing money, I'd sell them to some other wide-eyed newbie that wants to get in the rental business. Once you get your money back, then you can start buying rentals correctly - so that you actually MAKE money!

Good Luck,

Mike

Thanks for the details Mike,
It really paints a clearer picture. As much as I "don't" want to sell them, I feel that you are right on the mark (+) if i get my money back....I haven't really lost anything except Time. Big pill to swallow! Thank you!

it is that easy.

as mike stated, figure half the rent (over time) will pay for maintenance, taxes, insurance, vacancy, etc and the other half will pay YOU (half of rent - p&i = cashflow)