I got a question, haven't heard anyone talk about this?

Question

on the bleachers right now just learning so i got a question If I find a  duplex for 350k, put 20% down , 30 year mortgage after the 30 years is over and the property is paid off,  it cost me more than 700k that just doesn't sit right in my stomach. I don't ever see anyone talking about this, is it cause no one owns their duplex for over 30 years, they don't do a 30 year mortgage, they rent a lot more then the mortgage payment???

Chris Seveney · Answer

@Michael Kattouah

I assume you mean all the interest you paid over time

If you invested $350k and got zero interest on it over 30 years would you be happy with that?

Same with a bank which has shareholders / investors.

There is a risk in borrowing money and borrowing money is not free.

Russell Brazil · Answer

Your other option is to pay cash instead.

Nicholas L. · Answer

@Michael Kattouah

i understand what you're saying - lots of folks are shocked when they see how much interest they pay over time.

and it's a lot more at 7% than it is at 2.5%.

but... i certainly don't worry about it.  my tenants are paying the mortgage.

and... do we rent for 'a lot' more than the mortgage payment?  if we can =) this is heavily market dependent.  and you have to rent for some amount more or you'll be paying for repairs, vacancy, property management, etc. out of pocket.  and thus losing money.

hope this helps

Jonathan Greene · Answer

I am not sure what you don't understand. You don't have the money to pay the price to get the house in cash, so you have to use leverage. Leverage isn't free. Do you want the bank to lend you money for fun? You are paying the price to use someone else's money to buy a house. You also get the appreciation on the asset during the course of ownership, which is cash back to you at closing when you sell or refinance.

Tanner Lewis · Answer

If it sits vacant and you are paying a mortgage, insurance, and taxes on a deal, I agree it wouldn't make sense. But most investors are looking to rent out the property to cover at least these expenses and cash flow on top of this. Cash flow is not the only profit you will be taking on the deal: appreciation, depreciation, mortgage pay down, rent increases, etc.

Drew Sygit · Answer

@Michael Kattouah how is this any different than doing the exact same thing on a primary residence with a mortgage?

With rentals, the tenants should end up paying for eveything.

Chris John · Answer

@Michael Kattouah

One of the few things that I've learned in college that has actually stuck with me is that life is an income statement game, not a balance sheet game.

I'll pay you $100,000,000 for a $300,000 house if you let me pay you $1,000 a month for the next 8,334 years.

John Clark · Answer

What doesn’t sit right, the concept of the time value of money? You owned it for thirty years. What do you think it should cost?

Peter W. · Answer

If your underlying asset makes 9% (six percent in rents and 3% in appreciation). If you have an 20% down note at 7%, you’ll return 9% + 2*4% or 17% with leverage instead of the original 9%. This is why folks are okay with paying so much in interest, they are making more.

My math is unconservative (you make less due to loan origination fees and principal pay down) but is demonstrative.

Joseph Chiofalo · Answer

Hi Michael,

You could structure the loan on shorter term so you end up paying less interest over the life of the loan.

With that said- there is a cost to borrow capital.

I got a question, haven't heard anyone talk about this?

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