paying off the mortgage- the best strategies?

Question

Ok so I would like expert opinions on the best mortgage options for rental/income producing properties. If I have a positive cash flow prop, is it wise to apply the positive cash to the mortgage principal? does that help pay a 30 yr fixed down any faster or is it not really worth it and I should just pocket the leftovers? Im not an accountant and I hate math but RE is such a numbers game and Id just like to know the smartest ways to finance a rental portfolio. Also are 5/10yr interest only mortgages worth it if Im planning on selling a property only a few yrs after acquiring it for a nice return? do smart investors use int-only for short term investments?

Frank Adams · Answer

When I was younger I took a good look at where my investments (non REI), "job" prospects and the rest of my financial situation were heading. I decided to make everything that I had coming in then (peak earning years) do the most they could for my future (declining income years).

I decided that interest was an expense I did not need or want. I started slamming every extra nickel I could onto my LOWEST BALANCE LOAN. In hindsight it wasn't every nickel, I still kept around $5K or so in my checking account, ready cash, and had some of my "investment" portfolio in money markets funds and CDs.

Once I had paid off the lowest balance loan, I started in on the next lowest balance one, when it was gone the next one. By the time I was 45 I had 15 rentals FREE AND CLEAR. At that time we found a house that would be ideal for us, we didnt' have great cash reserves but we had a killer income stream. We actually took out a 95% LTV loan and paid PMI, but we only paid it for 3 months! We only paid on the mortgage for about 30 months before we paid it off.

Being "all cash" is a great way to live. I worked hard for a lot of years to build up my investment portfolio, both REI and equities. Now they are repaying the favor and supporting me.

all cash

Ken Hicks · Answer

I think it would depend on your situation financial and time. I just put down $10k towards the principle for 2 reasons. One I don't have much time for RE. the second reason is that $10k was just sitting in the bank so by adding it to the principle I should be getting 8% more towards the monthly principle contribution. This will only work for so long then you won't be effected as much.

Jon Holdman · Answer

So, first off, I don't like I/O loans for anything long term.  They're useful for short term.  But for anything I plan to hold, I want an amortizing loan.

If your goal is to acquire as many as possible as quickly as possible, I think you'll want the cash.  If you goal is to build up a portfolio of properties that maximizes your monthly return, I think you want to pay them off.

A small extra payment does make a difference.  On a $100K, 6.5% 30 year loan, your P&I payment will be $632. The first month the interest is $542 and the principle is $90.  If you pay an extra $90, you've paid the first two payments, not just one.

But that is only $90 less you owe.  So, if you want to sell in, say, a year, it doesn't make much difference.  If you paid the regular payment, you'd owe $98,882 after a year.  If you paid an extra $100 each month, you'd still owe $97,646.   Longer term, it makes more difference.  After five years, you'd owe $93,611 with the regular payment.  Paying an extra $100/month means you own only $86,544.

The real difference is the loan length.  That extra $100 reduced the term from 30 years to 21.  If I have a property that rents for $1000, that will net me $500, maybe $600/month, if it were paid off.  If inflation affects rent, expenses, and the value of money equally (a bad assumption, but hard to come up with a better one), then when its paid off, that $500 is $500 in today's dollars.  For me, I'd pay the extra $100 to get the shorter term.

I've attached a spreadsheet that lets you play with the numbers.

Richard Warren · Answer

You may wish to pick up a copy of The Total Money Makeover by Dave Ramsey.  It includes a lot of great advice and includes a program called a debt snowball, which is similar to what allcash talks about.
  
http://www.amazon.com/Total-Money-Makeover-Financial-Fitness/dp/0785289089/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1212990604&sr=8-1

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Aly W. · Answer

I just bought my first rental property and this is a great question. Looking forward to the responses.

paying off the mortgage- the best strategies?

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