El Paso, TX · Member since 2012 · 27 posts · 0 votes
Hello All,
I need someone who is strong in math and or spreadsheets to help me with goal setting.
Here is the situation: I want to own (free and clear) 15 properties as soon as possible.
The first one will paid off in February 2014.
Then ill buy another and put 4k per month towards its pay off. (110k loan)
Rinse and repeat x15. Each time using the income from the previous properties to pay off the next one. Add 4k per month of my own money to the payments.
As you can see each property gets paid of at an increasing rate.
MY QUESTION: Will paying off other debt and using the extra money for investing slow my progress or speed it up?
My thoughts are to not worry about my current non mortgage debt and put all my cash into investments. Can you prove mathmatically that I should pay off debt first or even concurrently with investing? Can you show me the benefits of such?
Whats faster? Paying off debt (80k at 8%interest , 9 different loans w varying amounts) using a portion of my 4k per month investment budget or focusing on investment property soley?
Which path is best/faster for achieving the 15 properties free and clear?
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Loan amounts don't help as much as price of properties to acquire. At a hundred thousand, borrowing 80K your acquiring one every 5 months, all going to the down. Buying 4 20K properties could be one every month.
The velocity of money has nothing to do with the use of capital or your opportunity costs, use of funds, what else would you do with the money, from that you can see if paying down the debt is the better choice. :)
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
Hi Bill,
I totally see your point. Other members have pointed out that acquiring 4 homes vs one at a time is faster to the goal.
However in paying these homes off with the goal of 15 being free and clear ASAP.
Does it make sense to pay off other debt and use that "freed up" money to reach my goals OR do i forget the other debt and use all of my net income to pay off the investment mortgages?
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Gotta know the purchase prices, a 100k purchase with 20k down is an 80k debt to be paid off, a 60k purchase is 12k down with 48k to pat down, big difference.
BTW, I'm not a techie to post spread sheets..... :)
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
I totally appreciate you Bill.
My purchase prices will be in the 100k range. Most likely with zero down. Im expecting 1200 dollar rents.
Speculation tells me that forgetting my non investment debt will yield the fastest path to the goal. I think that was the opportunity cost you mentioned.
My spouse wants to pay off non investment debt and then use the "freed up income" to invest later. I was hoping to find a spreadsheet that would consider all possibilities and show mathmatically what each choice would do to our goals.
I mean if we pay off 2000k worth of non investment debt and then use that "freed up money" to pay off more non investment debts and so on and so forth.... AND THEN use ALL of our money to pay investment debt....would it be faster to our goals? I think not. I just want to know for sure.
SFR Investor · Los Angeles, CA · Member since 2013 · 134 posts · 16 votes
13y
Hi Gary West
Great goal! Mine is to acquire 5 properties by the end of 2014 and to funnel the cashflow back into the mortgage with the lowest balance until each is paid off.
As far as the spreadsheet, I'm pretty sure a template doesn't exist. Couldn't find one. I wanted the exact same thing last week so I could map out my goal.
PM me your email, and I'll send you what I built last week. No idea how to attach files to the BP boards.
Here's my disclaimer: there are very few labels, and it was never meant to make sense to anyone but me. :)
If you want to start from scratch, here's all you need (and if anyone can lend further insight, please do)...
1. lots of time!
2. you need 2 worksheets, one with your math, and one with a mortgage amortization schedule. Google it, and the 1st link from office.mircosoft.com should be the template you need.
3. for the Excel spreadsheet, think of time progressing downwards; the further down in the rows you are, the further through the months
4. to map each property, give each one 5 columns {Month #, Mortgage Balance, Principal, Interest, Additional Payment}
* that is the month you're on in your repayment to the bank (1-360)
* balance due to the bank
* that month's principal payment (this is why it's handy to have the amortiation worksheet)
* interest for that month
* and what additional payments you'll kick in from the other properties.
5. when adding a new property to the sheet, just list the following as headers so you can add them into your equations {purchase price, down payment, P&I, cashflow when mortgaged, cashflow when paid-off}.
6. to make this all work, you take an iterative process
* start by charting your 1st and only property, and plot it out so it takes 360 months to pay off
* add in your 2nd property, and add its cashflow to the "additional payments" on you 1st (or have your 1st property's cashflow pushed into your 2nd .. whatever you like)
* keep doing this up to your 15th (or in my spreadsheet's case, my 5th property)
Some insights I've gained:
* the snowball effect works! I found it REALLY interesting reading the blog of another BP member, http://investfourmore.wordpress.com/ * with 5 properties, you can hypothetically pay off 1 of them in about 3 years time (all properties around $110k and 25% down)!
* paying off the mortgage with the lowest balance created the greatest cashflow & brought all properties to a zero-balance fastest (mathematically, this is not always the case, and you could easily find a counter-example if the purchase prices are very far apart)
I really want to learn how you're going to amass 15 properties!
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
Ryan,
I read Ned's post. It gave me more substance on which to make my decision.
Ill base some of my calculations on that.
I am in agreement that paying off debt can be thought of as a return on your money. As he says a return on your investment. However its not an investment that pays you money, its one that saves you money.
My thoughts are that one day I wont have a job. When that time comes making money will be a priority over saving money. My perspective is that my debt may always be there but my job wont be. So I think the focus should be on solidifying my retirement and real estate portfolio and preparing for the day that my "day job" is no more.
The only way that I will pay off my current debt at the cost of postponing investing is that when the pay off for doing so will catapult me into an investment and earnings rate that will far exceed putting the debt aside for now.
So my question remains, does forfeiting investment spending today to pay down personal debt help me to achieve my goal slower or faster than keeping the debt and putting all of my current disposable income into investments?
Pay off debt VS Investment spending?
Less investment spending now VS More investment spending later?
Normal investment spending Now is (4k/month plus SFR income)
Currently my plan is to pay off my current and only property off by Feb 2014. Then Ill buy another and use my disposable income from my job and my SFR earnings to pay it off (within 24 mos). Rinse and repeat until I have 15 properties. That's 1.5 million in assets that generate an income of 15000 dollars per month.
I may change my plan at some point to acquire more than one house at a time. For now my comfort zone is one at a time.
What I have not done is sit down and figure out how long it will take to acquire 15 houses using this method. I think that is what I need to do next.
SFR Investor · Los Angeles, CA · Member since 2013 · 134 posts · 16 votes
13y
Mathematically, there's no difference.
If you have $100k in the bank, $25k in debts, and your ROI is 8%, and your debts cost 8%, you make the same amount at the end of the year in both of the following scenarios:
* pay debt off first, you make $75k*.08 = $6k
* keep the debt and invest what you have, you make $100k*.08 - $25k*.08 = $8k - $2k = $6k.
Empirically, the answer is: if your ROI is higher than your debt's interest rate, don't pay off your debt any faster; if your debt rate is higher, don't invest; if the rates are equal, there's no best solution.
Time doesn't matter; dollar amounts don't matter. All that matters is ROI and debt interest rate.
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
Great replies Ryan. I think this has put me in motion to make a great decision. Maybe the answer lies in paying off the debt that is most damaging and not worrying about the rest.
I do want to give you a bit of perspective on saving income vs earning income. As I am racing for retirement income (43yrs old) I can tell you that money saved on interest may not be as valuable as money earned on investments. Money saved is great when you have an ongoing income. However once that income is gone investment earnings will matter the most. If income is zero, all that debt you paid off wont matter much. So with limited time paying off debt may not matter as much as ensuring an ongoing income.
For instance if I have 10 years and only 10 years of income left from my job, I have that amount of time to get my investments going. If it will take exactly 10 years to achieve my goals without paying off other debt then my focus should be just that. If paying off the debt and then investing my income takes 9 years, then I should do just that.
See what I mean. I feel like time is running out. I feel like income is running out. So I have to do exactly the right thing.
In this scenario it might be better to secure the income and then pay off the debt once that's complete.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
13y
did not read the whole thread, just a few posts...but what's the point to own them free and clear? so that you have more liability and no tax deductions?
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
George,
I guess Im focused on maximizing income. If there are mortgages owed then Im paying out a portion of my earnings. Whats better than 100 percent earnings?
Please elaborate oh how less liability and no tax deductions equals more money in my pocket? I view tax deductions as a plus while your paying the mortgages off, but to my knowledge they arent as valuable as the income off of a free and clear property.
I know a lot of people share your view point, but I just dont understand how a portion of money is better than ALL of the money.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
13y
i am no tax expert and shared your view for YEARS. the best way i explain it in my head is:
if my profit is 1k, IRS will take ~400 if i have no decuctions..so i am left with $600.
if i have a mortgage and my profit is 800k, IRS takes ~300, am left with 500, but it lowers the AGI.
in addition, if anyone sues you AND wins, they can keep the house. if you have a mortgage tied to that house, they get to keep the house with the mortgage, and noone wants that.
google has 10B loans. do you think they can't pay it off? sure they can, but why if it's cheap money just to pay low APR and use the money elsewhere. you grow faster when you pay a portion over time instead of the whole amount upfront.
kind of like leasing a car. a buy is 550, but a lease is 325. you get to use the 225 that you have left over for anything else you want.
i am sure i am not explaining it the correct way, but hopefully someone can chime in.
SFR Investor · Los Angeles, CA · Member since 2013 · 134 posts · 16 votes
13y
Thanks for your explanation, George P.
And good point - with your numbers, the tax advantage is in your favor. With very similar numbers, it's not to mine.
Both of you examples illustrate the point well. Price doesn't matter one bit. It could be Google's $10B debt or just a few thousand from your car. All that matters is ROI vs APR. Put your money towards whichever has the higher value, and you'll come out ahead!
Price doesn't matter one bit. It could be Google's $10B debt or just a few thousand from your car. All that matters is ROI vs APR. Put your money towards whichever has the higher value, and you'll come out ahead!
I just had one of those light bulb moments! The idea of investment debt has been bouncing around my head for a while, but now I think I understand it. Just like how the bank "borrows" your money in a CD at 1.5% and loans it out at 5-10%, you're just loaning your house instead.
Related to this topic, I noticed a link under "Resources" called "FilePlace," where you can upload files to share with the community. I was about to suggest this feature until I found it. I would be interested to see what spreadsheet you came up with to achieve your goal.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
13y
Originally posted by Gary West:
I know a lot of people share your view point, but I just dont understand how a portion of money is better than ALL of the money.
That's a very simplistic way to look at it.
Just because you're earning 100% of the NOI on a few properties doesn't mean you're getting ALL the money. It just means you're getting all the money from those few properties. Many people would rather earn less than 100% of the NOI, but be doing it on many times more properties (leverage).
As an example, if I offered you 15 full gold bars or 50 half of a gold bars, which one would you prefer? Would you want the 15 full gold bars because you'd feel like you had ALL the gold? Probably not...
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
J. Scott,
Thanks for the perspective. Tons of people have mentioned the multiple properties plan. Currently Im a one property at a time guy. Its just feels easier and more secure as I am nearing pay off of my first SFR. I work a very demanding full time job so multiple projects at once seems a bit intimidating. However, I realize that the math is positive if I choose to go that route. I just have to get the gumption to do it. Maybe by my 3rd or 4th property, when multiples will be the norm and not so scarey. I just want to see how much weight several properites put on me compared to the one i have now. Eventually I will need a property manager, but for now I am enjoying the lack of expenses.
Do you employee a property manager? If so did you start out that way or did you do it yourself for a while?
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
13y
Gary West, just another item to consider in your one-at-a-time approach, but markets and interest rates fluctuate, and while Feb 2014 probably won't be that different, waiting several years for each one may hurt your ultimate goal as right now we are still in a record low interest rate environment along with low home prices, but in 5 years, you may be looking at 8% rates or prices too high to justify buying to rent them out. You can't assume in your formula that home prices and interest rate environment will stay the same. Since 2008, we're trying to lock in as much low-interest financing for as long a term as we can get it and plan to invest more as we build up more 25% down payments. We did pay one property off thinking it was the best use of our money at the time, but now wish we had just refinanced it as hindsight taught us better use would have been to buy another one. At 3.75 - 4.75% range and prices that we've got right now our goal is to add as many additional properties as we can, although deals are already getting harder to find, then plan to sell a few in 10-15 years when we retire and pay off as many as we can with gains we get from the ones we sell.
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
Thanks Lynn,
I had not considered an inflated market or interest rate changes in my plan. You make an outstanding point.
I just spent 8 hours creating spreadsheets for 15 different properties. One with the "one at a time approach" and one with 4 active mortgages at a time. With no regards to interest rate or home price changes the time difference to goal was only a year between the two.
Now I need to make some tweeks on "what ifs" and maybe learn a little more about tax deductions and liability issues.
El Paso, TX · Member since 2012 · 27 posts · 0 votes
13y
Actually when I compare apples to apples there is about 4 year difference between the plans. My mistake was using a 30 year term for the "4 at a time" plan while using a 15 year term for the "one at time" plan.
The 4 year difference added to the possibility of inflation and higher lending rates makes it the superior plan.
Ill look closer and consider buying 4 this feb instead of 1.