I recently moved to Spokane Wa after leaving my house hacking duplex in Tri-cities. I am considering selling the duplex next month, after taxes and commissions- I will be at $40k profit. I am weighing the pros and cons between reinvesting in the Spokane market (i.e. 20% down on a 100k house and renting). Or... making $40k one-time principle payment on our primary home morgagte(252,000 owed). Amortization schedules are saying that I would shave roughly 9 years off my loan, with an interest savings of $77k.
What are your guys thoughts? I appreciate you taking the time to give me feedback!! :)
what are your goals? Use them as your play book on what to do. Our suggestions are just that. You want to be closer to debt free do the mortgage pay off and go back to what you do for work. You could take 40k and work hard to find partners to go in on a 1mill $$ multi family prop that now brings you income monthly given you find a good deal. I am in the same boat house hack in duplex in spokane sold a home last week and have 33k not as much but similar. My problem is i love to invest. If i paid the 33k to a mortgage then thats it done, gone. I am usingmy money to generate more money so it keeps compounding. i have stopped acquiring debt and once the rest is paid off then i can put my proceeds to a passive multi to retire. Food for thought pm me if you want to chat more. Good luck
Hi David, evaluating it based on years saved on your mortgage I think is the wrong approach. The real question is the opportunity cost of the alternative investment. In today's interest rate environment if you have a loan of 3-4% on your primary residence your actual return is just that, less any tax savings! In my eyes it's a terrible investment. Not that there isn't anything to be said for living free and clear of debt, but given the fact that you have come to this forum I assume you have greater goals than that.
I would set the cash aside and start to evaluate the market. If your looking to buy and hold start to evaluate properties (Properly!) including all costs and then calculate a realistic return on investment if you instead by an investment property. Compare that to your potential interest savings and then make an educated decision. My guess is, if your willing to do some work to make an intelligent investment the better choice is going to be the purchase of an investment property! Frankly even a low risk dividend paying stock can beat 3%.
Oh and to add to this- assuming the multi-unit was your primary residence (2 of the last 5 years) you should be factoring in the exemption on whatever taxes on sale you used to determine your cash take on the sale. I can't tell from your post if you were already aware of that.
Phillip, the calculation is including tax exemption and commissions to real estate agents. I do need to review the bigger pockets book again- so I am sure the following calculation is incorrect. Cash on cash return (hypothetical) for new property with down payment of 40k and annual rent cash flow (600*12=7200 after taxes maintence ect)... would be 18%. 6400*9 years(same as the difference in mortgage years saved) equals 64,800 in profit. However, the morgagte pay down scenario using the 40k one time payment nets me 77k in interest savings.
I am sure I am doing something wrong, please educate me, lol. 🤓
I am always available for coffee/lunch to discuss more in Spokane!
It really depends on what your long term goals are.
Are you looking to buy and hold more properties? From what I have seen of Spokane its a pretty great place to invest right now. If you bought an investment property how long would it talk you to make 77k? (Be sure to factor in mortgage pay down and tax benefits).
I'm pretty sure your 77k in interest savings your trying to compare is over the life of the loan. Assuming even 4% interest rate there's no way $40k saves you $77k in interest in just 9 years. This is very simplified version of the calculation but for ease:
$40,000x.04=$1,600. So your year 1 interest savings on $40k are approximately $1,600 dollars. Assuming you saved that $1600 every year (yes it compounds but it would with an investment also, i.e. Your cash on cash return example leaves out the principal pay down you'd also get on an investment property) after 9 years that's only $14,400. Your ACTUAL annual return is just the $1,600 plus compounding, the $77k has to be projected interest savings over the entire life of the loan.
Yah, your pic actually supports what I'm saying. Say you had 30 years left on the mortgage and the total interest over the life of the loan is $250,000. If the current principal balance is $500,000 and you were to pay it off all today, it would tell you that you had saved $250,000 in interest. This does not equate to a 50% return on investment. The "actual" annual return is simply the principal amount paid down x the interest rate.
Does this make sense? You can verify what I'm saying by entering a hypothetical payment which is equal to the entire principal balance. It's going to tell you that you have saved the entire amount of interest you would have paid over the entire life of the loan (30 years or whatever is left). The actual return however is still just 4% a year using my hypothetical rate.
That does make sense Phillip, if you want to grab lunch or coffee, pm me! Thanks
David, come to 12929 E Sprague ave tomorrow night (Thurs. Aug. 17th) at 630pm. Team investpro is doing an introduction to Velocity Banking, how to pay your 30yr mortgage off in 7 to10 years, not bi weekly or anything else you've heard of. The way banks pay there bills! We're not taught this in school because it does not benefit the banks. I think its the answer to your question. Win/win for you!
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Tell them Gerrit Harner invited you.
If anyone else reading this post would like to attend your more than welcome. Just tell them at check in that i invited you.
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