Long term mortgage or pay off quickly?

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Adam McIntyre · Answer

@Steve Vaughan thanks for the reply - fixed interest it is (i suspected so much as well). Off to the bank today so I will discuss all this with them. And thanks for the reminder about PMI, when I was 18 I took out PPI on my credit card and wow was that pointless and costly.

RE: $100k, I make software apps and sell them from my websites. I sold one of my websites to raise the capital. Websites are kinda short term - especially the niches I'm in - so my plan now is to try and transition to long term property rentals.

Build a couple more websites, then sell to buy, hold and earn rental income of $6k per month (because I rarely spend more than that). I live in Thailand too, so I'm hoping to buy properties cheaper than back home in the UK, but still charge western tourists higher rental rates. That's my assumption, but I could be / probably totally wrong.

Steve Vaughan · Answer

Definitely fixed given today's rates.  There's a lot more upside rate risk than down. Just 10 years ago 6.5% was a great rate!

I agree with posters above to get the most long-term, low rate debt you can if it's fixed rate residential, but wish they would say as much.  I paid off 19 rentals this year that were higher rate and/or commercial that is callable and adjustable.  Not all debt is the same.

I would recommend putting 20% down if you easily can.  Avoid PMI.  Congrats on having $100k to invest!  Would love to hear how you got that, Adam!

Shiloh Lundahl · Answer

@Adam McIntyre don’t get caught up in the total interest paid when it comes to what type of mortgage to get. Think of it this way, you want to get an investment property but you don’t want to use all of your own money to do it so you bring in a partner and split the profits some how. Just think of the bank as your investing partner. They are going to put in the majority of the money, you are going to do the work in finding and managing the property and they will be mostly a silent partner. I would be willing to split the profit  with a money partner who puts in the majority of the money as long as we both make money.

Shiloh Lundahl · Answer

@Adam McIntyre I agree with @Thomas S. as far as spreading out the cash to purchase more properties with the highest leverage over the longest timeframe will give you the greatest return on investment. I also agree that using the highest amount of leverage is more risky, but I just disagree with who carries that risk. The higher the leverage is on the asset, the more risk for the bank or person who loaned on the asset, not the person who received the loan.  Banks want to protest their invested capital and if something goes wrong, and there is a lot of equity in the property, then the bank is more likely to foreclose to get their money and fees back, however, if there is very little equity in the property, the bank would rather the asset become performing again rather than take the property back and lose money so they may be more willing to work with you. The same concept applies to attorneys. The more equity in an asset, the more you can become a target for a frivolous lawsuit. So rather than thinking “I want to own a cash flowing asset,” a different way thinking may be “I want to control and benefit from a cash flowing asset.” You do this by keeping high loan balances, spreading out the cash over multiple properties, extending the length of the loan as much as you can, and keeping some cash reserves to weather the storms associated with real estate investing.

Thomas S. · Answer

The investment decision boils down only to risk aversion.

Spreading cash to purchase with maximum leverage over the longest term will produce the greatest return on investment. It accelerates your path to wealth. Tenants pay your mortgage, you sit back and reap the rewards.

Paying cash or paying down a mortgage generates the lowest possible return on investment since all you are doing is earning the equilivant of the mortgage interest rate that you are saving. You are buying your income with your own money and slowing down your investment growth but you lower your risk.

Leverage produces maximum cash flow. Fastest wealth growth.

Cash buying is paying for cash flow and reducing risk.

Adam McIntyre · Answer

Thank you all for the feedback, this is really interesting to hear. It's the mindset of a pro and an amateur.

Another question related to this discuss would be: fixed interest or variable?

Shiloh Lundahl · Answer

@Thomas S. do you have any suggestions on finding those high return vehicles that are accessible?

Joe Vastola · Answer

I would suggest getting a long term mortgage to minimize your monthly payments. You would be able to generate stronger monthly cashflow and you will have the capital to invest in other properties all while having the tenant pay off the mortgage.

Thomas S. · Answer

"keeping some cash reserves to weather the storms associated with real estate investing."

This is the key to high leverage/high return investing. Invest your extra reserves in a high return vehicle that is accessible and your leveraged properties are at lower risk than if paid off. The return on your cash investment should, by itself, be sufficient to weather the storm.

Long term mortgage or pay off quickly?

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