What was your principal paydown in 2019?

Question

Curious to know you guys’ principle pay down for the year. How does that relate to the amount and type of debt you have?

I calculated my net worth gain from my amortization schedules - multiplied by my equity percentage on each note.

Terrell Garren · Answer

Ha, not a dime. I'm an old OK Boomer and done with debt.  I don't disagree that debt would make better use of my capital.  However, I'd rather have less money and sleep like porch dog. Clocks and calendars are for kids. Life is good.

Bryan Hancock · Answer

Principal (not principle) paydown generally is a sign you're de-levering investments that are sub-optimal save the leverage.  SFRs have real cap rates in the 3-5% range in many cases and apartments do well to approach 10% cap rates.  What makes real estate competitive to invest time in is that you can have large leverage ratios on those cap rates to get really good levered yields.  De-levering generally means you should consider more and more that the asset should be sold and the capital should be placed elsewhere where it is used more efficiently.

Having said that if you want a forced savings account measuring principal paydown is probably a good thing to do annually.  The calculation is simple; you compare your debt from the previous year to the debt this year.  The difference is how much our fixed-rate loan amortized the previous year.  In the early years of loans assuming no prepays these numbers aren't going to be very impressive in all likelihood.

A far more important thing to keep track of is how your property is operating and generating cash flows TODAY that can be observed and deployed productively to other endeavors.  Appreciation is still generally going to generate a large portion of your overall return and the tax shields should reduce your effective tax rate assuming you have your affairs structured properly.  Absent an exchange you'll have to pay to recapture those taxes later on and the government will tax you on the inflation tax.

I'd focus your time on cash flows first, appreciation second, tax structuring third, and amortization LAST.  The small amount you get from amortization is traded off against the lack of leverage you generate.

Hai Loc · Answer

I have spreadsheets on all of my amortization schedules for all my debt. I do all the calculations from day one. If the term changes I will make adjustments

Jeff Kehl · Answer

@David Walkotten it's somewhat hard for me to tell that because I've been selling off quite a bit of property, but if I look at how much principal I paid down this past month on current properties it implies I'm paying off about 3.5% of my total debt in a year. That's a fairly large number because I have a lot of short duration 15 and 20 year notes and some of them I'm 8ish years into.

I think it's extremely important to keep track of your principal paydown as it can be a large part of your return in real estate. If you're a bit of a nerd like me you can actually calculate them in Excel using the PMT functions. PMT calculates the payment PPMT calculates principal and IPMT calculates interest.

What was your principal paydown in 2019?

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