Faster payoff, yearly lump sum or monthly?
Member since 2019 · 58 posts · 21 votes
I have a goal to pay off a large loan in 10 years. Let’s say I have 10K available to put towards extra principal every month. Would I end up paying the loan off faster if I did one lump sum payment of 120K per year, or doing 10k every month? Seems like with amortization it makes some difference. Is there any difference or is it the same? Does one get me there faster?
@Chris Hill mathematically it would be faster to pay off 10k per month than save up 120k/year and throw it at the loan at the end of the year. Basically the quicker you pay down the principal the less principal available to accrue interest on. I’m certain Calculators online can show you the delta.
Why do you want to pay off the loan faster? Is this a rental property, with positive cash flow? If so, then all you're doing is adding to your cost. You're not saving money.
@Chris Hill
I see no one here wants you to pay the loans off. Im with you.
Why own 10 times the real estate for the same cash flow? Im not in this to own a lot of real estate, im in it for cash flow. To each their own. But i have 2 totally paid for properties and theyre a dream come true. 0 hassle. Rent check is late? Oh well. I hope it comes in next week.
That said, doesnt it depend on when you pay it.
Assuming interest is calculated monthly, paying 120k up front saves 12 months of intestest on 120k, 110k, 100k etc.
Paying 120k at the end of the year on the other hand, means you paid interest on that 120 every month instead of on 110, 100, 90.
Am i missing something?
Let the tenant pay it off! USE THAT EXTRA DOUGH TO KEEP INVESTING!!!
Agreed. This is a simple math problem...and I do mean simple.
People get 15 year mortgages in order to be debt free sooner. Of course with a higher monthly payment. A better way is to take that extra payment and invest it every month (assuming that your investment will yield more than the interest rate on the loan) - the principle is the same.
45k in cashflow with 14 rentals is tough - that's $3,214 per door in cash flow. For quick math you'll need at least 45 units, if not 90. I agree about the headaches and it is better to buy viewer, but higher revenue properties. Who wants to manage a door for $600 in rent??
We average about $500 per unit CF and I have wrestled the same question for years: do you grow wide or do you grow deep? My conclusion, as long as interest rates are lower than my average CoC it makes more sense to grow wider (more doors) than deeper (less debt).
Also we have that wonderful thing called inflation, at 8.5% you'd be nuts to use today's cash to pay of future debt!
@Chris Hill
I see no one here wants you to pay the loans off. Im with you.
Why own 10 times the real estate for the same cash flow? Im not in this to own a lot of real estate, im in it for cash flow. To each their own. But i have 2 totally paid for properties and theyre a dream come true. 0 hassle. Rent check is late? Oh well. I hope it comes in next week.
That said, doesnt it depend on when you pay it.
Assuming interest is calculated monthly, paying 120k up front saves 12 months of intestest on 120k, 110k, 100k etc.
Paying 120k at the end of the year on the other hand, means you paid interest on that 120 every month instead of on 110, 100, 90.
Am i missing something?
Yes you're missing something. What's the use of this illusion of higher CF if all you're doing is repaying yourself? The added CF comes from the added properties. This is a simple math problem. The cash that comes out of your pocket, and ONLY the cash that comes out of your pocket, is what the property costs you. When you add cash from your pocket to pay down a debt, that the tenant is already doing for you for free, you are adding to your cost, and just giving back the free equity since you are now paying for that equity. The tenant is paying the interest...not you.
The DP (your initial cash) buys the initial equity, and should be the total cost to the REI for that property. The tenant buys you the property, and pays you (CF) for the privilege of letting them do so. When you take the tenant's place in paying off the mortgage, all that added CF is doing is paying you back, so you're not getting ahead. When the tenant pays it for you (i.e. rent), you are getting ahead.
In other words, when you only have to put up the DP (your cash), you are buying a property worth 5 times what you paid for it. When you are the one that pays down the debt by making payments on the principle out of pocket, you are paying full price for the property.
@Joe Villeneuve
If the end is no debt then at some point you habe to pay them off... this comment just threw me off from your previous arguments.
I'm not a big fan of paying off early. Those houses are already paid off on the Income Statement.
Regardless, if you are going to pay off early, please be sure to leave yourself some liquidity for the occasional speed bump that life throws at you. If you lose a job, have an illness, etc. the bank isn't going to give you any credit for paying ahead. You can have all of the equity in the world, but if you need cash and can't qualify for a refinace loan because of not having a job or something, you'll pretty much be forced to sell. Just a thought.
I am in mindset pay it off, I did 3 houses that way, the rentals rent is all cash to pile up, invest in the market, ready to buy another A or B property, that part is huge for me appreciation on a fast pace i.e., location, location. I do and will take out mortgages too I will start to pay down the notes once I am in a happy spot which should be quick.
Some or lot of folks think debt is the way to collect rentals in C and D areas fast and furious as you can, if you have a hick up for a number of reasons that can cause the property to be unloaded on the buyers’ terms.
Thanks for posting on the original question, I think that makes sense now.
This has morphed into payoff/dont pay off which is great too. Joe, I do agree with your thinking. Years ago I paid 5k to recast a mortgage to save a few bucks. Total waste. However, focusing on my 45k a month goal, and that is my one and only goal, can you share with me how you would go about achieving that in 10 years? (I'm assuming take the 120k a year, over 10 years, 1.2 total, and buy 40 homes. At 400 a door, that would be 16k cash flow, plus my current 12, so I would be at 28k in 10 years).
However with my plan of pay all 14 off (gross rents are 22k, net 12), and add the passive syndication of 25, I would be at 47k in 10-12 years. I'm having a tough time poking holes in that. Sure the syndications could underperform, but so could other things.
Please poke holes in that plan. Again, sticking to my goal, that gets me there in 10 years. Help me see another to get to that number in 10 years without paying them down and using the current cash flow for a different investment. I'm open to learning.
To answer your question- they will pay down faster at $10k/mo.
The interest is calculated on the balance monthly.
I've paid off plenty. The $ difference in interest savings between monthly punches in the face vs annual isn't huge but the satisfaction seeing the balance fall every month sustained me.
Focus on your highest rate or lowest balance one and kill them off one at a time👍
I’m with you so far. I’ll be very disciplined. Unfortunately my one commercial loan will go up in 9 years, and that’s the biggest loan. I was thinking that one first. The rest are residential.
Do you know of a good calculator online where I can run different scenarios versus manual adding up like I’m doing now? I’m real curious what the best order would be. But I’m looking at interest rate, and what the paid off loan adds to cash flow.
Hi Chris, so now that I'm back at my desk, I ran two scenarios where a $1M loan originating on 1/1/22 with a 3.875% loan rate was paid an additional 10K per month vs. 120K at the end of each year. Under the extra 10K per month scenario, you would be paid off by 6/1/2028.
If you were to do annual 120K payments, your principal balance at 6/1/2028 would be 61,075.69 and at the end of the year you would just need to pay an additional 33,825 to fully pay off the loan. So just as I thought, a bit faster with the monthly additional payments, but I don't know if that would be considered a meaningful difference. If you'd like a copy of the Excel file I'm using, please feel free to DM me.
I also see a lot of responses here about how you should let your tenants pay the mortgage. To me, that's an argument not based on logic and more like a slogan or RE catchphrase because the tenants aren't paying the mortgage company. They are paying you and you are paying the mortgage. I.E., money that would otherwise be in your pocket is now being used to pay down the mortgage. Also, I'm pretty sure you mentioned that you would be using rental income to make these additional payments...but I guess that comment is being pretty much ignored by the "let your tenants pay your mortgage" crowd.
my one commercial loan will go up in 9 years, and that’s the biggest loan. The rest are residential.
I’m with you so far. I’ll be very disciplined. Unfortunately my one commercial loan will go up in 9 years, and that’s the biggest loan. I was thinking that one first. The rest are residential.
Do you know of a good calculator online where I can run different scenarios versus manual adding up like I’m doing now? I’m real curious what the best order would be. But I’m looking at interest rate, and what the paid off loan adds to cash flow.
Hi Chris, so now that I'm back at my desk, I ran two scenarios where a $1M loan originating on 1/1/22 with a 3.875% loan rate was paid an additional 10K per month vs. 120K at the end of each year. Under the extra 10K per month scenario, you would be paid off by 6/1/2028.
If you were to do annual 120K payments, your principal balance at 6/1/2028 would be 61,075.69 and at the end of the year you would just need to pay an additional 33,825 to fully pay off the loan. So just as I thought, a bit faster with the monthly additional payments, but I don't know if that would be considered a meaningful difference. If you'd like a copy of the Excel file I'm using, please feel free to DM me.
I also see a lot of responses here about how you should let your tenants pay the mortgage. To me, that's an argument not based on logic and more like a slogan or RE catchphrase because the tenants aren't paying the mortgage company. They are paying you and you are paying the mortgage. I.E., money that would otherwise be in your pocket is now being used to pay down the mortgage. Also, I'm pretty sure you mentioned that you would be using rental income to make these additional payments...but I guess that comment is being pretty much ignored by the "let your tenants pay your mortgage" crowd.
that made my head spin! :) thanks for thinking that through. for the past 10 years, I've been of that mindset, dont pay off, buy more units until the total CF once paid off reaches the goal. Based on your instructions, at 10 years, do you feel I would have more cash flow? Again, gross CF now is 22k. If paid off in 10 years, lets say its 25K with rents inching up. Would taking 120k per year for 10 years and buying more doors beat 25K? I get the argument of now i would have 50 properties all being paid off by tenants. I just dont want to be 70 when i hit my monthly cash flow goal, i want to be 50.
joe, what would you do with the 120 a year to get to 25k CF in 10 years?
The 900k loan is a commercial loan at 3.9, that i will have to refinance at 10 years (im in year 1). I'm assuming it would jump to 5-7%, but that guessing 10 years in the future. It would take 7.6 years of 10k payments to have that done, which yes would take discipline. But that would help me hit the goal.
i should add i get that paying 2m towards loans, to get 10-15k more in cash flow is terrible roi. but if my goal is my guide, why not hit the goal and be done, regardless of roi?
that made my head spin! :) thanks for thinking that through. for the past 10 years, I've been of that mindset, dont pay off, buy more units until the total CF once paid off reaches the goal. Based on your instructions, at 10 years, do you feel I would have more cash flow? Again, gross CF now is 22k. If paid off in 10 years, lets say its 25K with rents inching up. Would taking 120k per year for 10 years and buying more doors beat 25K? I get the argument of now i would have 50 properties all being paid off by tenants. I just dont want to be 70 when i hit my monthly cash flow goal, i want to be 50.
joe, what would you do with the 120 a year to get to 25k CF in 10 years?
The 900k loan is a commercial loan at 3.9, that i will have to refinance at 10 years (im in year 1). I'm assuming it would jump to 5-7%, but that guessing 10 years in the future. It would take 7.6 years of 10k payments to have that done, which yes would take discipline. But that would help me hit the goal.
1. current cf with debt is 10k
2. cash flow excluding debt is 20k (gross rents minus hoa/insurance)
3. adding 10k a month
4. loan balance 900k
5. its a 10 yr commercial loan at 3.9. At 10 years, i would likely have to just refinance and do it again. The balance would not be paid off at 10 years if i dont add extra payments. It would probably have 700 remaining at 10 years.
6. if i add 10k cash, the 900 would be paid off in 7.6 years, no balance
I have your answer. In 15 years, both methods would have the exact same total cash flow of around 1.8M. However, if instead of paying down the debt on this property, every time you accumulated $240k in CF (assuming you paid 20% DP on this one), you used that money for a DP on another property, by the time you reached that 15th year, there would be so many "0's" on your CF/Year, and in your total Property Value, it would make your head spin.
I'm not saying go out and buy another property every time you got $240k in CF. I said that to make a point of how fast/large your money grows when you take advantage of the compounding effect...which you would be doing if you reinvested in new properties instead of paying down just one. What that means is your goal, which is far less than the number with all those zeros would be, can be reached much sooner. In other words, you don't need 90 properties...and your don't need to pay them off early.
PM me if you have any questions and I can show you what I mean. I designed software to do this calculation for me.
@Chris Hill Cash Flow is king! Leveraging what you have to add cash flow is even better. Why pay off loans with low-interest rates, especially now with inflation and interest rates going up. If you haven't considered getting a cost segregation study done, I would encourage you to consider that to add to your cash flow and then look for another property.
Of course, there is another consideration. If you are elderly, don't want more to manage, and plan to leave the property to your heirs, get the cost segregation done and use that cash flow to help your family, pay medical bills, take a much-needed vacation, etc. When you pass, there is NO recapture and your heirs have the opportunity to do another cost segregation study on a new basis.
Normal people think in terms of debt and interest rate.
Wealth people don't worry about those... they look at cashflow and impact/growth to net worth.
You are correct, there is a difference. Monthly would be faster.
Matthew thanks, that answers that question.
My goal is 45k passive a month. With 14 rentals I’m at 12k. I’d have to buy a lot of rentals to get to 45k, and that’s more doors to worry about (I self manage). Seems like it would take 20-30 years to get to 45. Maybe I’m wrong? My payoff plan would achieve it in 10-12 years, with no additional doors.
Help me understand other ways of getting to 45k in a shorter time than 12 years. Is it possible another way?
I'm often the contrarian here, but I'm not a fan of leverage and expansion just for the sake of having more. Your profile of goals is how we did it. Maximize the return per door, instead of endless growth and leverage. If 14 rentals can achieve your goal, it's time to stop growing and focus on how to achieve your desired returns. Paying off the mortgages will help.
If you trust yourself more than the stock market, and like the control over your own finances and wealth trajectory, then this is a great strategy. Also, the earlier that you have financial independence, the sooner you get to enjoy your wealth. Thirty years is a long time to pay a debt down, but it's an even longer time to wait for enjoying financial freedom.
By maximizing your return per unit, that's an easy way to give yourself a raise. I prefer to have no debt, because IMO, whatever the interest is costing you is money you're giving to the bank instead of keeping in your pocket. It's like reverse compound interest-- the less principal you owe, the less interest you pay to the bank. So the sooner you pay it down, the quicker it will pay off. There's no point in waiting to pay it down, as long as you won't leave yourself strapped for cash.
The math would look like this: If you snowball your debt payments, every bit of interest that you would pay to the bank instead is liberated, presumably to pay down even more debt. If you want to hit 45K a month, your current and projected rents need to be 45K a month, then you need to work off the leverages (mortgage debt) one by one. If you're currently making 12K, is that gross or net? If net, then how much extra are your mortgages? Your take home (net) will go up exactly the amount of your paid off mortgages, as they pay off. So if you have 10 mortgages at $1000 payment per month each (10K a month in payments), every time you pay off a mortgage, you liberate an extra $1000 per month.
For the purpose of simplicity, I'm leaving off the basic landlord stuff like rent increase projections, turn over and repair costs, etc.
I really like the snowball calculator at Financial Mentor. It's easy to plug in the numbers and get the "what if I paid this..." results in a nanosecond.
This is my thinking as well. If i'm hitting my goal, why buy more?