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.
amazing calculator, thanks JJP
Unless the loan is at crazy high interest rate (8%+) I don't know why you would want to pay it off. Take that capital and buy another property.
@Rick Albert There are different phases in this investment game. At a certain stage, all you care about is accumulating and collecting all the available good investments. Hopefully, the foresight to begin with the end in mind is in the picture.
Then comes (phase 2) the "mid" stage when we have collected as much as you need to achieve our goal(s) or even achieved these goals. This is that stage I believe most people start thinking of paying off and most appropriate ways to "declutter" debts. This is most applicable to non multifamily REI.
In the final stage, we have achieved mortgage paydown (hopefully, payoff), enjoyed cashflow, depreciation and tax savings along the way, and we are ready to become less active in the game.
This may explain @Chris situation. At a point, most investors thinkin will shift towards payoff, and that's normal.
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?
I didn't read all responses but here's an important thing to consider. What stage in life are you now and what stage in life do you plan to be a decade from now? Also what lifestyle is important to YOU at these different times on the calender?
I'm no financial advisor/CPA(that's who should have final word for you) and someone could tell me I'm wrong. This is my opinion how I'd see it if I were in your position.
10k monthly may be better than 120k yearly. Your dollar is worth less over time and your amortization schedule should make it better to pay monthly than anually, unless your 10k a month can be invested somewhere that outpaces your amortization making the annual better.
Many have replied to you that it's a bad idea to use your cash to pay off your mortgages early in an effort to eliminate debt and increase passive income sooner. Your 120k free cash a year invested over ten years at a return rate of 6% gets you ~1.8M. Now that's an example number but consider, would the money you save paying loans down be greater than money made investing it and paying it off ten years from now?
If you're getting 120k a month cash, after a couple years you can buy a property or MF cash and let that rent money make the accelerated mortgage payments while the property you bought is appreciating and your rents increase every year. That's one example.
The primary benefit I see with the strategy you suggested is the peace of mind of paying down debts and reducing risk. If you're later in life and just want to get to your passive income with less risk then that may make sense. Otherwise putting that cash to work for you like everyone else said sounds like a better strategy.
Fair question. If those are all paid off, and the Syndications perform as anticipated, after the 10-13 year mark, I would be way past my cash flow goals. In short, I would hit my goals without needing more doors.
I scratch my head with these comments sometimes. It's not "free" money, debt is still an expense. When the property is paid for, all of the cashflow goes back to you not the bank. This is coming from a banker. And if you never get rid of debt what's the point of all of it? You seem to be fixated on this one piece of investing. Leverage is a good thing for sure when growing but not for a lifetime. Its a tool in your toolbox but not the only one needed.
Yes, agree Adam, you leverage more doors maybe get $100 to $200 cash flow a door depends A to D areas.
You need to factor in risks of more properties and in a C and D areas that has a math value that need to calculate in with added risks.
One paid off door could have a net take home of 2 to 4 mortgage doors give or take.
The one area of added doors on a brisk pace is appreciation usually most do the C to D areas when adding a brisk pace so that would be slow growth usually.
I myself live frugal I am happy I can easily live on 10K net take a home a month, a paid off S.F.H plus appreciation in A and B areas keeps rents up on inflation and then some is a happy spot for me.
Fair question. If those are all paid off, and the Syndications perform as anticipated, after the 10-13 year mark, I would be way past my cash flow goals. In short, I would hit my goals without needing more doors.
I scratch my head with these comments sometimes. It's not "free" money, debt is still an expense. When the property is paid for, all of the cashflow goes back to you not the bank. This is coming from a banker. And if you never get rid of debt what's the point of all of it? You seem to be fixated on this one piece of investing. Leverage is a good thing for sure when growing but not for a lifetime. Its a tool in your toolbox but not the only one needed.
Yes, agree Adam, you leverage more doors maybe get $100 to $200 cash flow a door depends A to D areas.
You need to factor in risks of more properties and in a C and D areas that has a math value that need to calculate in with added risks.
One paid off door could have a net take home of 2 to 4 mortgage doors give or take.
The one area of added doors on a brisk pace is appreciation usually most do the C to D areas when adding a brisk pace so that would be slow growth usually.
I myself live frugal I am happy I can easily live on 10K net take a home a month, a paid off S.F.H plus appreciation in A and B areas keeps rents up on inflation and then some is a happy spot for me.
Ah, now we get somewhere. Within the framework of your risk appetite, consider the "highest and best use" of your money by considering what else you could get that pays you over 3.9 percent (don't forget you're paying tax on that income, so it has to be more than 3.9 percent), the risk of loss on that investment, the risk of loss on the commercial loan you have now, and act accordingly.
You probably want to see how your reserves are. Buying property entails buying repair work. It also entails risking tenants who don't pay, etc. Do you have reserves set aside for that? Let's assume you have reserves. Let's assume new properties yield more than 3.9 percent. Assume your wife doesn't mind the extra risk -- buy more properties. Let's assume your wife minds the risk and wants to live well, not best on the block. Guess what? The spreadsheet goes out the window and you pay down the debt -- probably the commercial loan, maybe highest interest rate (you said you were disciplined, so you don't need the snowball route to make you feel good).
Just remember the words of the wise man: "Women and cooks, always keep them happy. Cuz if they ain't happy, ain't nobody happy."
The refi and leverage make a lot of sense if you are trying to scale grow and maximize your ROI. Especially if you are under 40yrs old. At some point when you hit your exit goal, you want to derisk. A portfolio of paid-off rentals has peace of mind like @Account Closed said which I totally agree with.
It all depends on the investor and how much risk you want to take. Some want to keep growing and maximize their returns and grow their net worth which makes them happy. Some want to hit their exit point and have zero worries in the world because everything is paid off. There is no right or wrong here.
From a lifestyle perspective, a person with $8m net worth has the same as a person with $30m. Maybe the $30m guy can fly PJ, have a bigger home, and has numerous supercars but they can pretty much do the same thing. It's a small difference. Is it worth the time, risk, and strain on your health to get there? There is a diminishing return at some point. In the end, do whatever will make you happy.
How about doing exactly your plan with a $100k bonus by changing just the 1st year's plan? Only in year 1 you make a change, all following 9 years you pay down exactly as you said you would. In year 1 you take the $120k cash as the down payment + closing costs for a new additional $400k rental. You lose your first year of $120k principal reduction, which adds compounded over 9 years = $69k interest to the end of your loan. In year 10 you sell the $400k house that you bought in year 1 (let's say it appreciated only by a low 3.5% every year) for $564k. $164k profit, use $69k that you still owe on your paydown, leaves about $100k extra profit, and you pay the capital gains tax + closing costs with all the cash flow that you saved up over the 9 years.
With the current rate of inflation, you
might not be able to survive in the year 2032 with “only” 45k in
positive cash flow.
Some people here do not even know the difference between principle and principal. As for my personal investment strategies, it is my principle to pay down as little principal as needed! Can you see the difference between the two words now?
@Chris Hill not getting into the pay off early versus let the tenant debate people are having in this discussion. I couldn't find one thing? What do you need $45k per month to do that you can't do on $12k per month? In most areas of the country, you can retire today on $150k passive income. Do you like your job or is there a bigger goal to use the $45k per month?
@Chris Hill not getting into the pay off early versus let the tenant debate people are having in this discussion. I couldn't find one thing? What do you need $45k per month to do that you can't do on $12k per month? In most areas of the country, you can retire today on $150k passive income. Do you like your job or is there a bigger goal to use the $45k per month?
Some people here do not even know the difference between principle and principal. As for my personal investment strategies, it is my principle to pay down as little principal as needed! Can you see the difference between the two words now?
Yes 45 is a ridiculous number, but why not ;)
So just confirm, monthly payments instead of one lump sum at the end of every year would pay it faster? interest getting smaller faster correct? Would the lump sum not put me at same interest payment 12 months later?
If you do the lump sum at the end of the year, you've paid interest on the whole amount for that year. If you do the monthly, your principal is decreasing every month and therefore the amount of interest you pay is being lowered.