Paying down additional principal each month
Homeowner · NYC · Member since 2023 · 8 posts · 4 votes
Paying down additional principal each month
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesPaying more on the mortgage every month isn't building equity...it's buying it. Paying that extra each month isn't negating negative CF...it's just paying it upfront. If you are at a breakeven after moving out, like this is, then you are really at negative CF waiting to happen. You aren't the one paying the interest, your tenant is since the source of funds is the rent. If you make cash added payments out of pocket, like you're suggesting, that comes out of your pocket and actually is an added cost to you since that principle you are paying for was part of the mortgage payment, which again was being paid for by the tenant's rent.
I would sell, take your equity/profit, and put it into a different deal with positive CF. This is a losing property for you.
51 Replies
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Paying more on the mortgage every month isn't building equity...it's buying it. Paying that extra each month isn't negating negative CF...it's just paying it upfront. If you are at a breakeven after moving out, like this is, then you are really at negative CF waiting to happen. You aren't the one paying the interest, your tenant is since the source of funds is the rent. If you make cash added payments out of pocket, like you're suggesting, that comes out of your pocket and actually is an added cost to you since that principle you are paying for was part of the mortgage payment, which again was being paid for by the tenant's rent.
I would sell, take your equity/profit, and put it into a different deal with positive CF. This is a losing property for you.
- Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes3y
I agree with everything that @Joe Villeneuve said but before committing to sell there are a few things to consider...
1. What do you forecast the rent growth to be in the area? How long will it take with you raising rents every year before this property will turn cash flow positive? (probably a long time, but something to consider)
2. What do you forecast the appreciation rate to be in the area? Condos generally don't appreciate as fast as single family homes. But this is something else you should be thinking about.
3. Are you currently paying mortgage insurance which is eligible to "fall off" at some point? You say you're a first time buyer. I'm assuming you used FHA or put less than 20% down.
Selling might be the best option, but I'd hate to see you lose that 2.75% leverage. We will probably never see rates that low again in our lifetime.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Scott E.:
I agree with everything that @Joe Villeneuve said but before committing to sell there are a few things to consider...
1. What do you forecast the rent growth to be in the area? How long will it take with you raising rents every year before this property will turn cash flow positive? (probably a long time, but something to consider)
2. What do you forecast the appreciation rate to be in the area? Condos generally don't appreciate as fast as single family homes. But this is something else you should be thinking about.
3. Are you currently paying mortgage insurance which is eligible to "fall off" at some point? You say you're a first time buyer. I'm assuming you used FHA or put less than 20% down.
Selling might be the best option, but I'd hate to see you lose that 2.75% leverage. We will probably never see rates that low again in our lifetime.
I like your list. I too would hate to lose 2.75% leverage, if that leverage was getting me anything. In this case, it's just a trophy and what it is getting you is a property that isn't negative CF right now. As far as the rest of your statement goes:
1 - I have found that most rent growth runs parallel with expenses, so the resulting CF is so minimal it doesn't really matter.
2 - Condos appreciation is iffy, like you said. If the appreciation in the area has been steady, then just buy a SF in that same area. However, I don't bank on future appreciation to bail me out since you have no control over it. I will buy a property based on past appreciation, actually it's a must with me, but I don't look at it as a lost recover solution.
3 - A very valid point. I guess this really depends on how long they have to get there. If it's over a year, maybe two, I would move on.
I would add a 4th to your list:
4 - What will the current lender say when this unit is converted from owner occupied to a rental? Also, what are the condo rules regarding this? (I guess that's 4a and 4b) - Homeowner · NYC · Member since 2023 · 8 posts · 4 votes3y
@Joe Villeneuve and @Scott E. thanks for the quick feedback and insight. For a bit more context.. I'm currently 29 y/o and purchased this condo during the pandemic because I wanted to stop paying rent and start building equity. I planned to live in my condo for 5+ years, and assess my options, but that changed when my girlfriend got place for residency in NYC :) I just recently became fixated on generating wealth thru renting which has me reevaluating this investment. Curious to get your thoughts based on the added detail I provided below. Thanks guys!
1. @Scott E. I forecast rent growth to increase $75/year (3%) based on what I've seen the last 2 years. I believe it will take ~3-5 years before this property will turn cash flow positive.2. @Scott E. Right now I'm forecasting standard 2% appreciation with 5%/year upside. My condo is near the US Capitol in DC, and very close to the NW/NE boarder. It's a newer building and has better amenities than comparable condos in the area. Historically, NE DC isn't the greatest area, but new apt complexes and restaurants are sprouting up rapidly which is making the area more attractive. I believe this will accelerate appreciation.
3. @Scott E. You're spot on. I put down 10% ($44,500) and will achieve 20% equity in ~18 months (assuming I don't pay any additional principal). This will eliminate $70/month I pay in PMI. - Homeowner · NYC · Member since 2023 · 8 posts · 4 votes3y
@Joe Villeneuve to question #4. Once this transitions from owner occupied to rental my property taxes will increase slightly because I will lose my $78,500 deduction on tax assessed value that I qualified for via DC Homestead Deduction.
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes3y
This is a very simple play.
Do you want to pay for your own equity that you could invest somewhere else (or use for something else) or would you prefer your tenant pay it for you?
At this point you will have negative cash flow no matter what if you are making no calculations for vacancies, maintenance, renovations and repairs. Its a matter of how much negative cash flow you want.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesHas nothing to do with this. That is personal info, and doesn't change any of the numbers.
Quote from @Billy Mcavoy:
@Joe Villeneuve and @Scott E. thanks for the quick feedback and insight. For a bit more context.. I'm currently 29 y/o and purchased this condo during the pandemic because I wanted to stop paying rent and start building equity. I planned to live in my condo for 5+ years, and assess my options, but that changed when my girlfriend got place for residency in NYC :) I just recently became fixated on generating wealth thru renting which has me reevaluating this investment. Curious to get your thoughts based on the added detail I provided below. Thanks guys!
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Billy Mcavoy:
@Joe Villeneuve to question #4. Once this transitions from owner occupied to rental my property taxes will increase slightly because I will lose my $78,500 deduction on tax assessed value that I qualified for via DC Homestead Deduction.
Even more of a reason to sell. That just means you have even more negative cash flow.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
Here's another angle :
- If interest rate is cheap enough, you don't really have to add more into principal but if rate is above 5%, then it's a good practice
- HOWEVER, paying principle down is useful especially IF you want to hold property for certain number of years and plan to sell it (in your case 10 years) ; AND also IF acceleration of the appreciation equity of that place is twice than mortgage rate (eg: if appreciation per monthly is 5k/month and mortgage is 2k, then paying off asset early is GOOD).
What I am saying is this:
- if your rate is 2% and your location is in Cupertino,CA then definitely adding principal is good
- if your rate is 6% and your location is in Cupertino,CA then definitely adding principal is a MUST
- if your rate is 5% and your location is in detroit michigan then forget about adding principalit really depends on the market, you can simulate this in excel using amortization calculator to understand what I meant.
This is my basis strategy how to payoff 30YFRM in 10-12 years only. - Investor · Vermont and New York · Member since 2023 · 308 posts · 309 votes3yI would keep the condo, don't pay additional principal. That's a great loan rate. Within a few years it will be cash flowing well AND will have appreciated. There will be frictional costs and non-monetary costs for selling it and then buying something else to replace it.
If you can't afford to throw in a thousand or two or three a year to cover your costs, maintenance, vacancy then sell it. But if you can handle the costs without it putting a burden on you financially then definitely keep it. - 3yPaul DefnginPro MemberLender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
@Billy Mcavoy, you've gotten a lot of good input. At the end of the day, you'll have to decide what is best for you but personally, I would keep the property even if you have a small negative cashflow. DC market is an appreciation play, and while I know everyone won't agree that is just a gamble, almost everyone I know that bought in DC have enjoyed their property values, many, many, many years later. I met a gal her on this forum that inherited a pretty crappy rowhome around the Capitol. It had a lot of deferred maintenanced that the grandmother did not do before she passed. When that gal came to me in 2017, we managed to pull some equity out and at the time that home was appraised for $620k but today that that property is going for over a 1 million plus. Now, I am not saying that yours will be the same but I am of the camp that you should keep it, especially since it's approximate location to the US Capitol and you can already see the gentrification going on there.
"Historically, NE DC isn't the greatest area, but new apt complexes and restaurants are sprouting up rapidly which is making the area more attractive". When I was going to school at CUA in DC, I wished I had bought something in the Brookland area. My friend, who was smarter than me, bought in NE close to the Capitol back in the early 2000's. Then, the price was just over six-figure. I think she paid for small row-home of around $158K or so, and it was scary to go there to visit her back then. She's since moved to Upstate NY with her family. Her husband wanted her to sell but she decided to keep it. Let's just say that she's smarter than both her husband and I - as she's sitting on a goldmine. - 3yNed J.Pro MemberInvestor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes
Its rarely a benefit to pay off more principle each month on an investment property unless the interest is crazy high. In most cases that "extra" $$ is better used somewhere else.
People point to how much higher their CF is on the property they paid off really fast or paid all cash for.... its not really CF....you are just paying yourself back interest free
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes3y
@Billy Mcavoy Joe hit the nail on the head.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Carlos Ptriawan:
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
Here's another angle :
- If interest rate is cheap enough, you don't really have to add more into principal but if rate is above 5%, then it's a good practice
- HOWEVER, paying principle down is useful especially IF you want to hold property for certain number of years and plan to sell it (in your case 10 years) ; AND also IF acceleration of the appreciation equity of that place is twice than mortgage rate (eg: if appreciation per monthly is 5k/month and mortgage is 2k, then paying off asset early is GOOD).
What I am saying is this:
- if your rate is 2% and your location is in Cupertino,CA then definitely adding principal is good
- if your rate is 6% and your location is in Cupertino,CA then definitely adding principal is a MUST
- if your rate is 5% and your location is in detroit michigan then forget about adding principalit really depends on the market, you can simulate this in excel using amortization calculator to understand what I meant.
This is my basis strategy how to payoff 30YFRM in 10-12 years only.Another example of how percentages lie. The interest rate on your mortgage has no relationship to the percentage of appreciation. Mortgage interest is applied to the mortgage. It has no impact on the property value, only on the cash flow. Paying down the mortgage has no effect on the appreciation since the appreciation is based on the PV which is the same if you have 100% equity, 100% debt, or anywhere in between.
Appreciation is applied to the property value. It has no effect on the mortgage or the cash flow.
The two percentages have nothing directly to do with eachother.Also, paying down the principle with the idea you are somehow gaining equity is a lie. You're not gaining it...you're paying for it. Which is the same as the tenant is from the rent.
- Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 656 votes3y
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
This is actually an extremely simple math problem, if your debt is 2.75% take that extra money you’d use to pay down debt and put it in a bond paying 3.5-4% and you’ll come out ahead.
- Homeowner · NYC · Member since 2023 · 8 posts · 4 votes3y
Quote from @Paul Defngin:
@Billy Mcavoy, you've gotten a lot of good input. At the end of the day, you'll have to decide what is best for you but personally, I would keep the property even if you have a small negative cashflow. DC market is an appreciation play, and while I know everyone won't agree that is just a gamble, almost everyone I know that bought in DC have enjoyed their property values, many, many, many years later. I met a gal her on this forum that inherited a pretty crappy rowhome around the Capitol. It had a lot of deferred maintenanced that the grandmother did not do before she passed. When that gal came to me in 2017, we managed to pull some equity out and at the time that home was appraised for $620k but today that that property is going for over a 1 million plus. Now, I am not saying that yours will be the same but I am of the camp that you should keep it, especially since it's approximate location to the US Capitol and you can already see the gentrification going on there.
"Historically, NE DC isn't the greatest area, but new apt complexes and restaurants are sprouting up rapidly which is making the area more attractive". When I was going to school at CUA in DC, I wished I had bought something in the Brookland area. My friend, who was smarter than me, bought in NE close to the Capitol back in the early 2000's. Then, the price was just over six-figure. I think she paid for small row-home of around $158K or so, and it was scary to go there to visit her back then. She's since moved to Upstate NY with her family. Her husband wanted her to sell but she decided to keep it. Let's just say that she's smarter than both her husband and I - as she's sitting on a goldmine.Thanks Paul - I’m currently looking at other properties in DC and would love to pick your brain.
- 3yPaul DefnginPro MemberLender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
Quote from @Billy Mcavoy:
Quote from @Paul Defngin:
@Billy Mcavoy, you've gotten a lot of good input. At the end of the day, you'll have to decide what is best for you but personally, I would keep the property even if you have a small negative cashflow. DC market is an appreciation play, and while I know everyone won't agree that is just a gamble, almost everyone I know that bought in DC have enjoyed their property values, many, many, many years later. I met a gal her on this forum that inherited a pretty crappy rowhome around the Capitol. It had a lot of deferred maintenanced that the grandmother did not do before she passed. When that gal came to me in 2017, we managed to pull some equity out and at the time that home was appraised for $620k but today that that property is going for over a 1 million plus. Now, I am not saying that yours will be the same but I am of the camp that you should keep it, especially since it's approximate location to the US Capitol and you can already see the gentrification going on there.
"Historically, NE DC isn't the greatest area, but new apt complexes and restaurants are sprouting up rapidly which is making the area more attractive". When I was going to school at CUA in DC, I wished I had bought something in the Brookland area. My friend, who was smarter than me, bought in NE close to the Capitol back in the early 2000's. Then, the price was just over six-figure. I think she paid for small row-home of around $158K or so, and it was scary to go there to visit her back then. She's since moved to Upstate NY with her family. Her husband wanted her to sell but she decided to keep it. Let's just say that she's smarter than both her husband and I - as she's sitting on a goldmine.Thanks Paul - I’m currently looking at other properties in DC and would love to pick your brain.
@Billy Mcavoy Reach out anytime.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
Use the extra cash to pay down a different mortgage.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
Here's another angle :
- If interest rate is cheap enough, you don't really have to add more into principal but if rate is above 5%, then it's a good practice
- HOWEVER, paying principle down is useful especially IF you want to hold property for certain number of years and plan to sell it (in your case 10 years) ; AND also IF acceleration of the appreciation equity of that place is twice than mortgage rate (eg: if appreciation per monthly is 5k/month and mortgage is 2k, then paying off asset early is GOOD).
What I am saying is this:
- if your rate is 2% and your location is in Cupertino,CA then definitely adding principal is good
- if your rate is 6% and your location is in Cupertino,CA then definitely adding principal is a MUST
- if your rate is 5% and your location is in detroit michigan then forget about adding principalit really depends on the market, you can simulate this in excel using amortization calculator to understand what I meant.
This is my basis strategy how to payoff 30YFRM in 10-12 years only.Another example of how percentages lie. The interest rate on your mortgage has no relationship to the percentage of appreciation. Mortgage interest is applied to the mortgage. It has no impact on the property value, only on the cash flow. Paying down the mortgage has no effect on the appreciation since the appreciation is based on the PV which is the same if you have 100% equity, 100% debt, or anywhere in between.
Appreciation is applied to the property value. It has no effect on the mortgage or the cash flow.
The two percentages have nothing directly to do with eachother.Also, paying down the principle with the idea you are somehow gaining equity is a lie. You're not gaining it...you're paying for it. Which is the same as the tenant is from the rent.
In my application, the two homes are owner occupant and cash-flow, also in CA cash-flow actually doesn't matter because it's only equal to 4 dinner in lousy restaurant LOL .... so the investing theory that I've applied, is achievable after 7 years.
This is a way to get one home for free in 10 years, one could use amortization schedule to simulate this effect. It's not hard to understand.
I'm in favour of adding principle because you would buy equity faster.
While I would never adding principle for cheap rental property in Indiana (like in your example), but doing this in California is really powerful to build equity faster. - 3yWendy PattonBusiness MemberReal Estate Consultant · Clarkston, MI · Member since 2009 · 864 posts · 350 votes
@Billy Mcavoy I love the 2.75% mortgage and you won't be getting one of those in the near future unless you buy Subject-To. I might have a different thought then others, but I feel paying down and paying off is what builds true wealth and it's not buying wealth, BUT there is some balance to that. Now - go look at your amortization schedule with 2.75%! Now compare that to what 5% or 7% would be - How much is going to PRINCIPAL? I did a presentation on Subject-Tos a year ago and had never discovered how much goes towards principal with lower interest rates vs. higher interest rates. I am sure most seasoned investors do not know this either. I only thought the interest portion of the payment would be affected by the change in interest rate, but that is not the case! The lower the interest rate the higher the amount goes towards principal. The chart below is what i came up with for a mortgage (30 years) and loan balance of $275,000. The first line is the Principal and Interest for that interest rate. The 2nd line is the principal (on left side) and the interest(right side) for year 1 (really month 1). What the heck????? with a rate of 2.5% (close to 2.75%) you should be getting almost 50% of your payment going towards the principal balance (without paying the extra $250/month). Where as if you had 6.5% you would have about 14% of your payment going towards principal! Yep, that is crazy to me! The next two lines are year 10 and year 15. Even in year 15 the lower interest rate has almost 2/3s of the payment going towards the principal where as the higher interest rate still isn't at 50%~
So my advice - save the extra $250 a month and save up for your next deal (or repairs on this condo)! Look for Subject-Tos that have low interest rate mortgages - they will be key now due to this exact reason of the amortization schedule. It's easy in this business to earn much more then 2.75% so keep that note where it is and as long as you can. I hope this all makes sense and a few other people will have a light bulb go off. You actually get a double great deal when you have a low rate - 1) the lower payment and 2) the higher principal reduction from day 1
To Your Success
Wendy
Michigan Real Estate Investors535 Reviews - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesHow is buying equity using your money better than the tenant buying that equity for you...for free.
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
Here's another angle :
- If interest rate is cheap enough, you don't really have to add more into principal but if rate is above 5%, then it's a good practice
- HOWEVER, paying principle down is useful especially IF you want to hold property for certain number of years and plan to sell it (in your case 10 years) ; AND also IF acceleration of the appreciation equity of that place is twice than mortgage rate (eg: if appreciation per monthly is 5k/month and mortgage is 2k, then paying off asset early is GOOD).
What I am saying is this:
- if your rate is 2% and your location is in Cupertino,CA then definitely adding principal is good
- if your rate is 6% and your location is in Cupertino,CA then definitely adding principal is a MUST
- if your rate is 5% and your location is in detroit michigan then forget about adding principalit really depends on the market, you can simulate this in excel using amortization calculator to understand what I meant.
This is my basis strategy how to payoff 30YFRM in 10-12 years only.Another example of how percentages lie. The interest rate on your mortgage has no relationship to the percentage of appreciation. Mortgage interest is applied to the mortgage. It has no impact on the property value, only on the cash flow. Paying down the mortgage has no effect on the appreciation since the appreciation is based on the PV which is the same if you have 100% equity, 100% debt, or anywhere in between.
Appreciation is applied to the property value. It has no effect on the mortgage or the cash flow.
The two percentages have nothing directly to do with eachother.Also, paying down the principle with the idea you are somehow gaining equity is a lie. You're not gaining it...you're paying for it. Which is the same as the tenant is from the rent.
In my application, the two homes are owner occupant and cash-flow, also in CA cash-flow actually doesn't matter because it's only equal to 4 dinner in lousy restaurant LOL .... so the investing theory that I've applied, is achievable after 7 years.
This is a way to get one home for free in 10 years, one could use amortization schedule to simulate this effect. It's not hard to understand.
I'm in favour of adding principle because you would buy equity faster.
While I would never adding principle for cheap rental property in Indiana (like in your example), but doing this in California is really powerful to build equity faster.
"Cash flow in CA doesn't matter"?????? Why? Is money somehow different in CA than the rest of the world? When you lose money (that's what negative CF is) in CA, that's OK because that money isn't the same money in the rest of the world. If you lose $1000k/month in CA, you are losing less money than if you lost $1000k/month in, oh I don't know, Indiana for example? If you have positive cash flow in Indiana, that's not as good as losing money in CA because???
If you pay for equity, you are using your own money...there's no gain. All you're doing is transferring you cash from your bank to the property. It's the same money, and it has no impact on appreciation at all. Equity gained from appreciation is based on the property value, not the existing equity.
Buying equity adds to your cost. Negative CF adds to your cost. Profits in any business or investment comes after all costs are recovered. This means these two volunteered added costs just delay the time to profit...and the mountain you have to climb to get there. Continuous negative CF just keeps that profit moving away faster and faster.
In the end, the rationalization of CA appreciation offsetting this in 10 years (it doesn't in your math anyway) loses sight of the exponential losses you are generating...thus the exponential gains you'll never see. - Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Joe Villeneuve:
If you pay for equity, you are using your own money...there's no gain. All you're doing is transferring you cash from your bank to the property. It's the same money, and it has no impact on appreciation at all. Equity gained from appreciation is based on the property value, not the existing equity.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Buying equity adds to your cost. Negative CF adds to your cost. Profits in any business or investment comes after all costs are recovered. ThisThis is very simple basic math.
Because of how the amortization worked, if you adding principal, your debt would be much less later on down on the road.
Consider two scenario.
You purchase home in Jan 1,1980; if you add $100/mo, your remaining debt in year 10 is $100k (this is just rough example)
if you don't add additional prncipal, remaining debt is $130k.
just google amortization chart in excel and input the principal.
But I agree with you, for rental in Gary Indiana or Detroit Michigan, I would not add principal at all. - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesIt is simple math.
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
If you pay for equity, you are using your own money...there's no gain. All you're doing is transferring you cash from your bank to the property. It's the same money, and it has no impact on appreciation at all. Equity gained from appreciation is based on the property value, not the existing equity.Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
Buying equity adds to your cost. Negative CF adds to your cost. Profits in any business or investment comes after all costs are recovered. ThisThis is very simple basic math.
Because of how the amortization worked, if you adding principal, your debt would be much less later on down on the road.
Consider two scenario.
You purchase home in Jan 1,1980; if you add $100/mo, your remaining debt in year 10 is $100k (this is just rough example)
if you don't add additional prncipal, remaining debt is $130k.
just google amortization chart in excel and input the principal.
But I agree with you, for rental in Gary Indiana or Detroit Michigan, I would not add principal at all.
The reduction in interest comes whether or not you use your money or the tenants rent to pay the principle. It's free when the tenant pays it. It's a cost to you that you have to recover when you pay it. That means the savings in interest would need to be equal to or greater than the cost to you or it's not worth it. Also, the savings comes at the end, not at the start. The interest is front loaded, which means you are saving interest out of the months/payments that have the least amount of interest applied to it.Based on your scenario of $100/month on a house that cost $200k, you would get the following results with these terms:
1 - Cost = $200k
2 -Int Rate 5%
3 - term = 30 years
4 -DP = $20% = $40k
5 - Loan = $160k
6 - MP = $858.91
7 - Total Interest Paid = $129,826.91
...now add $100/ month extra, and you get these changes...
8 - total interest paid = $160,164.40
9 - Total added pmts = $22,787.34
10 - Interest saved = $19,382.34
11 - Difference = $2,471.66 paid more than interest saved...and,you lost $22,787.34 in cash flow over that time period.
- Rental Property Investor · Member since 2018 · 826 posts · 810 votes3y
@Joe Villeneuve I agree with Joe and the prior poster who advocate the opportunity cost angle. People get misguided by the math because they are not accounting for NPV.
I’d rather owe $130k after 10 years instead of owing $100k and pay an extra $100/mo principal. Unless you use a low discount factor, the extra $1200 you save by not paying down extra principal compounds to more than $30k over 10 years.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes...or more. Say this investor has 10 properties that they are putting 100/month more into the principle. The math shows it gains nothing. It also shows it loses quite a bit more due to the compounding factor from lost income.
Quote from @Allan C.:
@Joe Villeneuve I agree with Joe and the prior poster who advocate the opportunity cost angle. People get misguided by the math because they are not accounting for NPV.
I’d rather owe $130k after 10 years instead of owing $100k and pay an extra $100/mo principal. Unless you use a low discount factor, the extra $1200 you save by not paying down extra principal compounds to more than $30k over 10 years.
With 10 properties doing this, that's $12k/year, that could have been reinvested instead of spent (see above). If that 12k was saved until the end of the 2nd year, it would give you a $24k DP on a #120k property. Now do it again 2 years later and you've added a 2nd property...with 2 added Cash Flows. Add the CF's to the next year of cash not spent on paydown, and you can buy an added property...again. Keep this going, and by the 10th year, the increased CF should be blowing away any assumed gains from payoffs.
On top of that, you'd be adding PV to your portfolio and every year the base amount that appreciation would be applied to would be growing, and growing, and ...
This is the compounded loss that occurs when you spend your money to pay down your debt. The tenant is doing that for you,...for free. Let them.
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