Bridge City, TX · Member since 2017 · 3 posts · 1 vote
So the way I have my real estate loans structured is a 7/25 intrest loan with a balloon payment after 7 years. The discussion keeps coming up as to wether during those 7 years I should put any cash flow towards the principal, take the cash flow and reinvest in more homes, or use the cash flow as income. I would only have to refi the homes at the end of the 7 years for another 7 and keep doing this. Ideas??
Reinvest it first, expanding the base amount of money you have to invest. This allows you to invest in multiple properties at the same time. Once you have the base large enough, or as large as you can handle at one time, you use that cash flow as income.
I would never help my tenants pay off my mortgage for me. Why would I when they are doing such a great job of it all by themselves. If I use my cash flow to do this, I am turning a possitive cash flow property into a negative one.
@Phillip Stagg, my theory is that your limitation to buy more homes will depend more on how good/bad your deals are in the first place (to refinance six months later to get your deposit back), than their cash flow. ie. If you only buy deals that are ALREADY valued significantly higher than you paid, then you won't need to panic so much about their future appreciation. (Conversely, you WILL have to worry about appreciation in the case of 7 year balloons, if you don't get bargains from day one). In short, I reckon the answer to your question is: it DEPENDS on your ability to find deals that will generate higher profit over time than the cost of their funding (refer: Sentence 1). My 2c...
I think that Phillip Stagg 's point of view makes sense. I like the idea of utilizing the leverage to reinvest, if it makes sense from a return and risk perspective. My question to you is, how many homes do you currently have in your portfolio that are subject to these 7/25 loans? May I ask why the loans aren't fixed, 30-year loans?
Reinvest it first, expanding the base amount of money you have to invest. This allows you to invest in multiple properties at the same time. Once you have the base large enough, or as large as you can handle at one time, you use that cash flow as income.
I would never help my tenants pay off my mortgage for me. Why would I when they are doing such a great job of it all by themselves. If I use my cash flow to do this, I am turning a possitive cash flow property into a negative one.
Paying down a rental income property mortgage is a very high price to pay for what is essentially artificial cash flow. It is actually killing your cash flow based on the value of that cash.
The opportunity value of cash is worth 3X todays mortgage interest rates making paying down a mortgage a financially poor investment strategy. Your best options are to either reinvest in additional properties or in some other vehicle returning greater than the prevailing mortgage interest rates. Mutual funds will easily return double todays mortgage interest rates.