Investor · Kansas City, MO · Member since 2017 · 96 posts · 82 votes
I have two rental properties in Missouri. Both with a mortgage. One of them has $25k left on it and the other one has $90k on it. If I pay them off in the next few years I would be cash flowing right around $1,800/month. Should I pay them off if I can have them both paid off in 5 years or not?
No you wouldn't be cash flowing around 1800/month. That "extra" money you are adding to the cash flow is just money that is now catching up to the cash you negatively put into your properties.
Since you don't mention what the payments are now for those two mortgages, I'll assume it would be a total of 1000/month you are now paying for them. That said, it would equal 12k/year. That means if you pay off 115k, cash out of your pocket, it will take you about 10 years before you break even.
If you want to increase your CF, take that same 115k in cash and buy another property (20% DP) that will cash flow, and let the tenants payoff your mortgages. That's their job, and they're really good at it...don't help them...they don't need it,
@Jason Waldo"My main goal as of right now is not necessarily a “really” good ROI on my money which might sound silly to some of you. My main goal is to get enough money coming in from my properties. All my expenses added together are right around $1700/month. So my first goal is to cover that and then use those two properties as collateral for getting loans on other investment properties."
Uuuuuh, no. It appears as though your main goal is to lose money.
I paid off a bunch last year, but they were higher rate and/or higher risk commercial loans. My market is also very expensive, so opportunities are limited and I still had enough left over for an opportunity fund just in case.
No way even I would accelerate low, fixed rate residential mortgages in a market like KC. Buy some more #1s. Maybe start paying off early when you get to 8 or so @Jason Waldo
*Proof: Corporations never try to be debt free. They borrow money by issuing bonds to then purchase assets that produce more profits than the cost of borrowing. I believe we should do also the same.
Berkshire Hathaway has 100 billion cash on hand, just as 1 example. Apple has 231 billion. Google, Microsoft, Amazon also keep cash. So you are just wrong. When Buffett bailed out Goldmans Sachs in 2008/2009 his cash made him a historic return. Net worth/free cash is a nice thing to have.
As to the original post, if you want maximum cash flow, you should use leverage (loans). However, if you want maximum net worth, or as we amateurs call it “wealth” then pay them off.
No you wouldn't be cash flowing around 1800/month. That "extra" money you are adding to the cash flow is just money that is now catching up to the cash you negatively put into your properties.
Since you don't mention what the payments are now for those two mortgages, I'll assume it would be a total of 1000/month you are now paying for them. That said, it would equal 12k/year. That means if you pay off 115k, cash out of your pocket, it will take you about 10 years before you break even.
If you want to increase your CF, take that same 115k in cash and buy another property (20% DP) that will cash flow, and let the tenants payoff your mortgages. That's their job, and they're really good at it...don't help them...they don't need it,
Hey, you always have a interesting point when it comes too payoff properties vs leverage. What do you think about a person primary residence ? We all have to live some where. Should it be payoff ? Besides house hacking
No you wouldn't be cash flowing around 1800/month. That "extra" money you are adding to the cash flow is just money that is now catching up to the cash you negatively put into your properties.
Since you don't mention what the payments are now for those two mortgages, I'll assume it would be a total of 1000/month you are now paying for them. That said, it would equal 12k/year. That means if you pay off 115k, cash out of your pocket, it will take you about 10 years before you break even.
If you want to increase your CF, take that same 115k in cash and buy another property (20% DP) that will cash flow, and let the tenants payoff your mortgages. That's their job, and they're really good at it...don't help them...they don't need it,
Hey, you always have a interesting point when it comes too payoff properties vs leverage. What do you think about a person primary residence ? We all have to live some where. Should it be payoff ? Besides house hacking
No you wouldn't be cash flowing around 1800/month. That "extra" money you are adding to the cash flow is just money that is now catching up to the cash you negatively put into your properties.
Since you don't mention what the payments are now for those two mortgages, I'll assume it would be a total of 1000/month you are now paying for them. That said, it would equal 12k/year. That means if you pay off 115k, cash out of your pocket, it will take you about 10 years before you break even.
If you want to increase your CF, take that same 115k in cash and buy another property (20% DP) that will cash flow, and let the tenants payoff your mortgages. That's their job, and they're really good at it...don't help them...they don't need it,
Hey, you always have a interesting point when it comes too payoff properties vs leverage. What do you think about a person primary residence ? We all have to live some where. Should it be payoff ? Besides house hacking
2 - What other options do you have with that money
3 - ...and more
Ultimately, it still comes down to a simple math problem....plus or minus.
All the cash you are spending (money moving away from you) is negative. All the money that is coming back to you (income) is positive. The operative word here is "cash"....not equity, not depreciation, not loan payoff, etc... The main reason just cash is out of all of those things mentioned (and more), the only one that is moving/liquid, and thus able to generate income in the form of cash that grows exponentially, is cash.
That doesn't mean you don't pay off your mortgage on your own home, but it still depends on those initial items I mentioned...and of course 1st grade math.
Note: This is the math a lot of people said, "...why am I learning this? I'm never going to use it"...LOL
Depends on your goals @Jason Waldo Can you purchase more properties with the monies potentially used to payoff these mortgages, increasing your cash flow and expediting the process?
@Jason Waldo Though we all have different goals, I think we should never forget that the reason we started investing in real estate is to get lessees/tenants to pay off mortgages for us and not the other way around.
Hope this helps, Jason. Goodluck. Thanks! - Ola
I would need to disagree with this statement. The reason I got involved in real estate was for passive income to allow me financial independence. In the short term I absolutely plan to leverage my cash, investors, and properties in order to acquire as many as I can, however that will at some point very much so switch to dumping cash into paying everything off (ie possibly selling half the portfolio to pay off the other half) and having a fully unencumbered portfolio. I know my ROE will be terrible, but I'll have a very health balance sheet and P&L and at a basic level that's my goal. I know lots of people have goals of being a big corporation and having lots of leverage and assets under management, but I don't know that that's for me.
Unlike the majority of my peers, I agree with @Tyler Kastelberg. The goal of investment property is to make wealth and not necessarily have tenants pay off the mortgage.
There are different schools of thought on what benefits are to be derived from paying off debt. The biggest is indirect leverage. Once a property is paid off, have a HELOC against it to borrow against it and use it to make cash offers on properties. An investor with a good eye can make an all-cash offer with waived contingencies if they know what is the fair-market value. A seller will likely look at a cash offer differently than a loan- or other contingency based offer, since it has more chances of closing (or the seller keeps the earnest money). Investors make money my buying an asset at less than market value and that is possible by buying it in cash and avoiding the "loan" premium.
Regarding a comment earlier about companies holding cash - I can only say this. I have worked at Microsoft and now at Amazon. And i am pretty familiar with Amazon and I am amused by the above comment. Unfortunately, I am not at liberty to disclose the specifics.
I love BP. There are so many amazingly intelligent thoughts here. Honestly, you all should be proud of your levels of knowledge and what you offer so many others that are learning.
@Jason Waldo Not for nothing but some of this really depends on your marginal tax rate. Odds are you don't have enough depreciation to offset the net income. Mortgage interest can help you do that. There are materially different marginal tax rates if you make $30K/year vs. $300K/year in your W2. Any income you can't offset will be (essentially) taxed at the highest marginal rates as it's "extra" relative to the ol' W2 income. I know those are two extremes but tax implications translate to real dollars and the end of the day. Consequently, while you're working a 9-5 you might want to keep that mortgage debt and associated mortgage interest. Post-retirement when you have no W2 income taxable income on a "free and clear" home is less burdensome.