Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes
Ok let’s say I have a mortgage on a house amortized for 30 years. The property earns about $300 a month in positive cash flow. I would like to reinvest this money but would like to know where it’s better off. Should I put that $300 dollars into the mortgage lowering my monthly mortgage payment and increasing my cash flow. Or should I save that $300 extra bucks until I have enough money for another property. What’s the better option and why?
Watertown, SD · Member since 2017 · 14 posts · 12 votes
7y
What are your goals? To have one paid off rental or build a portfolio of rentals? The best return for your money would be to save up to put future down payments on more rentals if that is your goal. Also paying extra principal on your mortgage doesn’t increase the cash flow until it is completely paid off, it is only building equity inside of the property.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y
What purpose is there in putting the money back into the mortgage? There is none. By doing this, you think you're gaining, but you're actually moving backwards.
Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes
7y
@Ross Olson
Hey Ross,
Thanks for the reply, my goal is to have a large portfolio of houses and to keep expanding. About the cash flow I was told making extra payments on a mortgage lowers the monthly payment. Does this then not increase your cash flow? I’m new so please explain.
Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes
7y
@Joe Villeneuve
I’m new but when talking to people who have owned rentals before they said making extra payments lowers the monthly payment on the property? Is this not true and if so would it not increase my cash flow?
I’m new but when talking to people who have owned rentals before they said making extra payments lowers the monthly payment on the property? Is this not true and if so would it not increase my cash flow?
No. Unless you're above 80% LTV and your PMI will be dropping off, the answer is no.
If you want to buy more properties, invest the money where it is earning a good interest rate and can be taken out. Putting it into the existing mortgage means it is much harder to pull it out without refinancing which comes with extra costs and therefore defeats the purpose of saving money.
@Cole Black Leverage. Hypothetical $100000 for investment. Buy 1 or 5 with leverage. 10 year time span. Growth 3% inflation and 3% rent. $1000 per month rent. 50% rule half to expenses. half for profit and mortgage payment. 1 house 10 years from now= $130000 and $1300 a month. 5 houses=$650000 and $6500 rent per month. But I have a mortgage= $2146 per month. Clear $4354 after mortgage payment. Mortgage paydown is $65073 x 5= $325365, Equity 5 houses $324635. A calculator is your best tool in your tool box.
I’m new but when talking to people who have owned rentals before they said making extra payments lowers the monthly payment on the property? Is this not true and if so would it not increase my cash flow?
No. All you're doing is spending more money on the principle. The tenant is already doing that for you. Why help them. Keep this in mind. Before you can show a profit, you have to recover all the cash you put in. Adding to the principle is adding more cash...your cash. Let the tenant do that.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
7y
I've paid off some rental mortgages, but only if they had high interest rates of 6%+ or other risk factors like balloons, adjustable rates, commercial, seller-financed, etc.
If you want to expand, do not sink your money into a long-term fixed rate mortgage below 6%.
It can make sense to pay down your primary to get PMI removed, but that's case by case if you're close already. Maybe your house has appreciated and a few grand puts you over. Other than that, principal paydown doesn't reduce your payment until it's paid all the way off.
Rental Property Investor · Wenatchee, WA · Member since 2018 · 99 posts · 103 votes
7y
For a lot of newer investors, like me, this is one of the most difficult ideas to adopt. While the bulk of the advice here is correct, it is also completely contradictory to the skills and decisions you made to become an investor. To become a smart REI most of us saved money or paid off balances and used equity and savings to buy a REI. Now, were taught to leave the debt and don't pay it off early. Again, contradictory to our path that got us to investing. The truth is, as long as the property is performing at a rate that the tenant is covering all of the expenses it's good debt to have, especially if you can weather a downturn in market rents.
I'm in the same pickle and I'm saving all cash flow, rather than paying of the debt on performing properties. This is against my nature and DNA but it will provide the most flexibility. All my notes are 30 years 5%ish.
Investor · Chico, CA · Member since 2017 · 5 posts · 2 votes
7y
@Cole Black. Unless you refinance that debt, lowering the debt doesn't lower the payments. More importantly, you should seriously think about moving into multi-family instead of SFR.
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y
Hi Cole,
In your case, you are just in the beginning phase of your long real estate journey. In the beginning, you need as much free cash flow as possible. I would use the extra money and start saving it as a down payment towards your 2nd investment. Paying it off does not provide any financial benefit unless the rate is 6%+ like Steve mentioned.
I understand why you want to have the mortgage paid off but it's too early for that. Let the natural progression of the loan do its thing. I own my properties free and clear but if I had a mortgage on them I would not look to pay them down. I like to acquire them cash up front which provides me with lots of benefits in the current market environment.
If you like buying and owning houses stick with that. I have own multi units and houses. I much prefer houses. That is the only thing I buy now. Keep it simple and just duplicate what you have been doing.
Watertown, SD · Member since 2017 · 14 posts · 12 votes
7y
@Cole Black So to answer your question as others have already done, if your payment is $500 a month and you put $800 that month on to your payment the next month the bank is still going to require a $500 payment. Your principal balance will have lowered, but your payment will still be $500. You will have reduced the number of payments required, but cash flow is unaffected unless as someone stated you have PMI that will drop off. Leverage is a great tool in real estate, but I would advise some caution in using it too aggressively. Make sure you have enough reserves to cover replacing a roof, or long term vacancy after a tenant trashes a place etc. This is where your cash will be more useful, than using it to pay mortgage ahead of time. Once you have required your desired portfolio you can snowball them and have paid off rentals at that time.
@Cole Black looking at this situation the only thing putting the cash flow onto the mortgage does is help you pay off the dept sooner. You can see an example of these by using a simple amortization excel workbook. Plug in your information and add $300 to the "extra payment" column. This will show you the principle amount of the mortgage will reduce quicker but your payments will remain the same.
Additional food for thought is saving some of the cash flow for repairs you may need. For example of the water heater or HVAC system breaks do you have the cash to replace it. Make sure you are setting aside a portion of the money to cover those expenses. I apologize if you are doing this already but I definitely didn't want to not say it.
Waipahu, HI · Member since 2018 · 121 posts · 81 votes
7y
I agree with @Ross Olson What are your goals? Some people just want to add one rental to their portfolio. Some people want the highest ROI. Some people want to eat out 5 days a week. If you are truly investor minded and want finical freedom as soon as possible probably saving for another investment property would give you the highest ROI. If you do not want to pursue that but still want to invest probably index funds would be a nice hands off approach. If you want to pay down the principle of the property you get a 4-5 percent return on that money, and when you pay off your mortgage you double to triple cash flow, but the ROI is pretty low. Again what are your goals? I really like to think of goals in terms of Mark Manson's perspective. What am I willing to struggle for? Let us know what you decide to do.
Rental Property Investor · Markdale Ontario · Member since 2019 · 94 posts · 12 votes
7y
Thanks for all the answers guys and girls I appreciate it. I was told that making extra payments lowers your regular payments but I guess it shortens your term instead. Guess I sound a little silly but thanks for clarifying it up with me I appreciate it.
Rental Property Investor · Corpus Christi, TX · Member since 2019 · 306 posts · 176 votes
7y
@Cole Black
Save enough in reserves so you can make any major fixes such as plumbing, roof, hvac etc. After than then I might start putting some aside for the next property. Dont want to stretch yourself too thin by dumping all of your capital into another property. Then what happens when you have some major issues at both properties with no cash to fix them...?
@Cole Black keep the money away see how much equity you have if good enough use that to get another property but don’t put more that 4 % down let the bank take a loss when the market crush or value decreases why?you don’t want to loose your money that could be invested somewhere be smart