Pumping Cash flow back into mortage

[Brendan Blake]

Newbie to the site and was wondering if someone could shed some light on the pros and cons of instead of taking positive cash flow out of the property, to in turn use a shorter term mortageg with higher monthly payments. Excess cash every month would essentially pay off more debt in the property and then use a 1031 exchange to move to a bigger property, all with the hope of avoiding the tax man. Anybody have any insights if this is the best way to grow a portfolio?

[Matt Devincenzo]

Originally posted by @Brendan Blake:

The rental income instead basically flows pre tax to the mortgage company. Once you find another property you like you then refi the equity you built up and make a leveraged purchase on your new property with untaxed rental income you have basically stored.

This is slightly wrong, the dollars spent on principal paydown will be taxed whether you keep them or pay off your mortgage quicker. In fact you will pay more tax because you will reduce your interest payment thereby reducing your deduction.

If you make $12K/yr rental income and say have $6K in expenses(not including mortgage) and then pay $1K in interest on your mortgage and $2K in principal payment, your taxable rental income will be $5K(12-6-1=5).

Same scenario you make $12K/yr rental income and say have $6K in expenses(not including mortgage) and then pay $800(because of extra principal payments) in interest on your mortgage and $5K in principal payment, your taxable rental income will be $5K(12-6-800=5200). So you pay more taxes

Also something I just learned recently, if you cash out refi you can't deduct that portion of the interest payment that results from the cash out. Now if you use that money to buy another property you can use tracing (I believe that is the correct term) to allow the deduction since you bought another investment.

Do a search here there are quite a few threads dealing with paying down principal or using a 15 year amortization instead of 30.

Any of these options of high leverage, faster principal paydown, shorter amm loans, longer amm loans, reinvest cash flow ect will be great as long as you bought right there is no "wrong" decision just what you are personally most comfortable with and what your goals are.