Pay Down or Save

3 Replies

Hello BP,

My first home was not intended to be a rental but after 2 years my family outgrew the home and we jumped on a deal for a larger home. Now I am a landlord with a razor thin cash-flow with above market rental lease. The cash flow problem is due to paying on the upper limit of the property value and leveraged with FHA (4.8% interest) with MI for another 2 years. After 2 years the MI is eligible to be removed if the loan to equity ration is at or below 78%. I plan on keeping the home long term and pay down to eliminate the MI to give myself some breathing room.

My question is this; do I continue to pay down the note and have the home free and clear in 6-7 years and snowball the additional cash flow on to the other property to pay off in 3-4 years then pay off the next in 1-2 years etc. or do I save the money for other opportunities/investment vehicles. I currently max out my work 401k and Roth IRA. My goal is to have 7-10 SFH paid and clear to live off of in 20 years or less and be a landlord full time.

Would home equity loan be equivalent to saving that money for a down payment for the next opportunity assuming home value is not declining?

Thank you all for your consideration.

- Joe (In great need of a financial adviser familiar with real estate investing)

I'd propose another option that fits in the middle of yours.

Save the amount that you would be paying down in an account, and then when it builds up to an amount that can pay down to your MI limit, pay it down. Do the same thing until you have enough to pay it off.

This does two things for you. It allows you to have an emergency account if things go wrong, and it gives you the option to jump on other deals should they arise.

You will hate yourself if you dutifully paid down the note but did not have cash on hand when the roof collapsed.

If your goal is to have 7-10 free and clear properties is 20years, then I'd recommend getting rid of mortgage insurance, but then all additional goes into house buying fund.

Buy 7-10 cash-flowing houses as quick and highly leveraged as your risk tolerance can handle.

Get 15 year loans, and you will have no problem owning them free and clear in under 20 years.

Once you have enough properties, start rapidly paying down or buy slower.

Note: my goals are about the same. I wan't 10 free and clear in 10 years.

I started 4years ago, had 13 properties, sold the slums, now I have 7(leveraged) that id like to keep.

From a strictly mathematical standpoint, you have debt on the house at 4.8%. If you think you can invest your cash to generate greater than 4.8%, then mathematically, that's the best financial decision. If you can't invest for greater than 4.8%, then pay down the debt and effectively earn 4.8% on your money.