Paying off propety early with cash flow?

20 Replies

Hi @Account Closed ,

I wouldn't pay down your mortgage early. You just end up trapping your cash as equity in the property. However, I can think of two good reasons why you would want to pay off your mortgage early: 1) Let's just assume it is a lump sum and you pay off your 30-year mortgage with a few years left - this may result in a nice ROI (like paying off remaining 20k would result in a 5k/year gain), and 2) you are close to retiring and are okay with putting your cash into your property and want to have lower monthly expenses.

Why would you help your tenant pay off the mortgage.  If the house has positive cash flow, you're not the one paying making the mortgage payments.  Don't help the tenant do their job.

Also, let's look into that crystal ball you have and see what you are doing in 30 years.  Can't look that far?  How about 25?   No?  20?  How about 10?  At least 5?  I'd say you need a new crystal ball.

@Tyler Psenicska. I would pay it off until no more PMI. Unless it’s fha then you always have Pmi until you refinance. People on BP always say never to pay off mortgages early and that’s fine but that’s not a strategy I am doing. My first property will be debt free within 3 years of buying it. It’ll then be a cash cow that I use to pay off other properties. The result will be thousands in saved interest and multiple free and clear properties before I’m 30. This money will be a small amount of my NEt worth so I’m not really gonna miss it.

@Account Closed

   I’d invest it. Either into another property or in the index fund like you’re talking about. 

The next property you get look into 10, 15, or 20 year loans. You'll get a better interest rate, a little less cash flow but overall more cash flow than you currently have.

   I wrote a blog breaking down this strategy recently. I’m staggering my loans this way so I don’t have to go back and forth on which way to go. Some will be paid off sooner than others but the tenants are still doing the heavy lifting. 

- Mike

paying off a house is simply trading liquidity for non-liquidity. you'll save yourself the compounding interest but that's at a very low rate.

If you keep the cash you can always pay the house off if you need. Or you can reinvest into a better return.

Keep dat cash money dog!

@Tyler Psenicska reinvest in real estate, you will always make more in real estate than any stock market investment.

There are pros and cons to both paying off and having a mortgage. I would take the cash flow and save it in order to invest in more properties.

Ultimately my goal is to have nice paid for SFH rentals. I don't mind using leverage to get there but whatever you do don't be over leveraged before a crash in the economy. Since we can't predict a crash its best to plan as if one could happen any year.

@Michael J. Very well put. I agree with using the cash flow for additional properties. The stock market has been up and down with all this TRUMPonomics lately.  

@Account Closed - Cool name btw. As a first step, I myself would definitely throw everything I could to get rid of PMI. If you consider yourself responsible (sounds like you are with house hacking and being able to buy a property), PMI is just horrible. Get rid of it if you can.

In my journey, I used cash flow to pay down the mortgage. It allowed me to then get a HELOC (I had to wait a year or so to get sizable equity), and I was able to "recover" some liquidity from me building more equity with early payments. On my property itself, my interest rate was so low that the tax returns at the end of the year and only getting 25%ish of it back (my tax bracket) was not extremely interesting; it was a no-brainer for me to contribute extra cash toward the note and aim for getting the HELOC. Now I've "recovered" that liquidity and now that my proportions of principal and interest (PI) every month is much more in my favor than the bank's favor, it's just like having saved up all this time to go out there and buy another property. Good luck out there! :)

Originally posted by @Tyler Silverman :

@Account Closed - Cool name btw. As a first step, I myself would definitely throw everything I could to get rid of PMI. If you consider yourself responsible (sounds like you are with house hacking and being able to buy a property), PMI is just horrible. Get rid of it if you can.

In my journey, I used cash flow to pay down the mortgage. It allowed me to then get a HELOC (I had to wait a year or so to get sizable equity), and I was able to "recover" some liquidity from me building more equity with early payments. On my property itself, my interest rate was so low that the tax returns at the end of the year and only getting 25%ish of it back (my tax bracket) was not extremely interesting; it was a no-brainer for me to contribute extra cash toward the note and aim for getting the HELOC. Now I've "recovered" that liquidity and now that my proportions of principal and interest (PI) every month is much more in my favor than the bank's favor, it's just like having saved up all this time to go out there and buy another property. Good luck out there! :)

So let me get this straight. You thought it was a "no brainer" to exchange your cash (free money) with immediate access, for a HELOC (less money...that you had to pay for in with interest)...that you had to wait for a year to use, just so you could eliminate the PMI, that your tenant was paying for in the first place? Oh, and that PMI you think you eliminated, you didn't. All you did was exchange that interest for the interest charges on the HELOC.

Why did you invest in real estate? Probably for better returns and more control. Wouldn't it make sense to use your cash flow to invest in more real estate for better returns and more control?

Not exactly. I might not have been clear...I did not have PMI in my case, I just meant to advocate that I would get rid of it ASAP, if possible, as it increases equity and cash flow if renting. In my case, I used cash to pay down the note while I lived there before renting it out and before getting the heloc. My intention back then when I was living there was not to save up to buy something else but rather to reduce paid interest. When I converted the property to a rental, I stopped paying extra principal and was able to open a good-sized heloc. You are right that less cash becomes available when opening a heloc but on a positive note, I am okay with that now that I have a tenant in there paying. Now my portion of principal is now much more than my interest portion each month while having access to the good-sized heloc whenever I find an investment that produces higher returns than my interest rate.

Originally posted by @Tyler Silverman :

Not exactly. I might not have been clear...I did not have PMI in my case, I just meant to advocate that I would get rid of it ASAP, if possible, as it increases equity and cash flow if renting. In my case, I used cash to pay down the note while I lived there before renting it out and before getting the heloc. My intention back then when I was living there was not to save up to buy something else but rather to reduce paid interest. When I converted the property to a rental, I stopped paying extra principal and was able to open a good-sized heloc. You are right that less cash becomes available when opening a heloc but on a positive note, I am okay with that now that I have a tenant in there paying. Now my portion of principal is now much more than my interest portion each month while having access to the good-sized heloc whenever I find an investment that produces higher returns than my interest rate.

 Got it.

The $200 of cash flow, which comes from the tenant not you, if applied to the mortgage would allow you to pay down the balance and do away with the PMI. PMI is an additional expense that doesn't benefit you, but only the lender, and it eats up future cash flow. Also, if you paid off the mortgage, how much more cash flow would you have? Double probably. The bottom line for me is that you will not get rich on $200 per month. You need 20 of these properties in order for it to really affect your life. Or, you only need 10 of these if you were getting $400 per month of cash flow to accomplish the same thing.

@Account Closed It depends on your comfort level. If you can get rid of the PMI by paying it down, it could free up some cash and bring you more cash flow over time. I've held properties with mortgages and without. I definitely prefer the latter. Good luck with your decision!

@Tyler Psenicska. I feel the market is gambling. Only gamble with money you are okay losing. I think there are a few factors to consider. What interest rate is the mortgage. How far off are you from retiring? Are you trying for financial independence? How much equity do you have? Those items would help making the decision. Good luck.
Originally posted by @Rachel H. :

@Account Closed It depends on your comfort level. If you can get rid of the PMI by paying it down, it could free up some cash and bring you more cash flow over time. I've held properties with mortgages and without. I definitely prefer the latter. Good luck with your decision!

 So you're going to spend money (cash) you have now in a large amount, so you can "free up some cash" in smaller amounts coming back to you...that you have to pay for?  

Isn't that large amount of cash you have now already "freed up"?

In reality, don't you have to recover the total amount of current cash spent from the cash flow before you can say you are ahead?

If you spent $20,000 today to get $200/month more in cash flow, that means it would take you 100 months (8 years and 4 months) before you gained the benefits of why you are doing this in the first place. On top of that, you're not the one paying the PMI...the tenant is.

The only cost to you in all of this is what comes out of your pocket.  Let's say you have a 10% interest rate, but you have a positive cash flow of $400/month with only putting $20k in DP.  You're total cost to you is $20k.  This means it will take you 50 months before you get to "profitland".  If you were to add $10k more to your DP (now $30k) to get $100/month more (now $500), it would take you 60 months to break even....and it would have cost you $30k instead of $20k to control the property.

It's not about buying a property, and  how much it costs (principle, interest, etc...).  That's the tenants job.  It's about gaining control of the asset (DP, and anything else out of pocket).

You and your tenants are partners...they just don't know it.  Don't tell them...and don't help them.