@Jerry Hill Depends on your goals. Do you want to own the property free and clear ASAP? Or are you happy with the cashflow and would like another property cash flowing the same way? Me personally, I'd save/ use the cashflow for other deals. But you may be more concerned with paying down your mortgage than I would be.
I'd get my reserves up and then spend that cash-flow like I'm gong to die tomorrow.
Thanks guys. I can see now His it depends on your goals. My goal is to buy more properties, so saving it makes sense.
Is there a short term vehicle you put this money in that earns interest?
Thanks for helping me think through this.
Hi Jerry - I just keep my reserves in cash at an online bank that pays 1% or so interest. I want the funds ready to go quickly if I find a smoking deal that has a short timeline.
I was in the same dilemma after purchasing my first rental property.
I am a CPA from Michigan so my gut says to pay off the debt right away.
After my first house I realized that having a good reserves and then using the cash for the next deal will help you grow. You earned that money, why not use it to make you more.
Let me know if you have any other questions.
Happy to help!
@Jerry Hill I don’t put it back into the mortgage. Money is “cheap” right so I don’t think it makes too much sense to do additional principal pay down. There are cases where it might make sense. If it lets you get ride of PMI then that a real savings. Commerical debt needs to be refinanced every (in general) 5 or 7 years. So principal pay down today will have a material effect on cash-flow in 5 or 7 years (lower loan balance at refinance time). But I’d still rather try to find an investor that yields better returns. Or maybe you can take that additional money and upgrade the property in some way to yield better rents, etc.
And, of course, if you’re just plain saturated and don’t want anymore more Investments then pay down your principal. I know people here love expansion and debt-until-you-die but it’s not for everyone. Sure, it’s a little lousy from a tax perspective and it doesn’t maximize ROI but it’s a way better option that chasing the “next deal” out of some reflexive reaction.
Half of the reason you should want “financial freedom” is the “freedom” piece of it.
if you hate money, put it back in the mortgage. this is where you put your cashflow when you want it to die. this is because every penny you put in gives you a return equal to your mortgage rate, which right now is likely around 4%.
if you like your money, save it and reinvest in vehicles that will return higher yields, (assuming you have a sufficient reserve fund) even an S&P 500 tracking fund is low risk and will give you 8-10% returns over time.
@Jerry Hill - find more property if you can. Money is still cheap. Definitely build up the portfolio and increase the cashflow. Now - if you don’t want more properties then that is a different story. You could always invest in other people’s deals!
Make the money work for you! Cash Reserves and reinvesting would be the route I would take!
To your success,
Everyone has said it depends on your goals and they are 100% on target with that. To give some example, I have a friend who has a goal for his retirement. He figures his goal will be reached when he has ~20 houses all paid off (in the range he's buying). So his focus is to buy them and then put every available cash flow dollar into paying off the mortgages, then when done, retire, stop investing and live off the cash flow.
For me, I am looking to build my portfolio and I work within a range of leverage %. Once I get below a certain %, I refinance and pull money out back up to the top end of the range and reinvest that money. So as you can imagine, my approach is to not put any extra $'s into the mortgage than I have to. Maybe that will change one day and there may be one-offs here and there, but overall, that's my plan.
So again, it all goes back to your goals :).
Yes, it depends on your goals. Paying off the house note vs saving for future deals. But nothing says you can't do BOTH simultaneously. You can reasonably make an extra payment a year and save for your future deal. As far as the investing vehicle, you want to have that cash liquid in case you need it. So the only reasonable vehicle would be a high yield savings account which is around 1%. You may consider short term CD's but even these won't yield that much more than 1% and once the money is deposited it has to sit for the time of the CD.
I started accelerating mortgages after getting to about 30 rentals, ran out of easily available opportunities and was sick of earning 1% or less in the banks anyway.
A lot of smart people suggest getting to at least 5 rentals first so you have a good base of cash flow and don't miss a smoking deal with your cash all tied up because of that one little mortgage.
I had easy targets to pay down, though. 10 year old mortgages above 6% and commercial loans. I could pay down more, but the opportunity cost of satisfying residential fixed 4%ish loans is too high. Most of us can beat that return about anywhere in our sleep.
@Jerry Hill put the money in a higher yield FDIC bank account. There are a couple banks paying 1.5% online right now so it pays a little while you wait. While you are building your portfolio, keep all the cash to put towards down payments. If you use the cash to pay down the mortgage, then the cash is tied up as equity. Nothing wrong with paying off mortgages, but that is usually a strategy once your portfolio is larger.
The age old question. There are many insightful responses on this post. I'll reiterate the "it depends on your goals" theme. Its very true. I was moderately leveraged on several properties (a mix of multi-fam and commercial) up until this past year. I made the decision to sell a few of the non-revenue or low revenue generating properties (i.e. the weekend ranch as we say here in Texas) and another rural acreage rental home, in order to pay off and pay down several notes. I did this in order to maximize cash-flow and allow me to transition my business from full-time law practice, to part-time law and part-time real estate. Point being, everyone's situation is different and that is most often what dictates the answer to the age old question.
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