All Forum Posts by: M. N. Iqbal

Todd, thank you so much for an excellent review and feedback. The tax and interest tax break is around 6600/ year, so overall I am positive even with negative cash flow. I am waiting for the rates to come down a little who knows how long would that be, but will refinance to 30 years and that will bring down mortgage and put me in positive cash flow hopefully. Thanks again for writing on my post. Appreciate it. 

 Having negative $350 requires looking at it from a different perspective. 

This is where you have to sit down with the numbers to identify the best approach.
Also, there are a fair amount of variables:

- Tax return from the interest. This goes down over time but you don’t have to take that into account. Does the tax return boost cover the $4200/yr loss? Note this goes down over time.

- If you get more properties, you would want the net cash flow to offset the $4.2k you are losing per year and beyond and for how long.

- Negative $350 also doesn't take into account any surprise repairs. You're not accumulating reserves. 

- You can raise the rent per year to help, especially if the taxes increase.

- Consider refinancing now, even with the current interest rates. Calculate additional down payment you need to get the monthly note to a positive cash flow. Even consider changing it to a 30 yr.
Bleeding money is fine only for homes in an area with strong appreciation appreciation. I assume the home is in a Cleveland suburb so I speculate it isn't appreciating as fast as the loss.
If bleeding money is ok, how long should it occur? The 5, 6, 10 years? The life of the loan?

Overall, I recommend calculating what it would take to stop the bleeding ASAP but no need to over do it and pay it all off.

@M. N. Iqbal

If you are looking for long term, hold onto your cash.  No reason to de-leverage.  If you pay off the loan, you'll probably be back on BP asking how to get your equity out and/or what to do since you are cash poor.

You never know what the future will hold.  Maybe in a few years rates will drop and you can refi.  Maybe rents will continue to skyrocket...  So, don't worry about "dripping in" the $350/mo.  Better to use a bit of your cash slowly then "losing it" to illiquid real estate equity.

This is the point of the so called "power of leverage" in real estate where its actually "good" debt.  As mentioned above, imagine having three properties free and clear in the future (with whatever might be their future value), as opposed to the one now...

Good luck.

I get it. Paying interest is basically just giving 93k of your own money to the bank in 15 years…just because.

However, how long will it take to recoup the 154k via cash flow from rent if you pay it off now?

Another approach is to use that for a down payment on two more properties. From there, your monthly income greatly increases.

At that point, what should you do? Save to buy another house or take out a loan on property #2 to get property #3 for even more income? Or, do you use your monthly income from the two homes to pay them off quickly. Sure, you’ll pay some interest still but you will have 3 units where all the income goes in your pocket thereafter.

It is a philosophy that takes getting used to as we like being debt free.

The secret? Do the numbers for each option to see where you are at the top.

Any mortgage will start with most of the money going towards interest. The amount going to interests decreases as you go.  For rentals, typically the best is to get as long of a term as possible (eg 25 or 30 year mortgage) to keep the payments low. the tenants are paying the mortgage for you.  If you want to pay it off early, you can.  If you are planning on buying more homes, you can also save that money and use it for a down payment on your next rental.  It is all a matter of what your goals are and what the numbers are.

I missed another important question - are you cash flowing or losing money each month? If you are cash flowing, even though the interest feels bad, the better answer would be not to pay it off. Leverage really helps with real estate investing growth and returns. 

That being said, if it keeps you up at night to pay that interest rate and you have the cash, it's your call if you want to pay it off. Just be aware that it will slow your growth over the long term if you choose not to carry debt.