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i guess it would depend upon what stage of investing you are in your life.
i think paying down the mortgages should be the name of the game so few people do it because it takes discipline. i have friends leveraged to the max and it doesnt seem to fun. they never seem to have any more spendable cash just lots of bad houses
its hard to go broke, bankrupt or get foreclosed on when your houses are free and clear, and just think of all that passive income
sell two keep one, sell two keep one, hit your mortgage with $5000 every time you sell a house and see how fast it goes down.
try to buy subject to the existing mortgage you wont need to over levarage everything you have
anybody else have good strategies for financial freedom
Joe M
Eric,
I believe keeping the extra $100 and buying more real estate is a better option, unless you already have enough real estate and reliable cash flow.
First, when you pay extra principal, you are investing your money at a yield equal to the effective after tax interest rate of your note (interest savings). If you buy real estate with reasonable leverage with your extra $100, you should make a much higher return. Let your investment compound and then sell it to pay off your mortgages. You should be able to pay them off faster than with the extra $100 principal payment.
Second, if you pay down principal and later need the money, you can’t easily get it back, so it makes the deal riskier for you if you can’t make payments.
Does anyone have a different view?
Pedro Machado
Eric,
Rarely do mortgage companies apply the money correctly if you send in extra money to principal. I think it is better to use that money to acquire more properties that will produce more cashflow.
Jackie
Check this out:
Loan Amount: $150,000
Annual Interest Rate: 8%
Loan Period in Years: 30
Scheduled Monthly Payment: $1,100.65
Scheduled Number of Payments: 360
Total Interest Expense: $246,232.87Rent Schedule for the next 13 years ($100 over mortgage payment plus 5% annual increase):
1 $1,200.65
2 $1,260.68
3 $1,323.71
4 $1,389.90
5 $1,459.39
6 $1,532.36
7 $1,608.98
8 $1,689.43
9 $1,773.90
10 $1,862.60
11 $1,955.73
12 $2,053.51
13 $2,156.19If I apply every extra dollar to principal I will pay off the mortgage in 13 years or 156 payments and pay only $105,127.30 in interest expense…this is a savings of $141,105.57 in interest expense.
Someone needs to verify the following…this is equivalent to an investment that returns an approximate yield of 12%. Stated another way…if I invest every extra dollar that investment would have to yield approximately 12% to achieve the same/similar results of paying off my mortgage in 13 years:
Yr. Xtra $/mo. Balance at 12%
1 $100 $1,268.25
2 $160.03 $3,450.05
3 $223.07 $6,693.10
4 $289.25 $11,164.71
5 $358.75 $17,054.28
6 $431.72 $24,576.04
7 $508.33 $33,972.12
8 $588.78 $45,516.03
9 $673.26 $59,516.52
10 $761.95 $76,321.94
11 $855.08 $96,325.13
12 $952.87 $119,968.88
13 $1,055.54 $147,752.07
If you have a vacant property for a few months or if a water heater or air conditioner goes out your plan is in deep trouble with only $100 a month over the mortgage payment.
It is way too skinny for me. I would never – ever – consider getting bank financing ( jack has trained me well). You’re not factoring in all the cost of getting a loan.
If you bought the same property with seller financing or a lease option, there’s a good chance the terms would be much better and the cash flow would be three times more.
Jackie
Jack Miller says, “The surest way to become a millionaire with real estate is to borrow a million dollars, buy property, and then pay it off. Even if the property never appreciated, you would have your million dollars.”
Also, the property was obtained via “creative financing”…so far my out of pocket expenses have totaled $500.
Yes, vacancies, maintenance, and repairs will happen and have been accounted for and can be managed with my credit lines and will be easily recovered when the property is sold because the property was obtained at 70% of market value.
Is $100 positive cash flow a bad thing? If so, what is the magic number?
Every person’s situation is different.
If you have a full time job or really deep pockets and can handle covering several months of making a mortgage payment with no rents coming in — or a water heater going out – or a new roof – or a new fence – or foundation problems – or any number of other things that require an infusion of cash — then you can live with $100 a month in cashflow.
If you live in an area that has little, if any, appreciation, ( like Dallas Texas) then it’s too skinny.
If you live in an area like California which has seen prices go up for more than 10 years and now they are all going down – a LOT – then $100 is too skinny.
In a perfect world, the property will always be rented and nothing will break. But, just when you think you’ve made $1200 a year, something will go wrong and eat it all up.. . . plus some.
Just yesterday, I had to replace an 8 foot privacy fence for $1800 at one of my rentals. The month before that, I had to replace a double garage door for $750. Last month I also had to get the trees trimmed at 2 other rentals, it cost $675 for both of them.
Now, I know some landlords don’t keep their proprties up and they don’t have any maintenance costs.
And sure, you can pass some expenses on to your tenants – I do that too – but I have to pay for the major things. I set aside $1000 per property per year for maintenance issues. Sometimes I use it all, sometimes I can carry it over to the next year. But even when there is a carry over, I leave that money alone for routine repairs and upkeep.
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