I have a real estate question for all you smart people

  • This topic is empty.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
  • #82606 Reply

      We have a great rental house that we were just able to refinance at 5.75% which seems pretty good for these days! And we got a great new tenant paying what we need for it. So right now the house is going great.

      My partner has gotten it into his head that paying off $20,000 of the approximately $145,000 new loan will make a big difference in the end. I personally want to just let the tenants keep paying it off for ever and not put any more $ into it, especially since we had to do a huge renovation when we got it and have put a lot into it already.

      So, I’m wondering if it makes sense to periodically pay off chunks of the mortgage when we have the $?

      Thanks for your input!

      #82607 Reply

        Accelerating principal payments actually (usually) dilutes (makes smaller) your return on capital.

        If you’re an “investor”, your general goal is to make your capital produce the highest possible return.

        If your present return on invested capital is 10%, you can’t simply up your tenant’s rent by $2k a year because you want to maintain that 10% on your $20k principal paydown.

        Your net worth doesn’t change by even a penny with a $20k principal reduction.

        You will have forever (as long as you keep that mortgage) forfeited the possibility that your $20k earns anything more or less than precisely 5.75%.

        And you’ve obviously lost $20k of liquidity.

        There are valid financial reasons for accelerating principal payments, but “feel-good” isn’t one of them. “It will make a big difference in the future” may (or may not) be a true statement. But a “big difference” (whatever that means) should be compared against other possible ways to use your capital.

        #82608 Reply

          I prefer to invest the extra cash in the market, let tenant pay mortgage, insurance, and taxes, and take the tax credit for the mortgage interest. Bigger ROI.

          #82609 Reply

            Generally you’ll get the greatest return on your money by letting them pay down the mortgage for you.

            #82610 Reply

              It depends on other factors not mentioned. Do you have a sinking fund for the repairs and CAPEX? What is your current cashflow and ROI? How much did you recently spend to renovate it? What is the market value? With rental properties, cash flow matters more than equity in most situations. I’d really analyze your cash flow situation before I locked up money in equity.

              #82611 Reply

                You’ve heard a lot of math answers here. There are two questions.

                What else am I really going to do with the money? If the answer isn’t something that gets better than a 5.75% return tax free or sheltered than I would usually go for this simplest option.

                What risk am I taking on by not paying this off? I can tell you during the pandemic a lot of landlords were sweating. If you have a paid off house you can manage it a lot better. You can mitigate that risk by having cash reserves but those cash reserves aren’t making much of a return either.

              Viewing 6 posts - 1 through 6 (of 6 total)
              Reply To: I have a real estate question for all you smart people
              Your information:

              Spread the love