Curious if there's a general best practice here. When it's other people paying the mortgage, is there any benefit to making additional payments to principal if it comes out of your own pocket?
I'm guessing the guidance is to minimize out-of-pocket expenses?
Or if it's a healthy profit, do you put that back in?
Or does it just make sense to let the tenants pay, and save the difference for a rainy day?
Assuming your properties flow, when would you make additional payments to principal?
byu/djohnstonb inrealestateinvesting
Posted by djohnstonb
6 Comments
I think (could be wrong) it becomes a ROI calculation. Paying down the mortgage has a guaranteed rate of return. I would only make extra payments if I didn’t think I could get a better return elsewhere.
This assumes you arent nearing retirement age and trying to maximize monthly cash flow to the potential detriment of long term return.
I am paying down my loans a little bit that are above 7%. rentals don’t cash flow as well right now even though appreciation is going nuts. just trying to balance everything out
Don’t forget about taxes. Mortgage interest on rental should be tax deductible. You may be better off paying down other debt that is not deductible.
In general for mortgages the early payments are so dominated by being mostly interest it makes more sense to make principal payments earlier in the life of the loan. Makes more sense on primary residences to do this though I think.
The extra payments to principal could be used to secure another property or as cash reserves. I am never paying a cent extra. Hell I’m pulling equity out with HELOCs this summer.
Even once I get to a point where I’m not buying anymore, the lowest return I’m getting on any money I invest would be 10 percent on S&P, while my highest intrest rate is at least two percent less.
Technically never. Mortgage debt is one of, if not the lowest interest rate you can tap into. Your return is most likely higher (if not, there are other issues…), so pay it off as slow as possible (or even refinance).
It is tax efficient too, as long as you manage cash flow risks (ie. Vacancy, capex, interest rates).