Archive for the ‘mortgage paydown’ Category

Silent Wealth Generation with Rental Properties

Thursday, January 12th, 2012

When you own a rental property, two silent forces at work to increase your wealth:

1.) principal reduction, and

2.) increasing equity.

With each mortgage payment, you decrease the amount that you owe on a home loan as you reduce your principal. When your property is rented out, your tenant pays your loan for you. At the same time, equity goes up as property values appreciate over time.

Let’s assume that the original mortgage (loan) for a property is $150,000, which is also the original value of the house. As time goes by, the value of the house may increase to $300,000, due to appreciation. At the same time, the amount owed on the mortgage is reduced to $20,000, due to the mortgage being gradually paid down. At this point, the amount of equity (or value) that you have in the house would be $280,000.

If we don’t allow periodic dramatic rises and falls in home values to shake our confidence, we can count on steady, long-term, profits from our investment properties.

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Why You Should Not Pay Down Your Mortgage

Friday, November 11th, 2011

Tired of making those monthly housing payments?

Are you tempted to pay a little extra on your mortgage to speed up the pay off time and own the property free and clear.

Then, think twice, because that may not be the best idea.

Check out my guest post, “Why You Should Not Pay Down Your Mortgage” over at Louisville Gals Real Estate Blog

Don’t Pay Down Your Mortgage

Tuesday, December 11th, 2007

I know it’s good advice to never say “never,” or you inevitably wind up doing the very thing that you said you would never do. But, as long as I am investing in real estate properties, I won’t shoot myself in the foot by making additional payments to my mortgages. Here on some reasons why:

1. Don’t drink your liquid assets. If you increase monthly payments to a mortgage, you are reducing your liquid assets, one of the most precious resource that investors have. Most real estate investors are property rich and cash poor. We need cash for unexpected repairs, or to replace broken refrigerators or furnaces, or to make the mortgage payments between tenants. Of course, there are techniques for greatly reducing the cost of replacing high-ticket items, like buying ahead of time, as mentioned in the earlier post Maximize Rental House Profits — buy ahead of time and install yourself, and utilizing construction equipment recycle stores, but we still must be prepared for inevitable financial jolt.

2. Live in the future, not the present. Why use present-value dollars to pay off your present-value debt? As real estate investors, we want a situation where we put in a little effort and get a big payback. Let inflation work for you. After 10 to 20 years of owning a house, the value of the dollar goes down as the price of your house goes up. Think back to when you were younger, and how much more you could buy for a dollar than you can now. Remember 5-cent packages of chewing gum, gasoline for 15 cents a gallon, a steak dinner for 30 cents? I don’t either, but we know it was true.

The point is, you can pay your mortgage with future dollars, which will be worth a fraction of today’s dollars. Once you have a mortgage locked in, the relative value of that loan will continuously drop.

3. Let tenants be your new best friends. Why spend your money when someone else is eager to pay it off for you? Provide a nice place to live at a fair price and you can keep tenants in a place for as long you want. And, the longer they live there the closer you are to having that mortgage paid off. In fact, tenants are better than friends. How many friends do you have who don’t always tell you how smart their kids are, and they actually help make you rich?

4. Time your pay off. Rather than make additional payments, it’s best to wait and just pay the whole mortgage off early. It’s useful to pay off a mortgage, if you wait until you have a relatively small amount left to pay, and you pay it all off with a chunk of money that falls in your lap. Or, when you sell a house and use part of the money you receive to pay off an existing small amount that you still owe. This way, you actually increase your cash flow.

Don’t drain you wallet making extra payments on your mortgage. Why do the casinos make so much money? Because the odds are always in their favor. Put the odds in your favor, by letting time, and tenants, do the heavy lifting for you.

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