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.
Info on Terry's Book
Share this: del.icio.us | Digg | Ma.gnolia | Reddit | Stumble Upon |
9 comments:
Very good advice. The only caveat I'd mention is that if your balance is >80% FMV then try to pay it down to at least 80% to not only pay off the higher 2nd (which probably exists), but also to stop having to pay PMI.
Excellent article-- its one of those sound concepts that goes against my old programing.
How do you feel about paying down the mortgage on your personal residence?
I love this line of thought. It has produced a positive impact on my life and I love it. Good stuff!
Connie --
My philosophy of paying down mortgages also applies to my own residence. I prefer to keep all the cash possible in hand, either for emergencies or for investing in another house.
Later, when retirement approaches, I plan to sell some houses to pay off the mortgage for my residence, and perhaps pay off mortgages on other rental properties that only have a small amount owed on them. That will maximize cash flow.
So, in that case, as I alluded to in my blog, I will be using future-dollars (lower value) to pay off a present-value debt.
--Terry
Steve --
Good point.
To avoid the dreaded PMI, I have used "piggyback" loans to cover 10-15% of the loan amount not covered by the primary loan. Although the second loan is at a higher interst rate, you can pay it off more rapidly since it is only for a much smaller amount.
Clifford--
Thanks for the encouraging comment.
Terry--
Excellent point :-)
I'm fighting this one every time I pay the mortgages-- my hand just begs to tack on that extra every month.
Great blog! I like how you incorporate all facets of home improvement including the mortgage.
Thanks Eric!
Post a Comment