Mortgage Paydown Strat

[Michael Corona]

All things being equal (term, interest rate, etc), if mortgage paydown is the goal with multipule properties, which strategy would result in paying off a small portfolio of properties the fastest?  (1) Spread cash flow equally, (2) send all cash flow to one and rotate between properties quarterly, or (3) send all fash flow to a specific property to pay off)  the idea to save the most interest.

Example:

3 properties

1-$75,000 mortgage @ 5.25% 20 year, $7,000 cash flow

2-$145,000 mortgage @5.25% 20 year, $11,000 cash flow

3-$145,000 mortgage @ 5.255 20 year, $10,000 cash flow

Option 1 above would be to apply the respective cash flows to each property

Option 2:

Jan, April, July, Oct  send $2300 each month to property 1

Feb, May, August, Nov send $2300 each month to property 2

March, April, Sept, Dec send $2300 each month to property 3

Option 3:

Send all excess cash flow to proerty 1 until paid off and repeat.

Again, I am only concerned about the math on the paydown, assuming everything stays equal.  I understand there will be vacancies, expenses, repairs and cash flow is going to vary.

My hunch is option 2 will result in the fastest paydown due to interest savings over time on all properties, but I am not sure.

thanks.

[Bill B.]

Paying one off first will give you the fastest increase in cashflow. If you’re looking to save the most interest, even though they are all the same interest rate, it turns out paying each loan the same additional amount will save you the most. I’ve done the math on this and it’s hard to explain to someone why even though the interest rate is the same paying one off first saves less interest. 

The basic reason is $1,000 extra paid with 20 years left saves more interest than $1,000 paid with 10 years left. Giving each loan $1,000 will save more interest. For the same reason that prepaying $1,000 extra each month saves less and less interest. 

Im not clear on the $2300 rotating extra payments. Simply tack $100/$200/whatever extra amount on to each payment every month. The sooner they have the money the sooner you save the interest. 

Ps. This assumes they all have equal length remaining. If not paying towards the loan with the longest remaining term would save the most.