How to pay off mortgage faster?

Question

Besides saving and paying extra money every month and biweekly payments,is there any other way to payoff mortgage faster?My goal is to own atleast 50 rental properties(all paid off) by 2035(i know pretty ambitious but i think its achievable).what plan/strategy do you recommend?is it good or bad to pay off mortgage faster?do you pay off your mortgage faster or not and what strategies do you use?Thanks :)

Bill Gulley · Answer

Try to figure out what money is really worth to you, what is your cost of capital?

Mortgage money is the cheapest around, other than borrowing from your own money, like off of CDs or perhaps your life insurance policy. And borrowering "against the box" with your stock broker might be lower, but for most in real estate, mortgage money is pretty cheap.

What opportunities do you have, if you had money? Having money and not much to do with it isn't much good. What deals are you missing out on? Your "opportunity costs" is the value of the deal not taken, where you missed out.

Your use of funds, how you apply money in your business will show what your cost of money can be, paing off higher rates than what your cost is will put you ahead, so selecting what you pay off or pay on influences your opportunities taken, using money wisely.

OPM, other peoples money that is available to you to use? That includes all lenders, you need to look at what the real cost is for renting money, if it's less than your usual cost, it's a good deal, if you can use the money for profiting in other opporunities, it's a good deal, do you really have a use for the money, can it pay off other debt or reduce expenses, if so, it can be a good deal.

Leveraging, the balance between using your money and borrowed funds to optimise profits. Consider taxes with interest deductions and how you profit from borrowed funds.

Equity in RE may make you smile, but it won't work very hard for you beyond the rate of inflation. Cash is better than equity. Can you beat the rate of inflation, if so, having money tied up in the walls of RE is really working for you.

Having debt is not a bad thing if you are increasing your net worth or income using it, if that is the case, you should be in a position to payoff the debt if needed.

What are your goals, are you about to retire and kick back or are you trying to accumulate more for that ultimate goal? What makes you sleep better owing or owning?

Just some basic considerations for you to scratch your head over.

Now, gotta go, I have some great looking honey smoked salmon, baked patato, squash and brocoli to finish off! Not to mention a game to watch! Go Huston! LOL

Bryan Hancock · Answer

There isn't a magic fairy to help you pay things off faster.  Some companies like United First Financial have clever marketing ploys to suck in folks that don't understand mortgage mechanics.  They tout these programs as magical elixirs to aid in rapidly paying down your mortgage.  The reality is that all of these games matter very little when compared with simply paying the mortgage down by prepaying each month.  This siphons off cash at a very low rate of return given today's rates.

Paying early mortgages off is likely sub-optimal for you given your goal.  I am sure you can own 50 piece of crap rentals in some tertiary market that you pay $10k a piece for and "cash flow" them with some outrageous number on paper without accounting for economic vacancy.  Owning 50 in a primary market with a solid tenant base that pays is a bit different.

I would think your goal should have more to do with mailbox money or passive income.  If you place your aim there instead of a quantity of rentals it will probably be a better goal.

Most of what I consider knowledgeable landlords don't want to prepay their mortgages because the additional equity is more useful elsewhere.  Many have fix and flip or new construction operations, lend hard money, or do something else.  Their rental portfolio also yields much more than the cost of the debt and thus prepaying the debt rapidly is not very strategic.

Having said all of that you need to take care to leverage properly and thus some prepayment may make sense.  Just know that prepaying 4 and 5 percent notes is a play to shore up your balance sheet in the long run and not a yield play.  Prepaying at the expense of keeping liquid cash around is also risky at times so you need to do it with balance in mind.

Ben Leybovich · Answer

Vishal,

The most important metric in any investment is something we refer to as cash on cash return (COC).  What makes RE such an excellent opportunity is that even the most un-imaginative investor is able to leverage $25,000 into a $100,000 purchase by way of a mortgage.  So, let’s consider a purchase of a $100,000 duplex for cash vs. 75% LTV financing.

Let’s say that the 2 units in the property rent for $550/mo. each, and operating costs for the building (all costs excluding the cost of money) are $400/mo.  This would leave you with $700 of NOI (net operating income).  If you have no mortgage payment, this is also your CF.  Thus, having purchased the building for cash, you will recover $8,400/year.  This is a 8.4% return on your investment of $100,000 to buy this duplex.

Now let’s say you put $25,000 and finance $75,000.  At a high by today’s standard 6% amortized over 30 years, your payment would be about $445/mo.  This would bring your CF down to $255/mo. (NOI – Mortgage payment).  This is 3,060 annually, which seems a lot lower than the $8,400 without a mortgage.  However, because you only used $25,000 of your cash, the COC is actually 12.2%.  Obviously this is a lot better than 8.4% return.

Now – you could use the cash flow to pay off the mortgage.  Your CF would shoot up to $8,400 without a mortgage payment.  But the return on your money would go down.  On the other hand, you could save that cash flow and use it for a down-payment on another 3 buildings just like the first one.  All things being equal, your CF would go to $255 x 4 = $1,020.  You would diversify risk by having 8 rent checks instead of 2.  And you would find out that there are significant benefits with respect to taxation, specifically if you don’t make too much at your day job.

This is of course overly simplified.  I am just throwing numbers on paper.  But this reflects my experiences as an investor very  well.  So, the question is - why pay off the mortgage?  Hope this helps.  Good luck!

Thom H. · Answer

Vaishal, 
Chris Clothier recently posted an interesting article on this subject (hope I got the link right below:

http://biggerpockets.us1.list-manage1.com/track/click?u=9038d68f4b0e0044fb104a6af&id=3505ac96fd&e=f3c3b37f37

You may want to read the many replies to this article for additional thoughts. It's a good thread. Best of luck.

Suzie B. · Answer

It seems pretty ambitious to have 50 properties paid off free and clear that quickly.  However, it really depends on what kinds & price ranges of properties you are looking at too.  The lower the value, the easier to pay off quickly... provided you can keep the majority of them rented with good cash flow.

We have considered paying ours down in snowball fashion once we have all the remodeling/repair work done that we need to finish on our properties.  We may put that on hold and acquire a few more properties first while interest rates are so low, and before housing prices here start to climb too quickly.  We've already seen an upswing and feel the push to get another property or two before we pay higher costs.  We tend to take a little more time than many here at finding the right property for us and getting established with that as a rental before we jump on the next one.

Everyone has what works for them.  Many here love the concept of leverage.  While I agree you earn more $$ with less of your own invested, there is some comfort in having a property paid for.

Jon Holdman · Answer

Uh.  No, there is no other way to pay down a mortgage more quickly than to pay more than the scheduled amount each month.  The biweekly scheme works because you're making half the monthly payment every two weeks, which means you make 13 payments a year instead of 12.

How to pay off mortgage faster?

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