Should I pocket my cashflow money or use it for principal payment?

Question

Hi all,

I'll be closing on my first 2-family this week and did some initial estimates and realized I'll probably be positively cash flowing anywhere $200-$500 a month. I'll be moving into the basement next year and will need to do some roof work, but am curious to hear some opinions on if I should pocket that extra cash for those home improvements or if I should go ahead and put it into principal payment? I do have the long term goal of cash-out refi in about 2-3 years.

Mason Weiss · Answer

Hey Andrea, build up the war chest and be ready for any problem that might arise with your property. After that, trust your gut on the best move for you. There is no right or wrong answer here just different preferences.

Dave Kush · Answer

If you have already accounted for the repairs and things like that, I would suggest banking the positive cash flow for the next purchase.

Ian Jimeno · Answer

Hi Andrea,

First of all, congrats! It looks like you're house hacking, so I'm stoked to see another budding investor in the industry :)I'll assume you have a 30 year fixed mortgage on the home. Having that cash flow set aside in case of emergencies would be best in my opinion. If you're already setting aside a couple hundred for any capital expenditures, then you're financially looking good.Putting the cash flow into the house may not be the best option; you're not going to be able to touch that cash until you cash out refi. And who knows when that might actually be, since you might not want to refi if interest rates increase to 9% or something.I would try to find ways to improve on the home or updating things before putting it into principal paydown. Updating the home means more rent and possibly a higher appraisal.

Hope this helps, let me know how your journey goes :)

Joe Villeneuve · Answer

Pocket it.  If you use your own money (your cash flow) to pay down your mortgage, all you're doing is paying more for the property.  If you have positive CF, then your tenant is paying the mortgage for you,...why would you take free money, and give it back.

Patricia Steiner · Answer

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Best...

Konstantin Ginzburg · Answer

@Andrea Lopez

If your goal is to cash-out refinance in a few years, there is not likely much upside to putting your cash flow into the principle. There are two strategies people employ for investing. Those that prefer higher cash flow and are comfortable with higher debt, will try to minimize their home equity in exchange for having more cash on hand that they choose to employ to other things, whether its personal or investment use. The other strategy is to sacrifice cash on hand in exchange for putting more equity into the property and decrease debt load. This creates less debt exposure and is used my investors who prefer less risk since you often have more options to pivot if you have higher equity ownership in a property. Neither strategy is right or wrong; its simple a matter of personal preference and goals. Is your goal to maximize cash in hand or to own your properties free and clear sooner? What is your debt/risk tolerance? Those are personal questions so it would be hard for someone on the forums to answer for you.

Dominic Rosato · Answer

Cash flowing in Jersey City?? Thats awesome, congrats! Paying down principal can be a good idea, if it's your primary residence, you are extremely risk averse, and are not planning to purchase new investments anytime soon. BiggerPockets users don't usually fit that description (me included).

Building your emergency fund and fixing up the property would be a great use for that extra cash flow. I'm sure you'll thank yourself later!

Theresa Harris · Answer

What are your long term goals and how much cash do you have in reserves for vacancies and unexpected repairs?  Make sure you have enough money set aside for the latter.  If you plan on buying more properties, paying down your current mortgages faster (unless your DTI ratio is maxed out) won't help.  Can you use that cash and get a higher return rate than what you'd save on interest by paying down your mortgage?  Also what are you like?  Does having lots of mortgages bother you and increase your stress?

Alecia Loveless · Answer

@Andrea Lopez I know the current trend is to refinance out of every property you own to continue growing your portfolio but after I analyzed my portfolio I realized I could accomplish the same goals financially by either buying another 25 units or attempting to pay off the buildings I have.

I’ve decided to work on a combination of both refinancing some and paying off others to maximize continued growth and best returns on my existing portfolio.

I am currently building up my reserves having ended up liquidating them when I bought my last property which was probably a very bad decision. So right now all of my existing cash flow each month goes back into the checking account associated with each building.

I do however make a principal payment of either $100 or $150 on each property each month when I make the mortgage payment depending upon how much cash flow that particular property generates. Those properties that have higher cash flows I do $150 and the properties with lower cash flows I do $100.

JD Martin · Answer

You should make sure you have a healthy amount of cash reserves before you think about extra principal repayment. Once you have that, then if you want to do extra principal payment you can do so above and beyond your reserves. Otherwise, considering you're going to plan to refi in the next few years it doesn't make a lot of sense tying up that money.

Should I pocket my cashflow money or use it for principal payment?

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