So I pose this question mostly because it’s the foundation of my long term plans but also because it’s not something I see discussed often. So here it is, is it better to use a large down payment and a short term like 10 or 15 years and pay off the mortgage then cash flow the majority of the rental income (minus the expenses) OR
Use a standard down payment of around 20 percent and taking out a full 30 year term and paying down the loan to then refinance and lower the payment to increase the cash flow on the property.
I’m asking mostly in terms of small multi family properties (duplex and triplex) but ultimately either could be applied.
I understand there are certain tax benefits when you keep a mortgage but would they outweigh the cash flow from the rent?
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
There are many ways to come at this question, @Devon O'Donnell. The leverage vs. no leverage question is one of the most talked about on BP.
Paying off a rental ASAP means you dramatically increase your CF once the debt has been retired. There are a few trade offs to be aware of:
CF leading up to that point is diminished
Less flexibility due to a larger mortgage payment each month
Higher DTI, which may impact your ability to purchase other properties
Once paid off you remove one of REI's profit areas: mortgage pay down
For me the biggest down side is Return on Equity. That fat check every month may look great, but when compared to the amount of equity you have in the property, the return is often dismal. By not re-deploying that equity, you are also missing the exponential appreciation and depreciation benefits that leverage provides.
Of course, the cool thing about REI is that there's many ways to approach it. One retirement strategy I've heard about, and really like, is to purchase 1 property every year (let's assume cost is $200k) for 15 or 20 years and put them on 15- or 20-year mortgages. The idea is that when you're ready to retire you refi the first property at 75% LTV and take that $150k of tax-free cash to fund your retirement. Do that every year with each subsequent property into perpetuity.
Me? I'm a fan of responsible leverage. I don't imagine I'd every keep a property unleveraged (maybe my primary). The money just wouldn't be working hard enough for me.
Thanks for the response I appreciate the prospective. My long term goals are to hold the properties and eventually pass them on the my Heirs so the low cash flow up front is somthing I’ve accepted but I Definitely have more to think about thanks!