Use rental cash flow to pay down 6.375% mortgage?

[Craig Daniels]

Hi - This was partially answered on one of the BP Podcasts recently, but I was curious to get a few opinions.  I just bought a rental for 30% down and have a 6.375% 155k mortgage on the place.  The rental will cash flow between 200-300/month.  Looking at pure spreadsheet math and common convention; if you pay down your mortgage you are effectively making that interest rate on your money.  If I were to put 2400 per year back towards the mortgage, the 6.375% equates to only (maybe) 150 per year that I am "making", but if you do that for a few years up front you can shave off years on the back end of the mortgage.  

I get the 2 schools of thought on keeping cash flow to stay liquid vs. investing your money where it will make the highest return, but my W2 job salary means I don't "need" the 2400/year of cash flow at the moment, really all I am looking to do is maximize this rental return over a 10-15 year return window.  

Anyone in a similar situation and thinking along these lines?  Curious to hear the forum's thoughts!

[Bryan Stengel]

Hi Craig, excellent question! I am a similar situation. I think paying off a loan with a high interest rate debt and adding to the principal is one way to stay liquid within the property. Liquid cash flow of $200 to $300 per month is only going to take you so far. As long as there are no outstanding repairs, I don't see anything wrong with paying off that loan faster. If you are looking to expand to other properties in the future, that option of a cash-out refinance or HELOC on your appreciating asset is always there. It seems as though you are happy with the property and it is a great long-term hold. For one of my multi-family properties, I chose to dig my toes in the sand and make extra payments on the principal until it was paid off. It now cash flows beautifully, which I continue to utilize for other my other properties. Leveraging debt is our foundation as investors, but paying it down when we can will always open up more opportunities to get creative with out money later on. Hope this helps!

[Caleb Brown]

100% preference. If you don't need the cashflow then you could throw it at the loan balance. It can be good to let the cashflow build up a little bit to have a nest egg. If you have strong savings and income it's not as big of a deal