Does bi-weekly payments make sense in a cash-flow market?

[Luka Jozic]

I understand that doing bi-weekly simply means you are doing 13 mortgage payments a year as opposed to 12. So you get one payment each year that goes straight to principal. I've read other threads on the topic and it seems like the obvious answer is that it depends, as doing bi-weekly pays off your mortgage faster but means less available cash for other investments.

Say we have a typical Cleveland property worth around 150K, assume the monthly PIMI is $1000 and that annual cashflow is $5000. According to my lender, if I do bi-weekly I would pay off the mortgage in 21 years as opposed to 30, shaving off 9 years. That means in 21 years I will have a fully paid off property, and can now cash out refi and buy X more properties. However, by doing so, I'll be paying $1000 extra each year towards my mortgage, reducing my cashflow to $4000/year. So after 21 years I will have either:
1. $21K extra to invest (not even enough for 1 down payment really) if I do monthly.
2. A fully paid off property which now should be worth at least $300K with appreciation, I can access 75% of that with a cash out refi so roughly $225K - refi costs.

To me, its a no brainer to do bi-weekly IF you plan to keep the house for that long AND you do not plan to refinance (rate or cash out). So the follow up question is, does it make sense to keep a property for that long and not dig into its equity for 21 years? What are your thoughts on this?

[Greg Scott]

I look at this issue from a different perspective.

As a real estate investor, can you find a way to make more than 7% return on your invested cash.  If the answer is "yes", why would you ever pay a mortgage off early?  If the answer is "no", then by all means pay your mortgage off early.  Keep in mind that the dead equity is only earning the equivalent of the saved interest payments.

[Andrew B.]

This is no different than all the other "should i pay down/payoff my mortgage" questions. At the end of the day you need to look at your interest rate, compare it to what you can get in other investments, and then layer your risk profile on top. 

Paying off your mortgage gives you a "return" on your cash equal to your mortgage's interest rate. If you have a 3% mortgage, you probably never want to pay it down. If your mortgage is 8%, you get a better return. If you put it in an index fund, you might get 10-15%. If you buy individual stocks you may get 20-50%. Consider that each higher return requires higher risk. Paying down your mortgage is 100% risk free. 

Make the decision that works best for you. 

[Jay Hinrichs]

for me I like to square off what payments I do have these days.

So like on my houses mortgage for example  if the payment was 2800 i am going to send in 3k a month and forget about trying to do it twice a week etc.

and do that on all mortgages.. I find couple hundo on a mortgage we just piddle that money away any way might as well do some good with it..

I would also look at snowballing one property at a time.. get one paid off then the next then the next.. paid off RE is where you want to be if you really plan on using this stuff for retirement cash flow..

[Luka Jozic]

Quote from @Jay Hinrichs:

for me I like to square off what payments I do have these days.

So like on my houses mortgage for example  if the payment was 2800 i am going to send in 3k a month and forget about trying to do it twice a week etc.

and do that on all mortgages.. I find couple hundo on a mortgage we just piddle that money away any way might as well do some good with it..

I would also look at snowballing one property at a time.. get one paid off then the next then the next.. paid off RE is where you want to be if you really plan on using this stuff for retirement cash flow..

 For me it is. Im buying these properties so that in several years from now, they can provide solid cash flow that I can live off of. This is my substitute for 401K. So yeah the sooner they're paid off the sooner they will cashflow better, and I'd rather have that happen in 21 years rather than 30 so I think it makes sense. 

[Jay Hinrichs]

Quote from @Luka Jozic:

Quote from @Jay Hinrichs:

for me I like to square off what payments I do have these days.

So like on my houses mortgage for example  if the payment was 2800 i am going to send in 3k a month and forget about trying to do it twice a week etc.

and do that on all mortgages.. I find couple hundo on a mortgage we just piddle that money away any way might as well do some good with it..

I would also look at snowballing one property at a time.. get one paid off then the next then the next.. paid off RE is where you want to be if you really plan on using this stuff for retirement cash flow..

 For me it is. Im buying these properties so that in several years from now, they can provide solid cash flow that I can live off of. This is my substitute for 401K. So yeah the sooner they're paid off the sooner they will cashflow better, and I'd rather have that happen in 21 years rather than 30 so I think it makes sense. 

run the numbers if you snow ball one at a time and see how that plays out once it free and clear if you get there quicker ?

[Ryan Arth]

If you are investing for cash flow long term, you would benefit from paying off the loan sooner (eliminating interest). 

If you are investing for a return on capital, the more you pay it down the lower your return on equity will become, as you have more cash tied up in an investment that brings in a fixed income. 

[Joe Villeneuve]

No.  All you're doing is making an extra payment, that you don't need to make.  Keep letting the tenant make those payments for you.

[Don Konipol]

Quote from @Luka Jozic:

I understand that doing bi-weekly simply means you are doing 13 mortgage payments a year as opposed to 12. So you get one payment each year that goes straight to principal. I've read other threads on the topic and it seems like the obvious answer is that it depends, as doing bi-weekly pays off your mortgage faster but means less available cash for other investments.

Say we have a typical Cleveland property worth around 150K, assume the monthly PIMI is $1000 and that annual cashflow is $5000. According to my lender, if I do bi-weekly I would pay off the mortgage in 21 years as opposed to 30, shaving off 9 years. That means in 21 years I will have a fully paid off property, and can now cash out refi and buy X more properties. However, by doing so, I'll be paying $1000 extra each year towards my mortgage, reducing my cashflow to $4000/year. So after 21 years I will have either:
1. $21K extra to invest (not even enough for 1 down payment really) if I do monthly.
2. A fully paid off property which now should be worth at least $300K with appreciation, I can access 75% of that with a cash out refi so roughly $225K - refi costs.

To me, it’s a no brainer to do bi-weekly IF you plan to keep the house for that long AND you do not plan to refinance (rate or cash out). So the follow up question is, does it make sense to keep a property for that long and not dig into its equity for 21 years? What are your thoughts on this?

This extra payment deal is for consumer/homeowner that will spend all the money he has available on cigarettes, beer, etc. so he “fools” himself into “painlessly” saving money by building extra equity in his one big “investment”.

A professional investor should NOT need to “fool” themselves into “forced” savings.  The only question is can capital be invested at a “risk adjusted” return greater than the amount paid in interest?  If I’m paying 13% interest on a hard money loan the answer is most often pay down the loan as much as possible.  If I’m paying 3.5% on a mortgage the answer would ALMOST always be pay down the mortgage as SLOW as possible and reinvest at higher return. Inbetween requires a more careful analysis. 

There are some scenarios which can change the equation and take priority over the opportunity cost equation demonstrated above.  Asset protection questions, tax questions, and inheritance questions can lead to different answers.  And there’s a “lifestyle” question.  It may not make financial or economic sense, but some people (me) reach a certain asset level and just do not want to deal with debt anymore.  

[Jay Hinrichs]

Quote from @Don Konipol:

Quote from @Luka Jozic:

I understand that doing bi-weekly simply means you are doing 13 mortgage payments a year as opposed to 12. So you get one payment each year that goes straight to principal. I've read other threads on the topic and it seems like the obvious answer is that it depends, as doing bi-weekly pays off your mortgage faster but means less available cash for other investments.

Say we have a typical Cleveland property worth around 150K, assume the monthly PIMI is $1000 and that annual cashflow is $5000. According to my lender, if I do bi-weekly I would pay off the mortgage in 21 years as opposed to 30, shaving off 9 years. That means in 21 years I will have a fully paid off property, and can now cash out refi and buy X more properties. However, by doing so, I'll be paying $1000 extra each year towards my mortgage, reducing my cashflow to $4000/year. So after 21 years I will have either:
1. $21K extra to invest (not even enough for 1 down payment really) if I do monthly.
2. A fully paid off property which now should be worth at least $300K with appreciation, I can access 75% of that with a cash out refi so roughly $225K - refi costs.

To me, it’s a no brainer to do bi-weekly IF you plan to keep the house for that long AND you do not plan to refinance (rate or cash out). So the follow up question is, does it make sense to keep a property for that long and not dig into its equity for 21 years? What are your thoughts on this?

This extra payment deal is for consumer/homeowner that will spend all the money he has available on cigarettes, beer, etc. so he “fools” himself into “painlessly” saving money by building extra equity in his one big “investment”.

A professional investor should NOT need to “fool” themselves into “forced” savings.  The only question is can capital be invested at a “risk adjusted” return greater than the amount paid in interest?  If I’m paying 13% interest on a hard money loan the answer is most often pay down the loan as much as possible.  If I’m paying 3.5% on a mortgage the answer would ALMOST always be pay down the mortgage as SLOW as possible and reinvest at higher return. Inbetween requires a more careful analysis. 

There are some scenarios which can change the equation and take priority over the opportunity cost equation demonstrated above.  Asset protection questions, tax questions, and inheritance questions can lead to different answers.  And there’s a “lifestyle” question.  It may not make financial or economic sense, but some people (me) reach a certain asset level and just do not want to deal with debt anymore.  

exactly  just dont want to deal with long term debt.. I also know the assets pretty darn well that the OP has bought and I am a firm believer with that class of asset getting them paid off is really the only way to get to the point were they think they are going to live on rental income..