Understanding hold vs sell vs payoff early?

Question

I have a property I purchased for $100k with $3500 down payment in 2014. It is generating approximately $250 in positive cash flow every month. Today it Is worth approximately $150k-$165k.

I’ve been paying an additional $500 toward principal and if I continue to do so, my house will be paid off by 2027, saving me over $40k in interest by paying it off in 13yrs instead of 30yrs.

My questions below:

- Is it a good strategy to pay extra towards my principal to save money on interest over the life of the loan?

- How do you determine best course of action of holding the property for cash flow vs selling?

Any feedback would be great!

Thanks,

Sixto

Joe Villeneuve · Answer

No. You're losing money paying off your loan faster. Sounds strange I know. It's all in the math...the complete math.1 - Your tenant is already doing this for you...paying your loan off. Why help them?2 - Any of your own money you use/spend must be recovered before you start making a profit. The more you spend, the more you have to recover...and the longer it takes.3 - The amount of interest you think you're saving,,,you're not saving. Remember, you're not paying this...your tenant is. On top of that, based on your math, that $250/month cash flow becomes a negative $250/month cash flow when you spend the extra $500 on the principle each month.4 - If you took that extra $500/month, plus the $250/month (cash flow) and put it aside, you'd have almost $10k saved per year. After a little over 2 years, you'd have enough for the DP on another $100k property...just like this one...and another $250/month in CF.5 - Now, add the $250/month from the new property to the $750/month you are continuing to collect from the 1st property, and after a year and a half, you'd have the DP for your 3rd property...just like the first 2.6 - Add the $250/m from #3 to the first 2, and ...well, you get the picture.As I said, you're actually losing money, not saving money, when you use your own money to pay off a mortgage on a rental...that is already being paid off by your tenant(s)

Davido Davido · Answer

@Sixto Velasco I believe the answer to your questions of "Is it a good strategy to pay extra towards my principal to save money on interest"? and "How do you determine best course of action of holding the property for cash flow vs selling", are simple. You must know what else you can and will do with that cash.? If you are paying off a 5% interest mortgage with money that you would otherwise leave sitting in a bank savings account at 1/2% interest, then paying off the mortgage is far better. The money you use to pay off the mortgage is then saving you (earning) 4.5% a year. However, if instead of paying off the mortgage or instead of paying it off early, you put the extra mortgage payment into an investment (perhaps another rental property) that provided a cash on cash return on investment of 10%, then you profit twice as much from the new investment as from paying off your existing mortgage. The same reasoning is true for holding property for cash flow vs selling. It is always a matter of what can and will you do with your money. To answer you questions, you must know and compare the financial results of the options that you have before you.

Jason Dillard · Answer

@Sixto Velasco take it a step further. Your cash on cash in 2014 was almost 100%! That's awesome. Your Return on Equity is now about 4%. That's the cash flow divided by your equity. Your ROE is getting worse every month because you owe less. The equity in your house could be your down payment on a larger property. You can double your cash flow, depreciation, appreciation, and let the next tenant pay down twice as much every month. Not only shouldn't you pay extra to bank, maybe you should consider moving up to a 300k property.

Sixto Velasco · Answer

@Joe Villeneuve thanks for your valuable input. I see now that paying it off early is not as beneficial as I thought I would be. Saving the extra money and using it towards other investments is making much more sense now.

Cory S. · Answer

Plus you get to write off mortgage interest on your taxes.

Sixto Velasco · Answer

@Mr Davido thanks for the insight. I hadn’t considered how much more I could make from other investments vs. how much I could save by paying off the house early. Seems like I could benefit more from other investment avenues, as opposed to sinking more into the principle.Thanks for the info.