Saving cash flow or paying off mortgage

[Jesse Unrath]

In your guys’ opinions or from past experience,

Is a perform better to save the cash flow they make per month or better off putting it towards the principle of the mortgage to pay it off sooner?? TIA

[Joe Villeneuve]

Originally posted by @Jesse Unrath:

@Joe Villeneuve

Makes sense. Thanks for answering.

Keep these 2 things in mind:  

1 - The only cost to "you", and the only one that matters, is what comes out of your pocket.  The rest of the "total cost" should be covered by the tenant through the positive cash flow from the rent.

2 - You don't start making a profit until you've recovered all of "your" cost.  So, the more you add to the out of pocket number, the more your cost becomes (and at your choice), the more you have to recover before you see a profit, the longer it takes to start to see a profit, and fewer number of dollars you have to use to recover that cost.

Example: You have a $100k property and two REI. One buys all cash, and the other using 20% down.

REI #1: All cash
Cost to REI = $100k
Cash Flow per year:  $10k
# of yrs to cost recovery:  10
Profit after 10 years: 0

REI #2: 20% DP
Cost to REI = $20k
Cash Flow per year: $5k
# of yrs to cost recovery: 4
Profit after 10 years: $30k

This doesn't include the ability to buy added properties when each REI gets to their "numbers"...$20k and $100k. The "All Cash" REI has to wait 10 years before the property is theirs, and the 20% REI can buy the next property after 4 years.

Now, if they both started with the same $100k, the 20% REI would start with 5 properties, and $25k in CF (all cost recovered in 4 years), and they could buy that next (6th) property after the first year. The subsequent buying/CF for them could look like this:

YR      # Prop      CF/Yr       Assets    XCF
1         5             $25k         $500K        $5k
2         6             $30k         $600k     $15k
3         8             $40k         $800k     $5k
4       10             $50k          $1M       $15k

10     40           $200k          $40M      $0

...and this doesn't include any appreciation.