re: How to pay down mortgage quicker?

Question

Ok so I know most everybody has heard about making biweekly mortgage payments in order to pay your mortgage down faster. Instead of making 12 monthly payments a year you make 26 half payments or 1 extra monthly payment per year. Over time, this additional annual payment can subtract approximately 7 years off the life of a typical 30 year mortgage. The challenge, of course, is sticking to the schedule and tracking your savings so you know how much you are reallocating toward your financial objectives that would have otherwise gone to your lender.

But how could something like this work with a BRRRR? I understand that the property is being rented so if the tenant is paying the mortgage (ideally) then why go to extra trouble to pay down the mortgage faster? Didn't that extra trouble actually build your equity faster though? If you can reduce the life of your 30 year by %20+ then aren't you able to buy your next property %20 faster to keep the BRRRR going and build the portfolio quicker?

With these thoughts and others in mind - how would you go about paying more on your mortgage so you can pay it down faster so you can buy your next house faster?

Andrew Postell · Answer

@David Wilhite paying down your mortgage goes AGAINST just about every principle of real estate that there is. Meaning, if I gave you $50,000 right now - would you pay down your mortgage or go acquire another property? The theory is that your TENANT is paying down your mortgage. The mortgage interest is tax deductible. The less equity you have in a property the less that someone can take it from you in a lawsuit. I am personally millions of dollars in debt...but the only way for me to own millions of dollars of real estate is by NOT paying down my tax deductible debt and continue to purchase more real estate.

I hope all of this makes sense.

Andrew Postell · Answer

@David Wilhite ahhh, you are correct sir.  I won't give you $50,000...but you will.  This is your money we are talking about.  Meaning, if you have a $200,000 mortgage and you choose to pay it down very $1,000 per month...over 5 years...that's $50,000.  That's your money.  So, would you rather have $50,000 in the bank....or $50,000 more in equity in your property?  To tap into my equity, I have to pay closing costs.  And what if things got really crazy and the housing market took a turn?  There have been instances in recent history where people could NOT refinance because of economic conditions. When you do a "cash out refinance" you have to have a certain amount of equity in the property to make that work.  What if you came across a deal within that first year of owning where you only needed $10,000 to execute on it?  You might not be able to do a cash out loan in the first year even if you do pay down the mortgage.

You can do what you want, of course!  But your post was about buying more properties as quickly as possible.  Having cash available to acquire more income producing assets is how most of us operate.

@Anthony Freeman hopefully some of that makes sense.

Theresa Harris · Answer

I don't refinance my properties.  If you pay down the mortgage faster, you do save on interest payments, but I haven't done the math to see how much you save as interest is also tax deductible.  If you keep maxing out your mortgages, you are pulling money out, but if you sell the property, you have nothing to show for it (ie only money you get back is likely your down payment).  Once the mortgage is paid off, your cash flow increases.

There is also a limit as to how much the bank will lend you, so if you keep pulling your money out of the rentals, which also costs $, you may reach your borrowing limit.

Take home message is do what works best for you.

David Wilhite · Answer

BRRRR.

did I stutter?

BRRRR.

you guys are on BP so you've read the book, read the articles, blah blah blah.

BRRRR.

Of course there is a TRANSACTION COST every time you refi. are you gonna sit here and list out all the COSTS of REI? we'd be here all decade.

because INTEREST is a pretty big cost that y'all are really downplaying in all your imminent wisdom.

But I get it. You do you and I'll do me.,

Which is how it was gonna be before gregariously answering my question with a barrage of extraneous irrelevance.

BRRRR.

One of those Rs is for refinance. A refinance is a mortgage loan. Stop adding more to the formula with all these exceptions and maybe this or if that happens or something else could happen.

That's a whole lot of uncertainty but one thing for certain is that the loan is going to get paid. By somebody. Come hell or high water. This is an inescapable fact - why is this even a debate???

I asked if systematically paying down a mortgage faster would accelerate a BRRRR strategy. The short answer is yes. Thanks for playing.

Richard Elvin · Answer

@David Wilhite You're not listing BRRRR, and I think that is where the misunderstanding is coming from.BRRRR:BuyRehabRentRefinanceRepeatThat's BRRRR, period. Nothing about "build equity", you added that and that's where the misunderstanding seems to be. The correct process is that Rehab = equity. To your OP, I believe you are conflating saving on interest for your primary dwelling vs buying investment property. Two vary different subjects, with differing opinions about each. BRRRR is about forcing equity through rehab to get 100% of your funds back so that you are able to Repeat. There's no delay after the Rehab to "build equity", that has already been forced during the Rehab. I hope that clarifies things a bit. Best to you!

David Wilhite · Answer

let me try it a little slower for the fast thinkers:

take out loan.

buy house.

rehab house.

get tenant.

build equity.

cash out refi.

repeat the process.

Now, I don't know how long this process takes you. Different investors are going to have different timeframes. What I do know is that the cash out refinance comes after you build equity.

ALL I AM SAYING IS TO DO THE SAME THING FASTER!!!

Did you guys get that? F. A. S. T. E. R. Faster.

From what I think I understand about Buy, Rehab, Rent, Refinance, Repeat is that you are taking out a loan. Not all investors even do loans so not all investors do BRRRR. Thank you for stating the obvious. For the rest who are following along with the book - they are taking out mortgages on each and every property. The whole leverage thing you guys keep going on about.

The house is not the most expensive thing, the mortgage is. Ring a bell anyone? As such, on a typical 30-year the monthly payment basically amounts to the relative minimum payment on a credit card: it is the schedule that will have you paying the most interest for the longest period of time.

Understandably, some would counter this by basically saying "who cares? as long as my property is cash flowing I don't care what the mortgage is! I'll keep paying that mortgage forever as long as the house is paying me!!!!"

And I get it. Get paid forever. Who doesn't want that?

But you're also saying that you'll pay the maximum amount of mortgage interest over the life of all your loans for the rest of your life... as long as you're cashflowing positive.

Let's repeat that slower:

Pay.

Maximum.

Interest.

Rest.

Of.

Life.

This is not about rate. This is about interest volume and the fact that by the time that house is paid off (never for most of us it seems) you'd have paid "X" amount in interest costs far, far, far above the value of the underlying asset.

You know what I am talking about? Of course you do.

My revolutionary idea is to pay the mortgage faster... so as to pay less interest... so as to effectively redirect money I would be giving TO THE LENDER anyways... and using it to buy more properties instead.

It. Is. Math. Yawl are missing my point.

You can keep the loan for your entire life if you want. But why wouldn't you want to pay it faster or asked another way - why would you want to give all that interest money to the lender that you could otherwise be using to buy more properties?

And even for the "lending professionals" in the room: why wouldn't you want people paying off mortgages quicker if they were gonna keep coming back to you to refi every time FOR THE REST OF THEIR LIVES?

But hey, everybody has their own $0.02 including me. I'm just following the math and it makes sense to me: less money in lender pocket = more money in mine.

Yes @Andrew Postell you can craft all manner of creative arrangements to bake equity into a property but I'm talking a straight a BRRRR situation as the book spells out. @Sam Yin is on the right track with the HELOC and I'll add to that the same idea can be done even with a checking & savings account. With discipline and/or the right tools...

Pay loan faster. Pay less interest. Buy more house instead. The math is exponential over time - just like the interest we pay to the lender. Only difference is we're hopefully using that money to build our wealth and not the lender's.

Doesn't seem so radical a thought to me.

Doug Smith · Answer

Actually, I wouldn't Cash is king and you need all you can get to deploy for your next deal. Take a look at your tax return...either your Schedule C or your 1120-S...whatever you file. Notice that you are expensing the interest. Let's assume you have an 8.5% interest rate and your in a 25% tax bracket. Your effective rate (ER) = rate ( 1 - tax bracket) or ER = 8.5% ( 1 - 25%) = 8.5% ( 75% ) = 6.375%...after taking into account the interest expense you get on taxes. Would you borrow money for your down payment on your next deal at 6.375%? If not, then by all means pay down the current mortgage. If you would, then don't pay down the mortgage early, keep your powder dry, and use that money to grab more appreciating real estate. Good luck you you!

re: How to pay down mortgage quicker?

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