Investor · Edison, NJ · Member since 2016 · 7 posts · 0 votes
Hi Everyone - Hope this weekend treats everyone well. I recently got into a real estate deal. It is a town home located in top school district in Charlotte area. I put 20% percent down with 80 financed on 15 year mortgage. The rental income on this property will be able to cover property taxes, HOE (monthly association fee), maintenance cost and P&I on 15 year mortgage. I am not expecting any positive cash flows as my cash flow will be to build more equity as principal is paid down aggressively from rental income on 15 year mortgage.
Question - is this a good business model to finance rental properties given there are no cash flows but produce long term wealth. Will appreciate insight from professional who have already been doing real estate investment business. Thanks again!!
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
9y
Just make sure to set aside larger reserves (and have alternative sources of income) for vacancy, cap ex and other repairs. If things are tight and you need a roof, HVAC system, economy takes or turn, and/or you have a couple of months of vacancy, you can get upside down quick and not be able to afford mortgage payments. Some investors get 30 year mortgages and pay them down faster instead to mitigate risk. It's also easier to scale up your investing with longer term loans. And then there is the whole separate debate on paying down debt versus staying more leveraged...heated topic for different post.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
9y
Just make sure to set aside larger reserves (and have alternative sources of income) for vacancy, cap ex and other repairs. If things are tight and you need a roof, HVAC system, economy takes or turn, and/or you have a couple of months of vacancy, you can get upside down quick and not be able to afford mortgage payments. Some investors get 30 year mortgages and pay them down faster instead to mitigate risk. It's also easier to scale up your investing with longer term loans. And then there is the whole separate debate on paying down debt versus staying more leveraged...heated topic for different post.
Investor · Edison, NJ · Member since 2016 · 7 posts · 0 votes
9y
Thanks, Mike. Cash reserve is not an issue - can afford vacancy if needed. My plan to have two properties a year to build a portfolio of 20 over 10 years so that I can retire peacefully. Just wanted to make sure if this is good business model to play aggressive with 15 year mortgage. Most investor would say if property does not pay any positive cash flows, it is not worth investing. My take is my cash flow is my aggressive principal payment. What is your take Mike?
Investor · Lake Norman/Mooresville, NC · Member since 2015 · 16 posts · 4 votes
9y
If I can weigh in, cash flow is security. Reserves are security. Cash flow is money you can spend, equity takes a little work to get your hands on it and it costs in the way of interest or sales costs to access it. Don't know your situation, but if you get 10 roofs that need replacing or a combination of high expenditure items simultaneously down the road...lawsuits, someone steals your hvac, tenant destroys your house, lose your job, and this list is truly etc.; then it might be nice to have the option of paying a lesser mortgage. You can always pay extra to the principal with a lesser required payment so why take the risk of having a higher required payment? Build up considerable reserves for each property and never touch it until something comes up. When something comes up, use it, then rebuild the reserves with the cash flow from that rental property. After rebuilding the reserve, continue to pay down aggressively as you see fit. With a longer mortgage term you have the option of paying more to principal that month or not if you run into some trouble. It can only help when the property is truly self-sustaining...reserves and all. With multiple properties, all the potential issues compound. Most investors' day job couldn't cover high dollar expenditures in multiples. So IMHO, don't make a higher future potential vacancy expenditure by taking on a higher required mortgage when you can make it easier on yourself with longer terms.
Developer · Charlotte, NC · Member since 2016 · 12 posts · 2 votes
9y
I always like to do 30 year mortgages on rentals with the least amount of money out of my pocket as possible. I don't worry about paying off the mortgages because my tenants are covering the payments and I am making a profit monthly. Rather than paying off the properties, I save the profit I make each month to use to purchase additional properties. I also always make sure that I can rent each property for a minimum of 1% of the amount I have invested in each property ($1300 per month for 130k) and that I can make my out of pocket cash back in no more than 5 years. Equity is nice to have, but I prefer to invest for monthly cash flow and look at equity as a bonus. This way I make money in either an up or down market.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
9y
@Waqar Yakoob those investors are referring to longer term mortgages than 15 years.
Principal reduction is definitely part of the rate of return on the investment. Incidentally, your rate of return will actually decrease as you pay down more.
Aggressively paying down debt is a strategy that many debt adverse BP members follow, although, more members value the benefits of leverage. You will also find members who value owning fewer free and clear properties for ease of management rather than owning more leveraged properties. You will also find members who leverage early in their investing and pay down debt as they reach critical mass or near retirement. It's not one size fits all as many members on BP would like to suggest. You can always start with 30s, reduce risk, maintain flexibility and pay down faster or move to 15s down the road once you are certain in your strategy. It's much easier to pay down debt faster later than get your cash back out later.
Investor · Edison, NJ · Member since 2016 · 7 posts · 0 votes
9y
Thanks you guys. I must say I finally found a place where members are responsive and respectful and I feel I can share and get timely advice. I work for wall street and motivated to do / explore different things beside my day job. I will reconsider taking 30 years vs. 15 and run my cash flows. Anyone knows a good property management company in Charlotte area, that is good at their work as well as reasonably priced?