Mortgage paydown

[James H.]

Hey guys,

It seems most of the merit of a deal is based on the generated cash flow here on BP. There are those who are more speculative, but by and large cash flow is the main aspect and it is usually analyzed with something roughly equivalent to the 50 percent rule.

I have a "C-" class property as my first investment and it cash flows nicely. It will be paid off in about a year, so I consider it basically a cash purchase. However, for my next property, I am thinking about something more along the lines of a nice duplex with a 3-2-2 or 3-2-1 on each side. I find that these deals usually only break even on cash flow. This also is based on move-in ready condition or nearly move-in ready as I plan to live in one side for a while to get OO financing.

So the cash flow doesn't look great, but the mortgage balance is much higher than cheaper properties that cash flow better (in general). So, while I wouldn't have extra cash in the here-and-now (after fully accounting for all expenses) I would have a larger asset that is getting paid off over time.

In your opinion, what is a better investment, a 250K property that breaks even after all expenses, or a 60K property that cash flows 150/month? (these numbers are just for example) How important is mortgage pay down to you, and is there a certain value at which point it is more or less important?

Please bear in mind, when I say break even, I mean that there is enough operating income to cover all the expenses based on a 50 percent rule analysis. Also, assume I have 6 months reserves.

[Ryan B.]

I do a little of both, as Jeff mentioned. I have a couple C class rentals that cashflow very good. I plan on them only having marginal appreciation, hence they were bought for the cashflow. They are a little more management intensive, but the cashflow is worth it.

On the other hand I have our former personal residence that we turned into a rental when we moved. If you apply the 50% "rule" to this property, it is a loser. It rents for $915 and PITI is $745. The good part is this property is in a great position for appreciation and in a high class suburb. I get great tenants, very easy for me to manage, and extremely easy to get rented. Since I am not a full time investor, this house is nice because tenants are paying it off for me and I should hopefully make a bundle in appreciation.

I like both types of properties, cashflow for now and appreciation along with mortgage paydown for later.