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.