Author Topic: Prepayment of loans on rental properties  (Read 964 times)

MarBarZARVN

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Prepayment of loans on rental properties
« on: July 12, 2017, 06:07:55 AM »
Hi New to the forum.

I've searched the forum for similar posts but couldn't really get a good answer.  My question is:

Does it make sense to payoff loans on rental property vs investing in other assets.  My rental properties are in South Africa which has a high prime rate.  My interest rates are over 11%.  Currently cash flow on these properties is negative as rental income isn't covering all expenses.  As rental income increase on average 10% annually, it will be a few years before I am cash flow positive.

I'm currently in a position where I am able to save +70% of my income and could pay off a property in a few months.  Do I payoff loans on my rental properties quicker to gain positive cash flow and savings on loan interest or invest in other assets.

I did a quick IRR analysis just looking at the Cashflow from my rental properties and best scenario was only about 2.3% and generally the IRR went down if I made early prepayments on the loans.  So with an IRR of 2.3% it looks like my investments were a bad decision, assuming I never sell (which was my intention).  I'm not sure if looking at the IRR is the right approach to analyze this investment.

Other considerations is currency exchange rates and as I'm earning USD,  should I stay in USD only converting the necessary amount to cover expenses?

Any insight would be appreciated.

rothwem

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Re: Prepayment of loans on rental properties
« Reply #1 on: July 12, 2017, 07:10:02 AM »
Hi New to the forum.

I've searched the forum for similar posts but couldn't really get a good answer.  My question is:

Does it make sense to payoff loans on rental property vs investing in other assets.  My rental properties are in South Africa which has a high prime rate.  My interest rates are over 11%.  Currently cash flow on these properties is negative as rental income isn't covering all expenses.  As rental income increase on average 10% annually, it will be a few years before I am cash flow positive.

I'm currently in a position where I am able to save +70% of my income and could pay off a property in a few months.  Do I payoff loans on my rental properties quicker to gain positive cash flow and savings on loan interest or invest in other assets.

I did a quick IRR analysis just looking at the Cashflow from my rental properties and best scenario was only about 2.3% and generally the IRR went down if I made early prepayments on the loans.  So with an IRR of 2.3% it looks like my investments were a bad decision, assuming I never sell (which was my intention).  I'm not sure if looking at the IRR is the right approach to analyze this investment.

Other considerations is currency exchange rates and as I'm earning USD,  should I stay in USD only converting the necessary amount to cover expenses?

Any insight would be appreciated.

Can you sell?  It sounds like a bad situation having negative cashflow on a rental property.