Author Topic: Paying Down Mortgage on 3 Family Inv Property  (Read 653 times)

simplyjay

  • 5 O'Clock Shadow
  • *
  • Posts: 28
  • Location: Massachusetts
Paying Down Mortgage on 3 Family Inv Property
« on: October 20, 2018, 08:44:50 AM »
as the headline implies I'm going to shift from investing to paying down this multi. simple reasons are peace of mind simple as that.. I don't like the idea of having this debt around my neck..
numbers are
Current Principle Bal:260,038.64 out of 296k Originated Dec-1-2015
Int=3.625%
Pmi=192.75 (i wish i put down 20%)
P&I=1,325.46
my OWN logic is when i pay this mortgage off ill save 1,518.21 per mo. property cash flows 3,100 before expenses
total expenses are = 2,476.00. when i pay it off it will produce 2'142.21 in positive cash flow... this will add 2,142 on average into my monthly super powers to save!
i will then roll over this amount + what i use to pay down the morgage to repeat the process and buy another multi. after 3 of these acts i should be all set. my monthly expenses personally is 3.6k.

so with what velocity will i pay this down? on avg i save 3.4k monthly after all expenses are paid personally. i dont mix the house money or expenses with my own.
expenses are 3.6k income is 7k net per mo.
so if i pay an extra 3k per month this = 5 years and 9 months from today to be paid in full. (july-2024, with 117.644.93 saved in interest)
an extra 3.4k per month = 5 years and 3 months ( January-2024 with 120,406.66 saved in interest)
an extra 4k per month =4 years and 7 months ( may-2023 with 135,679.13 saved in interest)<< id have to get an extra job to pull that off.


so at the very end and at the very minium i will have peace of mind. a little extra cash flow from that property and a boost in savings power! logically theres more money to be made if i invest the cash but, i wont find peace of mind rolling on the floor so i gravitate to live a debt free life and slowly build cash flow from investment properties that are Paid In Full.

simplyjay

  • 5 O'Clock Shadow
  • *
  • Posts: 28
  • Location: Massachusetts
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #1 on: October 20, 2018, 05:43:08 PM »
anyone here taking this route by the way?

Another Reader

  • Magnum Stache
  • ******
  • Posts: 4559
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #2 on: October 20, 2018, 07:18:02 PM »
Not on a loan at that interest rate.  I would pay it down enough to get rid of PMI and go after investments paying a higher return.

clifp

  • Bristles
  • ***
  • Posts: 485
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #3 on: October 20, 2018, 09:19:46 PM »
Not on a loan at that interest rate.  I would pay it down enough to get rid of PMI and go after investments paying a higher return.

I agree I'd pay it down low enough to get rid of PMI, although it may be easier and cheaper to get an appraisal if your lender would allow it.

3.6% is a really low rate, and will almost certainly seem even lower in a year or two. Unlike the complicated issues with deducting mortgage interest on your personal taxes, for investment properties, the interest is deducted directly off the rental income.  So your after-tax interest rate is likely well under 3%.

JoJoP

  • 5 O'Clock Shadow
  • *
  • Posts: 81
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #4 on: October 20, 2018, 11:08:24 PM »
Do you have any other debt that is a higher interest rate?  If not, I think it's a great plan.  Like the other posters, I'd push hard to get rid of the PMI cost.  You could always re-evaluate at that point.  If you want to make another investment, I'd maybe inventory resources after the PMI is eliminated.  Get a good feel for what a new loan for your new property will cost you, and then decide whether or not the triplex mortgage should be tackled, and at what pace.   

We paid off all of our mortgages at one point about 10 years ago, and then reevaluated and decided to buy more rentals.  We went from debt free back into debt!  We used our personal residence for a cash out re-fi, and leveraged that (and other) money to buy 10 rentals.  At one point we owed over 700K, split up into many mortgages.   Now, bit by bit, we've nearly got everything paid off.  I'm currently working on the final 150K of the personal residence loan, which has an interest rate of 3.75.   The invest vs. pay off the mortgage argument is a lively discussion on this forum, but I'm in the latter camp.  I'd rather be debt free than count on investment growth.   

simplyjay

  • 5 O'Clock Shadow
  • *
  • Posts: 28
  • Location: Massachusetts
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #5 on: October 21, 2018, 06:40:07 PM »
very neat how you got all these properties and slowly are paying them down to zero. i know it doesn't make sense to pay off the property but i have no tolerance for debt its a fear of mine to be honest. as brute as it may sound id buy another 3 family, pay, repeat. don't enjoy the stock market because its just a bunch of numbers on my screen. i like tangible assets, hands on type of guy. i could re-fi but that would take away traction and id lose 5-6k or whatever the cost is vs putting that on principle.. think of this as a wild hog on a rampage! on another note how many mortgages did you hold 10 years ago? what made you pay them off? are you all rentals vs stocks?. thanks for everyones input so far! this will be a great way for me to stick to my word.
« Last Edit: October 28, 2018, 10:30:22 AM by simplyjay »

JoJoP

  • 5 O'Clock Shadow
  • *
  • Posts: 81
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #6 on: October 22, 2018, 09:40:17 AM »
as brute as it may sound id buy another 3 family, pay, repeat. don't enjoy the stock market because its just a bunch of numbers on my screen. i like tangible assets, hands on type of guy. i could re-fi but that would take away traction and id lose 5-6k or whatever the cost is vs putting that on principle.. think of this as a wild hog on a rampage! on another note how many mortgages did you hold 10 years ago? what made you pay them off? are you all rentals vs stocks?. thanks for everyones input so far! this will be a great way for me to stick to my word.

I'm a person who prefers real estate rentals over stocks, so let's take stock investment out of this particular reply.  What makes sense to the stock investors doesn't make as much sense to the real estate investors, and vice versa.  There's lots of paths to success, and that doesn't mean that "it doesn't make any sense to pay off the property" if that's where your comfort zone lies.   But you should crunch the numbers and the averages, to make an informed choice that works for you.   I'll share how I would think about your situation:

 First, you mentioned refi.  What would it accomplish?  You pay points/fees and (usually) prolong the debt. Your interest rate is already very low, so no need to get it lower. Since you want to buy another investment property,  I think your choices are 1) Pay this loan down, then save up and get another one.  or, 2) Pay the minimum amount on this loan (perhaps after the PMI ratio is paid down) and buy another asap.   I'd do option 2.  Put all your efforts into saving the down payment up for your next property (after the PMI thing is handled).  Get that second job you mentioned, to really accelerate the process and help qualify for the next loan.  Get your next property asap.

I'd do it like this because first, your triplex already has a positive cash flow and a very low interest rate, so there's no urgency (in my way of thinking), to reset any income/debt/payment balances.  Then, the sooner you get your next property, which hopefully will also have a positive cash flow and low interest rate from the start, the sooner you build your wealth up.  Eventually the rents will go up and the debts(interest/principal ratio) will go down, so the sooner you you get the next one sewn up, the better.  Even if you never pay another penny in extra principal, the clock for your 15 year or 30 year mortgage payoff won't come any sooner if you wait to buy. 

To answer your question, we had at least 7 mortgages going, maybe more.  We bought one of them essentially with 100% financing, although it was painful and not by choice.   Things shifted around so I'd have to go through the archives to see dates of debts and payoffs, but we still had 5 mortgages just last year.  We got private loans when the banks quit loaning us money for income property.  I paid them down one by one.  Some with just a little extra every month, some with various chunks/windfalls, some with all the money that I earned throughout the year from my part time job, while we lived on my spouses (higher) income, and every penny from rental increases.   We Mustachians all know the amazing power of focused saving, and I just shoveled the money at our debts in any amount. 

 Our only regret is the ones we didn't buy.  There were 3 or 4, including a beach 5 plex, that we passed on for various reasons (mostly because they were priced a bit too high).  Now that they've doubled or more in value, we're kicking ourselves that we balked at an extra 10K in purchase price. Penny wise, pound foolish.  But we did what we could, beyond our comfort zone even,  and it worked out great.   

Edited to add this: I wanted to clearly point out this:  Investment property calculations and payoffs should include the amount of cash flow you're getting from the rents, so it's different than paying off your non-returning personal residence.  When most people talk about "paying off the mortgage" they generally mean your house.   So when I pay off a $1000 a month mortgage on a rental, that increases my cash flow by $12K a year.  You can do anything you want with the 12K, including invest it in the stock market. 
« Last Edit: October 22, 2018, 09:51:32 AM by JoJoP »

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 802
  • Location: Somewhere in Tejas
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #7 on: October 22, 2018, 10:31:34 AM »
But you should crunch the numbers and the averages, to make an informed choice that works for you.   

This is really good advice.  Heed it.

The paydown-vs-keep discussion is somewhat different when applied to income-producing properties, Especially if you are looking to expand and need to adjust your income-to-debt ratio for future loans.  That reason alone may change the math.  Also there is no benefit of itemization on a income-producing property (there is but it isn't the same or nearly as great as personal residence...) so much of the math goes out the window.

Also, it ALWAYS makes sense to consider the third option:  Selling off the rental.  Yours certainly sounds like a strong income-producing rental so this is extremely unlikely, but always do the math.  If I weren't making more than (at least) 5% returns on rentals, then I would sell for one that will command a higher margin (or improve the property in sweat equity and then command a higher margin). 

Personally, with that rate I would ride it all the way out -BUT- considering this is income producing, you may want to pursue other options.  If you are looking to get your income-to-debt ratio adjusted, then getting below 78% to remove PMI isn't a bad idea.  If you don't care about that but you suspect appreciation may remove PMI for you, get that appraisal ASAP to remove it.  Best 400ish dollars you will ever spend.  However, at 3.625% interest, I would prepay a dime. 

Best of luck!

simplyjay

  • 5 O'Clock Shadow
  • *
  • Posts: 28
  • Location: Massachusetts
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #8 on: October 22, 2018, 08:42:16 PM »
everyones advice here has been beyond insightful. i was warned that after sept-15-2015 that pmi is a PERMANENT fixture into the loan unless refinanced under a conventional loan. I'm looking into this again now that you guys have suggested it more than once. im turned onto the idea of paying down my LTV to drop pmi to maximize my earnings without paying off the loan. i could go and put another 20% down on a triplex and continue down that road. i don't know how you slept at night with 7 mortgages man. that's some mental strength you got there. ill keep posting here periodically when i add extra to the mortgage or whatever road i happen to finally venture down. till then its clear PMI has to go!

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 802
  • Location: Somewhere in Tejas
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #9 on: October 23, 2018, 11:22:47 AM »
everyones advice here has been beyond insightful. i was warned that after sept-15-2015 that pmi is a PERMANENT fixture into the loan unless refinanced under a conventional loan. I'm looking into this again now that you guys have suggested it more than once. im turned onto the idea of paying down my LTV to drop pmi to maximize my earnings without paying off the loan. i could go and put another 20% down on a triplex and continue down that road. i don't know how you slept at night with 7 mortgages man. that's some mental strength you got there. ill keep posting here periodically when i add extra to the mortgage or whatever road i happen to finally venture down. till then its clear PMI has to go!

FYI - Thats only on government loans from my understand.  EG-  FDA Loans, First Time Homebuyer FDA, VA Loans, etc.  I do not think that applies to private-backed mortgage, only public.

If I had to keep PMI on a 5% or more, the break-even math tips distinctly the other way.  3% has less benefit to investing.  6% would be a pay-it-all-off now situation.

The math is the math- permanent PMI or not.  The problem is people not willing to do the math first and make an informed decision.

simplyjay

  • 5 O'Clock Shadow
  • *
  • Posts: 28
  • Location: Massachusetts
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #10 on: October 23, 2018, 04:54:48 PM »
everyones advice here has been beyond insightful. i was warned that after sept-15-2015 that pmi is a PERMANENT fixture into the loan unless refinanced under a conventional loan. I'm looking into this again now that you guys have suggested it more than once. im turned onto the idea of paying down my LTV to drop pmi to maximize my earnings without paying off the loan. i could go and put another 20% down on a triplex and continue down that road. i don't know how you slept at night with 7 mortgages man. that's some mental strength you got there. ill keep posting here periodically when i add extra to the mortgage or whatever road i happen to finally venture down. till then its clear PMI has to go!

FYI - Thats only on government loans from my understand.  EG-  FDA Loans, First Time Homebuyer FDA, VA Loans, etc.  I do not think that applies to private-backed mortgage, only public.

If I had to keep PMI on a 5% or more, the break-even math tips distinctly the other way.  3% has less benefit to investing.  6% would be a pay-it-all-off now situation.

The math is the math- permanent PMI or not.  The problem is people not willing to do the math first and make an informed decision.

i know the math and understand what your saying after this conversation I've questioned the way im going to proceed. I'm going to pay down till pmi drops then see how i feel about it. till then that's what i'll do.

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 802
  • Location: Somewhere in Tejas
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #11 on: October 23, 2018, 05:01:40 PM »
everyones advice here has been beyond insightful. i was warned that after sept-15-2015 that pmi is a PERMANENT fixture into the loan unless refinanced under a conventional loan. I'm looking into this again now that you guys have suggested it more than once. im turned onto the idea of paying down my LTV to drop pmi to maximize my earnings without paying off the loan. i could go and put another 20% down on a triplex and continue down that road. i don't know how you slept at night with 7 mortgages man. that's some mental strength you got there. ill keep posting here periodically when i add extra to the mortgage or whatever road i happen to finally venture down. till then its clear PMI has to go!

FYI - Thats only on government loans from my understand.  EG-  FDA Loans, First Time Homebuyer FDA, VA Loans, etc.  I do not think that applies to private-backed mortgage, only public.

If I had to keep PMI on a 5% or more, the break-even math tips distinctly the other way.  3% has less benefit to investing.  6% would be a pay-it-all-off now situation.

The math is the math- permanent PMI or not.  The problem is people not willing to do the math first and make an informed decision.

i know the math and understand what your saying after this conversation I've questioned the way im going to proceed. I'm going to pay down till pmi drops then see how i feel about it. till then that's what i'll do.

Kuddos!  Let us know how it works out.

Its a good financial position to be in either way.

clifp

  • Bristles
  • ***
  • Posts: 485
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #12 on: October 23, 2018, 05:20:08 PM »
everyones advice here has been beyond insightful. i was warned that after sept-15-2015 that pmi is a PERMANENT fixture into the loan unless refinanced under a conventional loan. I'm looking into this again now that you guys have suggested it more than once. im turned onto the idea of paying down my LTV to drop pmi to maximize my earnings without paying off the loan. i could go and put another 20% down on a triplex and continue down that road. i don't know how you slept at night with 7 mortgages man. that's some mental strength you got there. ill keep posting here periodically when i add extra to the mortgage or whatever road i happen to finally venture down. till then its clear PMI has to go!

As @TexasRuner said only certain government back loans primarily FHA have permanent PMI associated with them.  I saw in my quick google on the subject that some loans don't allow an appraisal to get you to the 78% LTV value.

But even with a permanent PMI it is still a good loan.  (PMI $193/month*12)/260K balance = .9%  added to 3.6% loan is 4.5% which is still cheaper than new loans, especially for a rental.
Is the PMI fixed or does in change every year?

A couple of big pictures thoughts debt and real estate.  The all debt is bad mantra of Dave Ramsey or Suze Orman is too simplistic.   Sure for most Americans who borrow money at a high interest, for stuff they don't need or can't afford debt is bad and should be avoided and paid off.  That debt is dumb debt.  But for the LYBM folks on this forum can you use debt to make money, one example is card card churning. Any time you can borrow money to make more money than the cost of borrowing, I call that smart debt. 

 I'm primarily a stock guy, who dabbles in real estate. I like the simplicity of dealing with stocks, stocks don't break leases, have ACs that break down, or water heaters that flood, they are just nice clean numbers on screen who values changes constantly but generally go up.  However, there are two big advantages to real estates tax breaks and leverage.  I could write of long posts about all the crazy tax breaks that rich folks in Congress have given other rich folks who invest in real estate, but that's another post.   I think American real estate debt is some of the smartest debt on the planet.  You can borrow for long periods of time 15-30 years at low fixed interest rates. Much is subsidized the government, through a variety of government agencies.  If interest rates go down you can easily refinance at a lower rate.  Plus as we found during the financial crisis, if everything goes down the tube, you don't even have to pay off the loans back with relatively little consequence.

The best thing about debt is it magnifies your return.  On average US real estate just barely increase faster than inflation, call it 3%.  3% not a very exciting, but if you can buy an asset that increases a 3% a year with only 20% and borrow the other 80% suddenly you are looking at 15% return and that's pretty terrific. (Assume 0% interest) Now don't get me wrong you can go overboard, and for me juggling 7 mortgage like @JoJoP would be too much.   As Warren Buffett, said leverage is the only way a rich man can become poor.    But if was in my in 20s or early 30s trying desperately to become FIRE than might be worth risk.

So my general advice for you is don't be scared about having debt when investing in real estate.   There is a sweet spot between being too aggressive and to conservative, and for me, it is borrowing money that conforms to Fannie/Freddie VA/FHA etc guidelines.  Which means basically means  20-25% down and 15-30 fixed interest rates.


JoJoP

  • 5 O'Clock Shadow
  • *
  • Posts: 81
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #13 on: October 24, 2018, 08:07:32 PM »
7 mortgages was a lot.  I only wish it had been more!  Ha ha!  Little dollars signs are in my eyeballs!!

@simplyjay, it seems like you are in an area where the rent to purchase price is very favorable.  I'd say power through the first part of your plan and jump on your next one!  Favorable conditions don't last forever-- only until the rest of the investment world catches on. 

simplyjay

  • 5 O'Clock Shadow
  • *
  • Posts: 28
  • Location: Massachusetts
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #14 on: October 25, 2018, 07:02:57 PM »
@TexasRunner @clifp @JoJoP  this is a FHA loan, does this change the math here? when i signed paperwork for underwriting back in sept of 2015 they said PMI is now cheaper but runs the life of the loan. i wouldn't want to re-fi and lose the 3.625%. though if this is true its still cheaper then to refi out..

TexasRunner

  • Pencil Stache
  • ****
  • Posts: 802
  • Location: Somewhere in Tejas
Re: Paying Down Mortgage on 3 Family Inv Property
« Reply #15 on: October 26, 2018, 04:45:45 PM »
@TexasRunner @clifp @JoJoP  this is a FHA loan, does this change the math here? when i signed paperwork for underwriting back in sept of 2015 they said PMI is now cheaper but runs the life of the loan. i wouldn't want to re-fi and lose the 3.625%. though if this is true its still cheaper then to refi out..

Do the math to consider refinance with new rate vs comish or fees + old rate + old PMI rate

The old PMI rate is added to the old rate.  Then run it through the normal refinance or not formula to see what the 'payoff' time is from closing.

I haven't been seeing a lot of rates around 3.625% anymore.  I would say if the new rate is higher, then it doesn't make sense to refi even with PMI permanently on the old one-  but run it through the formula either way.