You are probably thinking "What is he saying, especially since he always talks about buying an investment property is buying a business". You are correct, buying an investment property is buying a business. Here is what I mean:A property is purchased at $625,000 with a mortgage of $500,000 (80% loan to value), borrowed at 3.99% for a 10 year term amortized over 35 years. Rental income for the duplex is $3800 per month, which nets $800 after taking into account 10% safety (for repairs & maintenance as well as vacancy).
There are 2 options when it comes to using the surplus:
- Increase the mortgage payment by $800 per month
- Use the lump sum feature to pay down the mortgage $800 every month or at a set frequency (quarterly or semi-annually)
If the real estate investor is planning to acquire more properties, option 2 is best, since increasing the mortgage payment would hinder qualification of further properties. The pre-payment feature would accomplish the same result without sacrificing the ability to qualify for more investment properties.
Let's dig deeper into the numbers:
If the mortgage is pre-paid by $800 every month, the mortgage amortization would drop from 35 years to 20.25 years! Imagine what would it feel like if you owned your investment property free and clear 15 years ahead of schedule and what that additional income would do to your lifestyle.
The next time you are buying an investment property, don't buy it to use the cashflow for personal expenditure, rather use it to payoff the mortgage.
Every real estate investor has unique goals, to discuss your personal real estate investment portfolio and goals, please contact me.