It is sometimes tempting to make extra mortgage payments in the effort to save on the vast amount of interest we pay to mortgage companies. This is especially true when we receive advertisements from companies who specialize in splitting you payment into two parts so as to reduce the overall payments you will have to make. This may be of some use for an average homeowner (although they could get the same results without paying a company to do it for them), but it is not a good idea for investors. Here are some reasons why:
1. Don't drink your liquid assets. If you increase monthly payments to a mortgage, you are reducing your liquid assets, one of the most precious resources that investors have. Most real estate investors are property rich and cash poor. We need cash for unexpected repairs, or to replace broken refrigerators or furnaces, or to make the mortgage payments between tenants. Of course, there are techniques for greatly reducing the cost of replacing high-ticket items, like buying ahead of time, and utilizing construction equipment recycle stores, but we still must be prepared for inevitable financial jolt.
2. Live in the future, not the present. Why use present-value dollars to pay off your present-value debt? As real estate investors, we want a situation where we put in a little effort and get a big payback. Let inflation work for you. After 10 to 20 years of owning a house, the value of the dollar goes down as the value of your house goes up. Think back to when you were younger, and how much more you could buy for a dollar than you can now. Remember 5-cent packages of chewing gum, gasoline for 15 cents a gallon, a steak dinner for 30 cents? I don't either, but we know it probably was true.
The point is you can pay your mortgage with future dollars, which will be worth a fraction of today's dollars. Once you have a mortgage locked in, the relative value of that loan will continuously drop.
3. Let tenants be your new best friends. Why spend your money when someone else is eager to pay it off for you? Provide a nice place to live at a fair price and you can keep tenants in a place for as long you want. And, the longer they live there the closer you are to having that mortgage paid off. In fact, tenants are better than friends. How many friends do you have who don't always tell you how smart their kids are, and they actually help make you rich?
4. Time your pay off. Rather than make additional payments, it's best to wait and just pay the whole mortgage off early. It's useful to pay off a mortgage, if you wait until you have a relatively small amount left to pay, and you pay it all off with a chunk of money that falls in your lap. Or, when you sell a house and use part of the money you receive to pay off an existing small amount that you still owe. This way, you actually increase your cash flow.
Don't drain your wallet making extra payments on your mortgage. Why do the casinos make so much money? Because the odds are always in their favor. Put the odds in your favor, by letting time, and tenants, do the heavy lifting for you.
Terry Sprouse is author of the book Fix 'em Up, Rent 'em Out: How to Start Your Own House Fix-Up and Rental Business in Your Spare Time.
Visit his blog at http://www.fixemup.org
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