Discover how strategic loan repayment enhances investor returns in the real estate market. Uncover the intricacies of mortgage payments, equity growth, and the long-term financial benefits for investors. We are here to equip you with the knowledge to maximize returns and build wealth through intelligent loan paydown strategies in real estate.
Welcome to the next lesson.
Loan Paydown.
So loan paydown is one of the four ways that we covered in a prior lesson that real estate pays the owner quote-unquote. And the reason that is, is if we think about a loan payment, it’s made up of two separate and distinct pieces. One is the part that goes to pay off the interest, and the other is the part that goes to pay off the principal or the actual dollar amount that you borrowed. And if we look at something called an amortization schedule or amortization table, which we have in our calculator at MyFi Academy, you can see that the payment that you’re making every single month for real estate specifically, every loan is a little bit different, but for real estate specifically, if we’re using a fixed loan, the interest rate doesn’t change, meaning the payment doesn’t change over time.
So the actual dollar amount associated with that mortgage is likely to remain unchanged for many of us is going to be a 30-year period. Some people might use a 15-year mortgage, but the 30-year fixed mortgage is a very common, common instrument when real estate investing. And we’re going to get into that in a little bit.
But if we’re using a fixed mortgage, the amount of our payment is going to remain unchanged for the life of the loan. And so let’s say our payments a thousand dollars. Well, there might be 700 of that at the beginning going towards paying off the interest and 300 goes to pay off the principal. I’m making up numbers here, but, that sounds reasonable. Each month that you keep the mortgage and you make your payment, those, the breakdown of interest versus principle changes ever so slightly. And so the first month that you’re paying your mortgage is going to have the biggest portion of that going to interest for the life of the loan. Each month that you pay your mortgage, the amount that you’re paying in interest goes down ever so slightly. And the amount you’re paying towards principle goes up by that amount. So think of it like a sliding scale that has to be balanced because the payment doesn’t change, but the two pieces of it are going to change. And so we’re going to see that in the amortization schedule or the amortization table.
So every single month you are contributing to your mortgage or you’re paying your mortgage, you are paying down the principal balance. Ever so slightly towards the end of the life of the loan, that pay down is going to be become more rapid. And so if we think about how a mortgage works and how rental real estate works, we have tenants who are paying us rent. Then we, as the owners are paying operating expenses or the associated expenses with the property, and then we’re paying down our mortgage. If we have a mortgage, if you don’t have a mortgage, you’re buying property, all cash, this section really doesn’t apply to you.
But so the tenant pays us rent. We pay our expenses, then we pay down the mortgage and if there’s anything left, we pay ourselves and we covered that was cashflow. But so we have a tenant essentially buying down our mortgage every single month. So if we just zoom out for a second, we can say that if you have a tenant in place for 30 years. It’s it’s uncommon that you would have the same tenant for 30 years, but tenants or have a tenant in the property over the life that you own the property, they’re essentially buying that property for you.
So again, going back to that thought experiment for just a second, if you had the same tenant for 30 years that paid you rent every single month and the rent increased enough to keep up with the increase in cost of expenses at the end of that 30 year period, if you were using a 30-year mortgage, they just bought that house for you. They paid your mortgage every single month. And then hopefully there was still money left over. So you’d have some cash flow to pay yourself. But so you put the down payment and they paid off your entire mortgage.
That is insane. So just think about loan pay down as a true benefit to the owner, because it truly is a way that real estate pays, quote-unquote, the owner.
So in the next lesson, we’re going to get into one of the other ways.
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