The largest expense in real estate, whether it’s a personal home or a rental property, is usually the monthly mortgage payment. This is a combination of the principle repayment of the loan from the lender plus interest. In rental properties, the rent that tenants pay SHOULD be covering all the expenses, including the monthly mortgage amount owed.

It’s critical to find and negotiate a good mortgage with a lender as it has a direct and significant impact on profits. That topic is not for today’s discussion though. I want to talk about the beauty of other people paying off my mortgage!

Mortgage Paydown: simply a repayment of the loan each month that was given to purchase the property. Part of the repayment goes toward the principle (amount owed to the lender) and a significant part of the repayment is interest charged by the lender.

In commercial multi-family rental properties that are relatively new (built within the last 5-10 years), it can be challenging to find one that cash flows well. This is primarily due to 1 reason: the value of a new build is higher so the purchase price is higher, which means the mortgage (debt servicing) is higher and that in turn eats up a significant amount of the rental income. In many cases, the cash flow can be negative.

I am still firmly against acquiring any negative cash flowing rental properties, but for the sake of this article and for those who do believe it’s ok in some cases, I will explain why in SOME cases, investors choose to acquire negative cash flowing properties.

The larger the mortgage on a rental property, the higher the monthly mortgage payments – simple. As mentioned earlier, the mortgage payment is broken down into principle repayment and interest. In larger commercial multi-family properties that cost over 2 million to buy, with the same down payment percentage as smaller properties, the mortgage payment each month is BIG! VERY BIG! This means the equity of that property is increasing a lot each month – much more for a larger property than a smaller property.

The difference at the end of one year can easily be $100,000++ depending on the size of the property. This is why SOME investors will sacrifice maybe $1000/month when they acquire a property if it means earning $100,000/year in equity [$100,000 – (12 x $1000) = $88,000].

After a few years of doing this, and remembering most big lenders will refinance up to 80% LTV, a LOT of money can be pulled out of that one property to be used all over again and acquire another one (my preferred strategy)….or do whatever you want with it.

I hope that gives you a better understanding of why some investors may purposely buy a property that does not cash flow. There are other ways to make significant income from a property, but with that larger income comes higher risk. Otherwise, everyone would be doing it. Obviously, you also need to have extra money to invest every month for a number of years to make something like that work. That’s not including the unforeseen costly expenses and emergencies that can and sometimes do occur with rental properties.

Summary: find the biggest multi-family rental property available, leverage lenders as much as possible while maximizing cash flow, and watch the equity build MUCH faster than smaller investments.

Have a great week and let me know if you have any questions about tenants paying down your mortgage in rental properties. I also work with some great mortgage brokers if you need some additional technical assistance.

See you on the beach!

Mark