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Today’s question comes from Jim and Jim says, hi Marco. I’m one of your listeners in the Southern California market who has benefited from equity appreciation on my primary residence. I’m considering refinancing to use this idle equity in cashflow markets as a 60 year old. I’d like to accelerate the amortization on the newly purchased turnkey property. From a numbers perspective, would it ever make sense to purchase one of Norada’s turnkey properties by putting down a greater down payment, say 40% and financing your investment over 15 years as a way of accelerating amortization.
Jim, good question, and thanks for sending that in. The first question, I guess you need to ask yourself and what I would ask you is what is your overall goal?
It sounds to me pretty clearly that cash flow is your primary focus here. Cashflow overgrowth, because these are kind of opposite ends of the spectrum, although you can kind of target both of these at the same time, but really you have to give up a little bit on one to gain more on the other. Typically, let’s just assume cashflow is your focus because that’s what it sounds like, but you’re also trying to achieve something which impacts your monthly and annual cash flow and that is going from a 30 year fixed rate mortgage to a 15-year mortgage to accelerate the amortization. When you do that, it increases the debt service and therefore less monthly cashflow, less annual cashflow. So these were kind of opposing forces if you will. So let’s take a hypothetical example here and do a little bit of math. You don’t need to write all this down.
I’m going to kind of give you the numbers. It might sound like a lot, but I’ll bottom line it for you here in a second. Let’s just do the math on a $100,000 property because it’s just an easy number to work with and easy to remember. Let’s look at four scenarios. 20% down on a 15 and a 30 year and 40% down on a 30 and 15 year. And here’s basically what it looks like. So 20% down is an $80,000 loan and these are all at 5% interest. So a 30-year mortgage would be 429 a month. If you did a 15-year amortization instead of four 29 it’s six 33 it’s a $204 difference. So that means your cash flow is $204 less per month going from a 30 to a 15 year. Now, what if you did 40% down instead of 20% down just because you had asked, so that means your mortgage is now 60,000 instead of 80,000 again, at 5% a 30 year fixed rate mortgage would be $322 per month.
It’s considerably different obviously. And a 15-year amortization would take that to $474 a month. Now the difference between the 30 and 15 years, $152 now those were a lot of numbers, but let’s look at this range. The lowest number in that range was $322 per month on that mortgage payment. The highest number was $633 and that was what the 20% down and a 15-year amortization. The bottom line is this 40% down over 30 years will give you the highest cash flow, but the lowest cash on cash return. So we’re talking something that’s measured in terms of dollars and something that’s measured in terms of percentages. So the highest cashflow, lowest cash on cash return is with the larger down payment over a longer-term. The flip side of that is a 20% down payment over 15 years. That’s going to give you the lowest cash flow and the highest cash on cash return.
So if your focus is cash flow, then your goal might be to finance these with the longer term, the 30-year amortization, and a slightly larger down payment, let’s say 40% in your case. However, keep this in mind, lower down payments can provide you more properties with higher total aggregate cash flows. And some people don’t think about this, you know I always use that a hundred thousand dollar hypothetical example. You got a hundred thousand dollars of investible capital, you can buy one single-family home in a nice community and you own that free and clear. So yes, there is no debt service, but at the same time you only have, I say only in quotes, but you only have that one property versus taking that a hundred thousand dollars of investible capital and purchasing two, three, maybe four properties. And that’s all doable depending on the price points, but it’s essentially more than one.
And so the aggregate cash flows from those two, three, four properties using that a hundred thousand dollars actually ends up being more than just the cash flow on the one property. And the other side benefit of that is you have more properties providing you more aggregate equity growth each year because you’re amortizing multiple loans, meaning multiple properties and you also have the potential benefit of appreciation across those two, three, four properties versus the only one property. And that’s really the biggest difference there. But again, you know, you got to consider what is your goal, what you’re trying to achieve, what your age is, what your strategy is. That kind of leads me to my last point, you know, why do you want to accelerate the mortgage? Why are you trying to accelerate the amortization? Is this part of your retirement income?
Are you trying to just benefit from the cash flows now and then you dispose of the property later? See less cashflow now because you have financing and then in 15 years when the loan is amortized and it’s free and clear, you will have higher cash flows. I mean, maybe that’s what you’re thinking or do you plan to sell this property within the 15 year period? Sometime between now and then? I don’t know if that would make any sense in any way. Maybe this is part of your estate and that you plan to pass this onto your heirs. Uh, maybe the higher cashflow now is better for you then. So you want to put 30-year mortgage on it so you maximize your cash flow or maybe purchasing multiple properties so you have maximum cash flow because this is part of your retirement income. Or maybe you’re planning to leave these properties to your heirs and your goal is to have them free and clear by the time you do pass on your estate to your family or loved ones or whoever that may be.
So the flip side of this is if you have a growth strategy in mind, you know, then focus more on growth markets and multiple properties. Of course, this puts the focus on equity over cashflow, which doesn’t sound like what it is you’re trying to achieve. So my suggestion is just pencil out some scenarios for yourself and if you need help with that, contact one of my investment counselors here or maybe a financial advisor that you’re working with or maybe both. And just work it out because a lot of this is math. Part of it is it has to do with your goal and you know, whatever strategy you’re trying to employ here. But most of it comes down to math and just what it is you’re trying to achieve. So, Jim, I hope that helps. I kind of went over it very quickly, but hopefully, that’ll give you some direction there.
All right, for everyone else, if you have any questions about investing or finance or something related to real estate investing, I love answering these questions. So by all means, contact your investment counselor. They can certainly help you with your questions or just go to passiverealestateinvesting.com or AskMarco.com and just click the button at the top and I am going to reply or cover that on the show and I’m slowly getting through these and that’s it. So I appreciate you listening. We will see you on our next episode.
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