I’m looking to purchase a 3 family home this summer and had a question about best spending the cash flow. For instance, on one particular property it looks like if I live in 1 of the 3 units and the other 2 are rented out, I will have an excess of $400 after paying mortgage, taxes, pmi, and insurance. My question is, should I take that excess and invest it or should I put it towards paying down the mortgage? If it was simply a single family home where I was paying my mortgage with after tax dollars anyway I would not, but since I’m assuming I will be paying taxes on the cash flow, does it make more sense to put towards the mortgage? I appreciate any thoughts on the matter.
It may look like you’ll have cash flow of $400/mo, but it could be way different once you’re actually in that situation. If you make a good deal, you’ll have money left over from time to time that could be used to pay the mortgage, but things will come up and I bet that amount will be smaller than you’re estimating now.
It’d be good to save up some of that cash flow for things that might come up. You could save anything past that to put toward your next deal if you want to acquire multiple properties.
You pay taxes on your net rental income no matter what you do with the money. Paying down your mortgage does not reduce your tax bill, just makes it higher next year because you will have less mortgage interest.
Use the cash flow to build up a six month emergency reserve. Then you will have cash on hand to tide you through vacancy periods and/or major systems replacements (new roof, new HVAC, new carpet, new appliances, etc.)
After you have a cash reserve in place, then consider paying down your mortgage if you have an adjustable rate loan, otherwise save to purchase your next investment property.
If my tenants are paying my mortgage, all my expenses, and there is money left over for positive cash flow, then I am not in a hurry to pay off the loan. I would rather use excess cash flow to purchase more income producing assets.