Wednesday, March 30, 2011

change of plans

well, after much deliberation, i decided against paying off rental property #1. the reason for this seems kind of at odds to my approach on finding good cash flow and yield on my investment. you see, the property has about 7 years left on the note, and the rent that we collect is just enough to offset all the expenses related with owning the property. if we were to pay off the property, we would easily see a positive cash flow out of the property. i took that cash flow and projected it over 7 years. it came to be roughly equivalent to the lump sum amount that we'd have to pay in order to payoff the property.

this means that by doing nothing, and leaving our money essentially just in cash or some vehicle that at least keeps up with inflation, we'd be in the exact same position in 7 years whether we pay off the property now or not (assuming no appreciation). in one situation, we'd be out that cash, but it would slowly be building back up, and in the other, we'd have that cash on hand and the property would pay itself off.

instead, if we found some other vehicle for that capital that i was going to use to pay off the property, we'd actually come out ahead (assuming that the capital retains its original value). for example, if we purchased another property, that cash would be converted to equity, and any return on that cash would actually improve our position.

this seems to be a 180 degree reversal from what i was advocating before, which was to seek out investments with good cash flow. though the cash flow would not be as good, it actually makes more sense in the longer term. after 7 years, our cash position would be less, but we'd actually be cash flowing 1.5 times what we would cash flow by paying off the property.

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