What Is Mortgage Capital Payback And Is It Right For You?


The real estate market is on fire right now and all the talk is about either the gains investors have made through appreciation or debates about whether we are nearing a 2008-style cliff. For his part, Zillow estimates that “annual home value growth will rise to as much as 13.5% by mid-2021” before it cools down somewhat “by 2021 to end at 10.5%”.

I don’t venture into predicting how property prices will move in the years to come, but the focus on increasing value recently has obscured the many other benefits of real estate investing. One of the most neglected benefits, despite being the most trustworthy, is the main payment.

What is the main payment?

The amortization is simply that part of the mortgage that you pay each month that is applied to the loan balance in lieu of interest. For an interest-only loan, this amount is zero. The following applies to an amortized loan: the higher the repayment, the less capital is repaid each month and vice versa.

For example, a $ 100,000 loan at 4.5% interest amortized over 20 years has a monthly payment of $ 632.65 with $ 375 used for interest and $ 257.65 used to pay off the mortgage in the first month become. Thus, for the second month, the loan balance will be $ 99,742.35.

On a loan that is amortized over 30 years, the interest payment is still $ 375 for the first month, but the amount that goes towards amortization drops to $ 131.69, so the total mortgage payment is $ 506.69.

So while more money comes out of your pocket with a lower amortized loan, all of the extra money is used to pay off the mortgage faster.

This may not sound like a huge benefit as you are paying back the loan with cash that you otherwise could have kept in your own pocket. In fact, the capital repayment seems to be creating smaller pockets.

Hence, many investors would rather have interest rate loans and keep all cash flow if they could. However, banks do not allow that. Even so, most (including us) prefer longer paybacks over shorter ones in order to keep cash flow as high as possible.

The advantage, however, is that the capital repayment acts as a form of forced saving. When buying rental property, it is important that the cash flow goes beyond the loan and any expenses. This loan includes the principal amount that you pay off each month.

So, if a rental cash flow of $ 100 per month across all expenses and the $ 100,000 loan mentioned above is amortized after 20 years, you would have made an additional $ 257.65 in mandatory savings by paying off your mortgage.

A profit of $ 100 becomes $ 357.65.


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Financing real estate can be one of the biggest challenges for both new and seasoned investors. This section of the BiggerPockets blog is your source for funding your next real estate transaction. Whether this is your first mortgage or your 100th mortgage, the articles on this page can help you decide which financing approach is right for you. Investors with unusual or special circumstances can also look for more direct feedback in the Creative Real Estate Finance Forum or ask questions specific to their situation. Also, Brandon Turner wrote recently The book about investing in real estate with no (and little) lack of money. This is a great resource for those looking to buy real estate without waiting to qualify for conventional financing.

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The “return”

Many already know all this, of course, but few seem to take this advantage into account when discussing real estate investments. That strikes me as strange. In fact, it was an amortization plan that originally inspired my father to start real estate in the first place.

To illustrate this point, let’s look at what the internal rate of return (IRR) would be if only the principal was repaid. Strictly speaking, this is not an actual return. The principal repayment builds equity, and converting that equity into cash would require refinancing or a sale. Still, the figure will show how beneficial capital repayment can be.

So for this example we will use the following assumptions:

  • $ 100,000 purchase
  • $ 20,000 deposit
  • $ 80,000 loan
  • Payback over 20 years
  • Rental income covers all expenses for the property and debt servicing, but not the cash flow (break-even)
  • The property is not appreciated at all

Using the CCIM financial calculator, we can work out the internal rate of return (which is a better metric than a simple ROI or ROI as it takes into account when you get the money, not just how much).

With a holding period of 20 years, this would result in a return of 7.18%.

While a 7.18% return won’t make you rich, it’s not bad at all, especially since that’s just one of the perks of real estate investing.

For a 15 year loan, the IRR rises to 9.68%.

npv irr calculations 2

It is relevant here that historically the stock market has returned about 10% per year. The pure break-even point for a rental property that does not appreciate at all comes close to investing in a diversified equity portfolio with a 15-year loan.

However, it should be noted that the IRR on a 30 year loan is only 4.73%. In addition, if you paid off the loan early, the IRR would also be lower, since the early payments are mostly interest. This can be clearly seen from an amortization diagram.

Nevertheless, the capital repayment alone provides a fair return. This is one reason why sitting on the sidelines is not a good idea because “the market is too hot”.

First, there is no way of knowing when the market will correct or how much it will correct if it does. Second, the other benefits of real estate investing can help mitigate the risk of a market correction – especially the repayment of principal.


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Are you ready to invest?

One of the most frequently asked questions on the BiggerPockets forums is, “How can I invest in real estate with no money and bad credit?” The answer? They should not. You need to put your situation in order and invest from a position of financial strength.


Capital repayment and the IDEAL advantages of real estate

I have quoted the acronym IDEAL many times to explain why real estate investments are so powerful:

  • I: Income (cash flow)
  • D: Depreciation (tax benefits)
  • E: Equity Building (Main Payout)
  • A: Appreciation
  • L: Leverage (ability to use bank financing to increase returns exponentially)

Additionally, real estate is an inefficient market, which means you can buy at a discount to get built-in equity upfront while reducing the risk of real estate depreciation.

Cash flow is the perk many people get interested in real estate initially, but it shouldn’t be more than the icing on the cake. Even $ 100 a month in cash flow only adds up to a pretty pathetic 1.8% IRR over 20 years.

npv irr calculations 3

Even taking an annual cash flow growth of 5% into account does not achieve the return on capital repayment.

npv irr calculations 4

The biggest benefit of cash flow is that it keeps you solvent and the banks require that it give you credit.

The biggest advantage of real estate is arguably the increase in value. Of course, the rate of increase in value varies greatly depending on the time and place. Overall, however, according to SF Gate, real estate has an average national growth in value of 3.5-3.8% per year.

Using the lower rate of 3.5%, a home would go from $ 100,000 to $ 198,979 in 20 years. That $ 98,979 gain corresponds to an IRR of 8.32%.

However, if you put them all together, the IRR goes up to almost 16%!

npv irr calculations 5

That will beat almost any other safe investment. And this analysis assumes that the property was bought at market prices and does not take into account any of the tax benefits that come from real estate.

Real estate investments, especially buy-and-hold real estate investments, have many advantages. Oddly enough, paying back capital (or building up equity) is rarely considered. But there is another powerful mechanism for getting rich with real estate that you should consider.



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