Even though my buddy investors mock me with the fact that I bought my RP#1 all cash, I still believe that it was a great decision. First, it is a cash-cow which I don’t have to concern much with (it will still cash-flow). Second, it was such a great tool when I came to the bank asking for money. “Look fellas, I’ve got myself this nice property in cash. It nets me about €2400 a year. Don’t you think that I am creditworthy? Oh, and BTW, I am debt free.”

You should look at the bankers face when they saw this 27 years old who bought an apartment all cash, when they have been paying theirs for 20 years and ain’t done yet. Maybe I sound like a privileged prick right now, but that is not my intention. I am simply happy with the fact that this helps me negotiating with the bank (remember, Portuguese banks are very peculiar when it comes to lending money…).

OK, moving on. I started to play monopoly, and boy, I like this game! For one, I bought this sweet RP#2 which cost about 38k plus (very high) closing costs and nets about €350 a month (gross rent is about €500). Two, I also bought another property, which cost me about 33k plus (enormous) closing costs but will yield about €1.2k-1.4k gross a month (I will talk more about this one later on)!

I don’t expect any sort of appreciation on RP#2 and little on RP#3, but I certainly bought them with huge discounts, as they are worth 60-65k and… 80-100k! What are the plans regarding paying these properties down? Well, I just posted my plan for the next 6/10 years, which is based on creating liquidity (holding onto cash) vs not caring about cash and deferring cash flow to the future. The idea is that I want to be able to leverage high interest rates at the bank when they increase and leverage market crashes, for which I should have a lot of liquidity (100k, if you want to know what “a lot of liquidity” in my book is).

Now, based on this plan, even though I’ve got myself a 30-years fixed-rate mortgage, I will try to pay RP#2 in about 9-19 years. I can’t say what is the exact plan right now, as I will take a responsive action plan (based on inflation, interest rates and what not). The bottomline is though, that either I am holding onto cash or I am not. If not, I will pay off debt aggressively. If not, I pay my mortgage and that’s it! Let us see what determines this.

Years I will NOT be holding onto cash (that comes from rents)

• I do not have relatively safe investments in which I can make more than 5% net on my other investments. If this holds, I should pay off my debt, as I am paying 4.55%.
• I want to defer cash-flow to the future. It is either now getting an extra say €100 a month, or getting them in the future. In the future, these bucks will most likely worth less due to inflation. However, it may be that I will need them more (or make more money off of them).

Years I WILL BE holding onto cash (that comes from rents)

• I predict that interest rates will increase and I want to leverage them. Interest bearing accounts are probably the safest class of investments I can think of. If they yield 5%+ net, I want to put all my money there, as I will be borrowing money at 4.55 and increasing my money at a higher rate.
• I want to buy assets and I need liquidity. Markets (stock, RE, etc) crashed or I suspect that they will crash soon. I’ve spotted a great deal, etc.

I worked on Excel a little bit today and the picture on the top is what came up. The average extra cash-flow that the property will yield is about €160-190/mo. By extra cash-flow I mean the cash I end up with after paying for my mortgage, insurances and what not. Maybe this increases with inflation (matter of fact the current rent has to be increased soon), but I did the math assuming this cash flow for the next 20 years. Please note that these calculations are very conservative – although I consider to amortize a lot, I considered a fixed mortgage (which is not true, as it will go down with amortizations).

So, if I pay off the debt aggressively, every year, I will pay off the mortgage in about 17-19 years. Again, note that I considered a fixed mortgage for the entire period, which is absolutely not true (paying off debt every year would result in about €600 extra cash by the end of year 6, and €1200 by the end of year 10, for example). If I also amortized the extra cash that results from the decrease on the mortgage installments, I would end up paying for the mortgage in about 9 years time (this is not shown in the figure).

Some other bloggers have shown to pay for their mortgages as fast as they could. Others, prefer to lock 30-year mortgages and pay only what is required to be paid. They have their reasons and I understand them. I will take a mixed approach because that is what I am comfortable with. At the end of the day, I think that my master plan will work well, and this is simply another (small) piece of the puzzle.

Stay cool and rent out!

Hugs