I have a loan on a commercial NNN property. 6.5% over 8 years (amortized
over 25)
I have about 25% equity in the property already. The question is should I pay
down the loan so I can enjoy the 8% cap rate of income that I am receiving on
the property?
My original thought was to use any extra money I had to pay this down as
opposed to putting it in the stock market, but maybe it’s not the best move
since it ties up my capital?
Re: Paying down the Mortgage note? Good Idea - Posted by ray@lcorn
Posted by ray@lcorn on August 17, 2011 at 09:06:38:
John,
That depends on several variables, some of which will be personal to you.
Foremost consideration is whether there is any pre-pay penalty on the loan. if so, that may obviate any further consideration.
If no penalty, there is still the hurdle of whether you’re talking about a partial pay down or in full. If the former the payment amount probably won’t change. So you won’t really increase cash flow, just equity.
If you’re talking about a payoff in full, then the decision comes down to relative yield. Ex: If the debt service is $125,000 per year and the payoff amount is $1,000,000, then you’re gaining 12.5% yield on the cash required to pay it off. Note that this is internal to you and does not reflect the investment’s actual return.
Last, consider the tax ramifications. Paying off the mortgage will affect your (or the entity which holds the property) taxable income. This is not generally a deciding factor, but should always be considered.
I’ve decided not to pay down my mortgage. The reason being is that
too much of my capital will be tied up in real estate, so I won’t be as
liquid. Secondly it’s a hedge against risk…Meaning if someone were to
sue me they can only go after the equity in the property. And I guess
3rd, I don’t need the extra income right now even if were to pay it off.