Principal Reduction – The Sweetest Benefit of Investment Property

As we have discussed before, there are four main benefits when you own investment property that add up to one big benefit in the end…security for you and your family. Again, the Big 4 are Cash Flow Before Taxes, Principal Reduction, Depreciation and Appreciation.

But let us talk, just for this post, about Principal Reduction. Assuming you have purchased the right property (not the one mentioned here or here) your other three benefits are kicking in. But PR is my favorite. Not necessarily the biggest return…but my favorite. Why? BECAUSE SOMEBODY ELSE IS BUYING YOU A HOUSE IN YOUR NAME!!!

Think about this. Every month someone scribbles a check to you for rent. Inside of that check is your interest due, your extra cash, your expenses AND an amount that is designated towards your principal. Not a great amount at first, but pay down they do…for you! (Unless, of course, you’ve gone with a negative am loan…which I’m not too crazy about for our market here in Kansas City. I see cause for them on the coasts…but not here…in most cases…of course everything is a case by case basis…have I covered all my bases yet?)

Month after month, lease after lease these people (we’ll call them tenants) are going to work, earning money and helping you to purchase a house so that when you are older you can retire in comfort. Personally, I think it’s awfully nice of these tenants to do this and that is why I don’t mind the occasionally call from them about this or that.

What are your thoughts on the subject, Hobson?

3 Comments

Filed under 4 Benefits of Real Estate Investing, Investment Property, Kansas City Real Estate

3 responses to “Principal Reduction – The Sweetest Benefit of Investment Property

  1. Jeff Brown

    Chris – I think you set out the subject well. I have an alternative approach.

    What would be the be the comparative return if the investor had been able to buy TWO rental homes instead of one because the loans had NO principal paydown?

    Appreciation on twice the original value, but using the same initial capital would give your investor twice the profit.

    At that point a little principal paydown probably wouldn’t even register on his radar.

    Again – great post.

  2. Chris Lengquist

    Jeff- I know your point…and truth be told I have used that approach on my personal properties before. (Two to be exact.) However, my conservative approach likes/loves the principal reduction.

    And maybe that is more of a “midwest thing” but 99% of my clients seem to feel the same way. Probably because our properties are considerably more affordable.

    Your comments are well respected. I would say it comes down to the criteria and goals of each individual investor. And if you know your criteria AND your goals the answer will appear before you. (It seems most people try to do it backwards. They buy the property with whatever loan and then see how it fits into their goals/criteria…if at all.)

    Thanks for your input!

  3. Pingback: Tax Time Has Tax Consequences « Kansas City Real Estate Investing

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