Re: Two questions… - Posted by Dave T
Posted by Dave T on June 14, 2006 at 23:20:18:
I see your “problem” differently. You don’t really want to be debt free, I think you really want to maximize your cash flow. You are just using a debt free solution to get there.
You don’t give us any numbers to work with, so let me just pick some numbers to illustrate another option.
Let’s say that the sale of your current primary residence will net you $150K in tax free profit.
Let’s say that the 4-plex produces sufficient cash flow to comfortably support the property when you have all units rented. Let’s say that the monthly mortgage payment on your four-plex is only $600 per month, and your cash flow is about $200 per unit (or $800 per month for the property when all four units are rented), and you have 15 years left on your current mortgage.
When you move into one of these units as your primary residence, your cash flow drops to $600 per month because you are only getting rent from three units. Paying off your mortgage on the four-plex adds another $600 per month to your cash flow because you have eliminated the mortgage payment, bringing your total cash flow to $1200 per month.
Instead of paying off the mortgage loan, what if you invested the $150K proceeds from the sale of your primary residence into three or four Canadian Royalty Trusts (purchased on the stock market) so that the current yield on your investment will be 10% or better.
An advantage of these Royalty Trusts is that they pay dividends monthly – every month. A 10% return on $150K invested cash is $15000 per year or $1200 per month.
Note, that paying off your mortgage only increases your cash flow to $1200 per month. By investing your sale proceeds instead of paying off your mortgage, you will still have the $600 monthly cash flow from your rentals AND you will have another $1200 per month income from your stock market investments.
If maximizing your monthly cash flow is your true goal, paying off your mortgage is not always the best way to get there. If you have excess cash flow, you can always contribute a little extra each month to debt reduction if you wish.
Look at this strategy from a different perspective. What will you have in 15 years if you pay off your mortgage now – you will have a free and clear property.
If you follow the investment plan I suggest, in 15 years you will have that same free and clear property, but you will ALSO have a stock market portfolio worth about $600K (with only a modest 10% average annual appreciation) that will continue to throw off dividends of at least $15K per year, probably more because successful companies tend to increase their dividends to attract and retain investors.
Just food for thought. In case you are wondering if this really works, my wife and I are doing this now. We invested $180K equally among 20 different stocks that will pay us a total of $18016 in dividends and interest this year (before taxes). The monthly income from the investment completely covers our monthly mortgage payment on our primary residence. If I applied all the income to our loan, I could reduce the term of our mortgage from 26.5 years to 10 years and one month.