What is Principal Paydown?
Principal Paydown is not the feared leader of your elementary school, and while it *does* sound like a pretty cool WWE title, principal paydown is in fact an investment term. More specifically, principal paydown is another facet of the five profit centers of real estate investing.
How to Make Money in Real Estate Through Principal Paydown?
Here at JWB, we know the way to win in rental property investing is to buy and hold for a full market cycle, or 10-20 years. The reason for this is layered, but let’s start at the inception of a mortgage. Mortgage loans come in a variety of options with rates being fixed or adjustable and loan terms contrived from 5-30 years. Because most mortgages are conventional in length, a majority do conform to the typical 30 year time frame.
FUN FACT: In case you didn’t know, when you pay for a mortgage, so much of the money you put towards your mortgage payment is interest. They call this “front-loaded” which means you don’t really pay off the house until substantially later in the process, typically around the 12-year mark. (Yes, we know, crazy!)
Understanding Principal Paydown
Let’s put you in some landlord shoes. You buy a house, you hold onto it for 12 years, you reach the benchmark where (all things equal) the majority of your rental income is now going towards the principal on your house and not just the interest. Suddenly years 12-20, you own an income producing property (cash flow FTW) that’s also proffering you equity.
You see, when the principal gets paid down, you now “own” that money in your house; it’s equity. If this were your own home that you lived in, the ownership doesn’t change, it’s always been your money, and your equity. But when you own the home, and it isn’t your money footing the mortgage bill, suddenly that principal paydown looks a lot like free money.
(It both is and isn’t, technically, you still pay your mortgage, but you can think of rental payments covering that mortgage as a reimbursement to your own monthly payment. Then the equity that you receive as the owner of the home, is “free” in the sense that you aren’t paying for it.)
And when you own that property for a full market cycle, that principal paydown grows and grows year over year: just look at this. Principal Paydown is incredibly literal and seems almost too good to be true.
Why Doesn’t Everyone Invest in Real Estate?
So, now that we all understand the insane benefits you get from investing in rental properties when you have someone pay down your principal, I mean, what’s stopping you?
The risk? Yeah, nothing is without risk, and renting your home to another person doesn’t absolve you of the responsibilities of homeownership. You essentially become the landlord, and as we all know from our experiences with renting, landlords never seem to have the time or money to make your home more livable.
How Does JWB Ensure Principal Paydown is Easier for You?
Well, we’re glad you brought it up, because here at JWB, we aren’t landlord that’s too tired. You see, we’re vertically integrated, and you can read all about that here, but what you need to know is that we handle the entire investment process from the purchase of your properties, right down to the day-to-day maintenance.
We’ve got you and your future residents covered. So, what are you waiting for?
But in case you need even more incentive, follow along in the rest of our series for part 3: Home Price Appreciation, where we’ll show you how to make even more money in rental properties.