*Below is to show an example in a particular situation. In real life, you may have to consider your unique case and consult with an appropriate professional.
At the last blog, everything being equal, I wrote about why buying multiple houses generates more cash flow than paying off one house. In this blog, I will talk about the hidden benefit of purchasing multiple properties than just paying off one home.
I will use the same scenario where you just got $200,000 mortgage for your primary residence and right after that inherited $200,000. If you use the money to pay off the house, and with $250,000 market value for the home with 3% what kind of appreciation would you get? 3% of $250,000 is $7,500. Since the appreciation does not change whether you pay off the mortgage or not, you will get $7,500 equity no matter what.
However, what happens when you use the money to buy multiple rental properties? Using the example from the last blog, you will be able to buy 7 more rental properties with $100,000 market value each. Using the same appreciation rate, you will get 3% of $100,000, which is $3,000 equity per rental property. Since you can buy 7 properties, the total equity increase will be $3,000 x 7 rental properties = $21,000 equity. On top of that, you will get $7,500 equity increase from your primary home, so that will be $7,500 primary home + $21,000 rental properties = $28,500! That is almost 4 times more than what you can get by paying off the mortgage.
This gain is not money in the pocket, as it is equity, and unless you pull it out, you will not be able to use it. That said, what you should do with the inheritance should be pretty straight forward. Plan A will give you $7,500 equity, while Plan B will provide you with $28,500 equity. Everything else being equal, you should pick Plan B.
So far, the buying multiple rental properties will produce $11,659 extra cash-flow and $21,000 additional equity or $32,659 more than what you get by paying off the mortgage. However, there are more benefits of buying multiple rentals compare to paying off the mortgage. More to come in future blogs.
