• Does your employer match your retirement savings?
• Do you have any debt other than your mortgage?
• Do you think you could get a better return on investment in other things?
• Do you have an emergency fund?
• Do you currently owe more than it’s worth?
• Does the amount of mortgage bother you?

The first three emphasize that if there are better investments (with a higher ROI) than your mortgage interest, you should invest in those instead. The fourth emphasizes that it’s good to have an emergency fund (they recommend 24 months, which is quite conservative). These all make good financial sense to me.

The last two seem entirely personal.  I don’t see any advantage, except psychological, to pay it off if it’s underwater. After all (and I’m not advocating this), you lose the option of doing a short sale if you do decide to move, and if you have the extra cash you can always pay it down when you do decide to move.

In my case, I see my three rental properties as businesses, and mortgage is a business expense that’s paid for by the rental income. By leveraging these investments, I was able to buy three houses instead of just one, and with interest rates this low I’d rather have the cash to invest in other things with a higher than 5% ROI (like more houses!). That said, I might start to pay down my mortgages when house prices go up and it no longer makes sense to buy rental properties.

So, in my case it’s a business decision to leverage as much as possible, but I can certainly see the emotional argument to pay it off and be debt-free (especially for a personal residence, and when I get closer to retirement).

1. Cash Flow – Money earned each month after mortgage, taxes, insurance, maintenance, and other expenses.
2. Appreciation – Money earned by selling the property for a higher price than you paid.
3. Loan Amortization – Money paid each month by your tenants towards the principal on the loan (not the interest).
4. Tax Shelter – Money saved from various deductions including mortgage interest, maintenance, and depreciation.

I expect to go into each of these in more detail in future posts, but it’s important to understand these basics, and it’s interesting to evaluate a given property along all four dimensions.  I might also add a fifth dimension, which is hedge against inflation — if you have a fixed-rate mortgage and the price of EVERYTHING goes up, then you’re getting even more money in rent/appreciation, but paying relatively less in mortgage.

Different investment strategies might emphasize different dimensions: for instance, a fix-and-flip strategy would focus on appreciation.  I’ve been focusing on single family residence rentals, and here’s an evaluation of my properties along these dimensions:

1. Cash Flow – I’m getting some cash flow each month, though much of it gets eaten up by periodic repairs.  This will grow over time, as rents go up but my mortgage payments stay the same.  I would never want a property with negative cash flow; it would become a burden to pay every month and I wouldn’t enjoy it.
2. Appreciation – I don’t expect any appreciation any time soon in the current economy, but I’m not planning to sell any time soon either.  This could be a major plus when the economy turns around.
3. Loan Amortization – My loans are new, which means that most of the payment is going to interest rather than principal, so I’m not getting much value in amortization yet, but this will change over time.
4. Tax Shelter – The flip side of my mortgage payments being mostly interest is that I can deduct all that interest. I can also deduct things like insurance and repairs, and I also depreciate the value of the house and any improvements.  In my first year, I didn’t end up paying any taxes on the income earned from my tenants due to these deductions.

After a few panic calls to my dad and a friend for advice, I decide to call the only plumber I know of from their well-marked vans that I’ve seen driving around on the highway – Roto-Rooter.  They come out the next day, and after a couple slow hours, they’re able to clear it enough that it will drain somewhat but warn me that they haven’t really fixed the problem.  I’m out $600 for a service call that was less than 3 hours, and didn’t involve any materials.

A few months later it happens again, but this time I know better.  I ask around for recommendations, and also look in Yelp to get contractor ratings.  I choose a contractor who is both recommended by another landlord and who has good ratings online.  They come out that night at 7, try to snake the problem and determine that the pipe is broken somewhere under my yard. They can’t fix it that night, but are out the next day for the whole day (with an assistant), dig a small hole in my yard, replace the broken pipe, and the problem is permanently fixed (they even replaced the sod over the hole they dug). This time I’m out $700 (including materials), but the problem is fixed, not just patched.

Repairs are a cost of doing business, and I try to get them done promptly to keep the tenants happy. But there are a few lessons learned from this scenario:

1. Don’t blindly trust the name brand corporations.
2. Ask around for good recommendations.
3. Use rating services such as Yelp to find quality contractors.

What do you think?  Any other advice for good repairs?

1. Know your options. There are different strategies depending on whether you want to be a landlord, or restore and resell properties. In my case, I chose to focus on rental properties.
2. Partner with experience. Work with an agent who has the right experience, or partner with an experienced investor. I did both — worked with a friend who also started investing in this market, and found a real estate agent who also does the same. We regularly share ideas and advice, which sped up the learning curve greatly.
3. Look for the right location. For rentals, they suggest to stick to high population areas, houses with multiple bedrooms and baths, and near amenities like shopping areas and public transportation. I chose to focus on single family houses in a working-class neighborhood, and found that 4-5 bedrooms seem to bring the most profit due to the type of renters that I am targeting.
4. Have capital lined up. Perhaps easier said than done in this economy, but you should expect there will be months when the property isn’t rented or sold, and you’ll have to pay the mortgage. They suggest keeping six months of mortgage payments saved, in case you need it for an emergency. You don’t want to stretch yourself too thin, and become another victim of  buying more than you can afford that caused the housing bubble to burst in the first place.
5. Build a supporting cast. You need to have good, fast, and affordable contractors available for renovations and repairs. I’ve worked with my “partners” (my agent and my friend) to find good contractors, and used services like Yelp to get others when an emergency arose. They also recommend that you might need an attorney or accountant, but I haven’t needed them yet.

What do you think?  Have any other good tips for new investors?