I look at monthly cash flow before interest rates

When it comes to loans, people naturally focus on interest rates. The lower, the better. This is obvious. The larger the loan amount and the longer the repayment period, the more impossible it is to ignore the difference in interest rates.

However, I try not to compare loans based solely on interest rates. What I look at first is the monthly repayment and the money remaining in my hands after that repayment.

The weight of monthly payments changes with the repayment period

Even with the same loan amount, the monthly repayment amount changes if the repayment period is different. Shortening the period allows you to reduce the principal faster, but the monthly repayment tends to become heavier. Lengthening the period makes the monthly repayment easier, but the total interest paid tends to be higher.

It is not a matter of which is absolutely correct. It changes depending on the property’s income, available funds, repair schedules, plans to buy the next property, age, and work style.

My properties do not all have the same repayment terms. There are properties where the monthly payments feel heavy due to shorter repayment periods, and others where I have increased my cash flow by opting for longer repayment periods. Each has its own benefits and anxieties.

If the repayment period is short, the loan balance decreases quickly. This is attractive both mentally and in terms of asset formation. However, if the monthly repayment is heavy, it becomes difficult during months with vacancies or repairs. If you prioritize repayment too much and your cash on hand becomes thin, you will be unable to act when the time comes.

If the repayment period is long, monthly repayments are kept down, making it easier to retain cash flow. This makes it easier to keep cash on hand to prepare for repairs or vacancies. On the other hand, the period for paying interest becomes longer, and there is also the anxiety that the debt will remain for a long time.

Rather than interest rates, how much is left at the end

Therefore, I do not simply decide that “low interest is good” or “long-term is good.” I calculate the repayment amount. I subtract management fees, insurance, taxes, projected repairs, and a buffer for vacancies from the rental income. After that, I look at how much is left each month.

The difference between the gross yield and the loan interest rate is sometimes called the yield gap. For example, even if the gross yield is high, you won’t know how much money actually remains without considering expenses and vacancies. The yield gap is a guide for properties, but it is not the final answer. Always break it down to cash flow before thinking.

What I want to avoid most is a property with a monthly deficit. Continuing to pay out of pocket every month while only hoping for future price increases or tax savings is not for me, as someone who wants to create the option to quit my job. It is important that the business runs in the black, prepares for repairs, and leaves room for the next option.

Look at bad months, not good months

I also consider the possibility of interest rate fluctuations from the start. I also consider the possibility of continued vacancies. Neither can be predicted perfectly. That is why I do not base my plans only on good months. I look at whether repayments can continue even in bad months.

For me, a loan is not a competition to borrow as cheaply as possible. It is a means to borrow in a way that I can repay, hold the property for a long time, and increase my options while protecting my life with my dog. Interest rates are important, but I believe what is more important is whether the cash flow allows me to sleep at night every month.

Don’t decide based only on current repayments

When thinking about repayment terms, I also imagine myself a few years from now. Am I still working as a company employee? How is my side business doing? Is there a time when repairs will overlap? Do I want to keep cash to buy the next property? The answers may change, but it is better not to decide by looking only at current repayments.

Having thick monthly cash flow does not guarantee success. The results change depending on what you use the remaining money for and how you prepare for repairs. Conversely, if you pay back the principal quickly but run out of cash on hand, you are vulnerable to unforeseen circumstances. That is why I repeatedly review the balance between repayment and cash.

Loan conditions differ by property, person, and time. Do not copy someone else’s conditions from a blog. Calculate your own bad months using your own income and expenditure statement. If you choose after doing that tedious work, both the repayment period and the interest rate become part of your business plan, not just numbers.

That is why I review the numbers many times before signing a contract. A way of borrowing that keeps me awake at night does not suit me.