Paying down the principal on debt is a second way we grow the value of our assets.
We use appropriate, but significant leverage to purchase our multi-family properties. We borrow money from the “banks,” often with agency funding from Freddy Mac or Fannie Mae.
Each month we make a payment on these long-term loans. Part of the payment is an interest expense and part is the paydown of the principal owed.
In effect, our residents are paying off our loans for us. In the early years of the 30-year, 5% loan of $4 million, the amount of principal is not much, about $50,000. By year 5, the loan will be reduced by $300,000. This is a significant growth in the equity on the property. By year 10, $700,000 is being added to the equity as the debt is reduced.
This amortization of loan increases the equity we have in the property – another wealth builder with a leveraged real estate investment.
“Real estate investors have historically been given preferential treatment by the tax code,” says Nick Sher, founder of New York-based Sher & Associates. “All things being equal, 2018 tax reform only enhanced that preferential treatment.” (https://money.usnews.com/investing/real-estate-investments/articles/2018-03-30/theres-no-better-time-to-be-a-real-estate-investor)