Real estate investors enjoy many benefits by owning real estate investment property generally including short and long term revenue streams, annual income tax deduction allowances, a monetary hedge against inflation, and the pride of ownership with being a landlord.
In this article, though, we’ll look at a somewhat more obscure benefit afforded real estate investors known as loan amortization because it might not have been considered by novices thinking about real estate investing.
What is Loan Amortization?
Loan amortization is the liquidation of a debt over time by an installment of payments over time. Here’s the idea.
Typically all real estate property financed consists of a loan payment comprised of both interest and principal. Therefore, each payment made by the owner satisfies the lender’s yield along with some amount of principal reduction to his or her mortgage balance.
As a result, each loan payment that includes both interest and principal chips away at the balance of the loan until finally (after so many years) the mortgage is completely satisfied, the debt is paid off in full, and the loan amount no longer exists.
You might have experienced this concept if you financed a home. That a thirty-year fully-amortized fixed rate mortgage would be reduce the principal to zero after three hundred and sixty payments and the home would be yours, debt-free without a lender to answer to.
Debt Service (total mortgage payment)
less Interest Paid (for the bank)
= Loan Amortization (your loan’s principal reduction)
Benefit to Real Estate Investors
Okay, but unlike your personal residence where you alone must make the principal payments to reduce the loan in usually monthly installments, as a real estate investor you gain a notable benefit.
For it is not you, but your tenants who make those monthly payments and pay down your mortgage. Think about it.
Each time one of your tenants makes a rent payment to occupy one of your rental properties they are essentially helping you to own the property outright.
In other words, your tenants are not only paying your bills, they are paying down your mortgage and in turn adding more equity you have in the real investment property.