Tenant Buydown

What it is

On that $240,000 loan, you have to pay the bank every month — principal, interest, taxes, and insurance. The principal and interest alone is going to be about $1,300 a month on a $240,000 30-year mortgage. But if the tenant pays $2,300 a month in rent and you figure about 60% of rents is what you’ll actually collect after management, maintenance, taxes, insurance, capex, and vacancy — that’s $1,380 going into your pocket. Mortgage is $1,300. So you have a cash flow of positive $80 a month.

That is what I call the tenant buy down. The tenant is literally paying for that house for you.

Mechanically, every amortized mortgage payment splits into two parts: interest to the bank and principal against the loan. In early years most of the payment is interest. As you get to the back half of the loan, you start paying more of the actual value, more of the principal down. You start to create more net worth. The tenant funds both sides of that split the whole time.

Why it matters

$80 a month actual cash flow doesn’t sound that great, I know. But who cares? You get to take advantage of all that appreciation and all of that debt buydown over the next 30 years and get wealthier and wealthier and wealthier. I don’t care about the cash flow today. I only care that it is net positive. If it’s net positive by $1, I will buy that deal.

This is the quietest line item in the whole solo house flipper model, and it might be the most important. The three advantages real estate has over everything else are the equity gap, cash recycling, and the tenant buy down. Stocks just get appreciation. Real estate gets all three stacked on top of each other, plus leverage.

After 5 years on a portfolio like that, you’d have $790,000 in equity. At 10 years, $1.9 million. At 30 years, $10.15 million. That math doesn’t work without the tenant buying down your mortgage the entire time.

The other reason it matters: it’s automatic. No action required. A tenant who stays for five years quietly pays down principal while you sleep. Compare that to a flip, which requires active work every month to produce income.

How it shows up

The 30-year timeline is why I use it as the example in the wealth calculator. You buy a $300,000 house with 80% bank financing. 30 years later, after the tenant has funded every mortgage payment, that mortgage is paid to zero. The house appreciated over the same period to $728,000 at 3% per year. Every dollar of that wealth — the paid-off loan, the appreciation — the tenant handed to you through their monthly rent checks.

The secret isn’t complicated: buy right so the rent covers the mortgage plus the 31 percent rule bite. Put a qualified tenant in. Let the amortization run. Don’t over-borrow. Don’t equity-loot through cash-out refinances that reset the clock. Just sit and collect.

That’s actually the whole solo house flipper model in one move. Flip to build the cash cushion, hold to let the tenant buy down the debt, repeat until the portfolio is free and clear.

Related

wealth engines, market appreciation, forced appreciation, cash flow, rental income, 31 percent rule, equity gap, cash recycling