When looking at your rental portfolio, or, your note portfolio (when you have underlying debt services on them) , how do you know which ones to pay off first? Balloon dates? Interest rates? Lowest ROI’s ?
I use something called the Cashflow Index calculator. This takes into consideration the interest rate, but more importantly, the efficiency of the loan.
One thing I am constantly studying is real estate finance, and investment finance. And using this strategy has been really nice to help me know which of my loans are the most efficient, and which ones are not. Real estate loans are a wonderful way to use leverage, and using this CFI calculation on your loans (leverage) can help you manage them.
Its very simple.
Take the balance of the loan, and then divide it by the payment. This will give your CFI number. The higher the number, the more efficient the loan is . (again, from a cashflow perspective)
125,000 balance / $859 payment = 145 CFI
70,000 / $710 payment = 98 CFI
So the point is to focus on the CFI when looking to pay down your debt service.
Another way of looking into this, and perhaps the way you may have heard before is calculating the Loan Constant. Again, its a measurement to determine the efficiency of a loan. For the loan constant, do the opposite calculation of the CFI. Take the payment and divide by the loan balance. In this instance, the lower the number the better.
I am always open to learning new strategies and techniques. Do you have your own way of managing your debts? Do you have a better strategy? Let me know…
I hope this helps, and as always