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I Paid Off My First Rental Property! (Here’s How… and Why)

by Mark Ferguson on February 9, 2014 · 104 comments

  
Pay Off Rental Property

This week was an exciting week for me as I was able to pay off the first rental property I purchased!

I purchased the home in December of 2010 and paying it off three years later was right in line with my long-term plans.  I have been looking forward to this milestone for a while and it feels good to have reached it!

How I Was Able to Pay Off This Home So Quickly

I bought this property for about $96,000 and put 25% down (my mortgage broker convinced me to put more down for a lower rate).  

I have had it rented for $1,050 and $1,100 since I bought the property and my payment with taxes and insurance has been about $500.  The home has needed very little maintenance and has never had a vacant month!  I would still have  a long way to paying off this house even if I had a full $600 dollars extra each month to put into the mortgage.  I also used the cash flow from my other rentals to pay off the loan.

I Have Big Goals!

I have a lot of goals and a lot of big goals.  

One of them is to purchase 100 rental properties by 2023, which Kenny Estes brutally criticized here.  I love Kenny and I think he made a lot of great points in that article, but I still think its good to have big goals and I explain why in my article here.  

Because I want to buy so many properties, I need to get a lot of financing and most of us know that can be difficult in today’s market.  It is tough to get more than four, more than ten and especially more than 20 mortgages.  I am lucky that I have a lender who will give me loans on as many properties as I can qualify for right now.  I don’t know if their policies will last forever and paying off my mortgages quickly will give me a better chance to get more loans if things change.

How Do I Pay Off My Loans Quickly?

I use the snowball method to pay down one mortgage at a time.  

I take all the cash flow from my 8 rental properties and use it to pay down one loan at a time.  I don’t save any of my cash flow or reinvest it in other properties, I use my income to do that.  Now that I have my first rental property paid off, I will take the additional cash from that property along with the cash flow from my others properties to pay off one of my other rentals.

Why would I pay off my loans so quickly if I want to buy so many properties?

I get this question all the time!  

People tell me I should be saving all my cash flow to buy more properties, but I don’t for a couple of reasons.

1.  My lender only offers me ARMs because I have ten mortgages in my name right now.  I prefer to use five year ARMs with a 30 year amortization.  Right now rates are low, but I don’t know what they will be in the future and I want to get my ARMs paid off before they adjust.

2.  Like I mentioned before, with ten mortgages in my name it gets much trickier getting loans on new properties.  I have a great set up now, but I can’t count on that lasting forever.  With fewer loans in my name it makes it much easier to get new loans.

3.  When I pay off a loan my cash flow increases greatly!  I now have $400 more a month cash flow than I did before I paid off this loan.

4.  With a house completely paid off I look great to banks.  That loan I just had is off my record and my ratios all look much better for qualifying on a new loan.  I can also get a line of credit on the property and still use the equity when I need it.

What About Buying New Properties?

My biggest problem right now is finding deals, not the money to buy them.  

This may not apply to everyone, but for me it makes more sense to pay off one property at a time.  If I did not have the money to invest in more properties and I was just starting out I would save my cash flow and build up as much cash as I could.  Plus I mentioned getting a line of credit on the house I just paid off.  That line is actually in progress now and the home appraised for $160,000.  I can get a line of credit for up to $120,000 and I will have plenty of money for down payments if I need it.

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{ 104 comments… read them below or add one }

Glenn Schworm February 9, 2014 at 6:48 am

Congrats Mark on paying off your first one! I think that is an awesome plan and while I am not familiar with your discussions with Kenny, I agree with you that big goals are necessary if you want to achieve great things. Way to go, one down, 99 to go.

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Mark Ferguson February 9, 2014 at 8:32 am

Thanks Glenn! Kenny and I are on good terms we just have different strategies for achieving goals. I think our strategies are actually more similar then we thought when we discussed them, we mostly expressed them in different ways.

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Joe H February 9, 2014 at 6:50 am

Okay Fertuson, I’ll be the one to ask: you have an emergency fund set aside for capex and reserves instead of contributing periodically? Or did you wait to have that emergency fund in place before starting the snowball? I have same trouble borrowing money, with 10 financed properties, even though I only have six mortgages in my name. I see more deals than I can fund and am now compelled to do JV. But like you said, having a plan to achieve a goal takes the sting away from giving away equity.

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Mark Ferguson February 9, 2014 at 8:35 am

Hi Joe, I had an emergency fund before I started to snowball. That’s a great question. I have to admit at one point I did dip into that fund one time to pick up a great deal.

Have you tried looking for local banks?

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Joe H February 12, 2014 at 7:28 pm

Hey Mark. Oh man have I tried local banks. Community banks, Credit Unions, hard money folks only do 65% and the rates are outrageous. I’ve reconnected with a private money long-term lender so it’s promising, also have a year three tax return with only three rehabs instead of seven so I should be on the glide path.

I’m realizing that there is an endgame, where the collection should be mostly paid off.

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Mark Ferguson February 12, 2014 at 7:43 pm

That is frustrating! You have probalably tried, but I would call local banks and search for portfolio lenders all throughout your state. They don’t have to be in your town.

John Thedford February 9, 2014 at 7:22 am

Congratulations. Isn’t that a good feeling to have one free and clear!

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Mark Ferguson February 9, 2014 at 8:36 am

Thanks John! Yes it is a great feeling!

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Abbott Mary February 9, 2014 at 7:45 am

Mark congratulations on your first free and clear property! As a newbie trying to figure it all out, i have a few questions for you.. if you don’t mind. What kinds of risks do you plan for with your strategy? and what are your “back up” plans? Also you said you saved money from your income to put down payments on new properties. Let’s say you didn’t have an income, do you think the correct choice would be to “snowball” all your rental cash flow into down payments of new properties until you have your ideal cash flow (after all debt is paid) and then and only then begin to put cash flow into paying off your mortgages? Or would you have to change your strategy entirely? Great article though, thanks!

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Mark Ferguson February 9, 2014 at 8:42 am

Hi Abbot, to start out with I would save my cash flow for an emergency fund fist an then towards down payments. At some points I would start paying down mortgages depending on my lending situation and how many loans I could get. There are many variables to consider; returns in your area, qualifying for loans, level of risk you take on etc.

I personally don’t see much risk in my strategy because I usually end up with 50 to 60 loan to values on my homes adter down payments, built in equity and improvements.

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Jordan February 9, 2014 at 7:59 am

I really like this approach, you usually hear it the other way around. To me I think it pays off in the long run, that’s one let’s mortgage you have to worry about. Congrats to paying off your first rental free and clear!

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Mark Ferguson February 9, 2014 at 8:43 am

Thanks Jordan!

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Sharon Tzib February 9, 2014 at 8:22 am

Congratulations, Mark! It’s nice to see someone who has goals actually accomplish them. Appreciate you sharing your strategy. What’s your take on losing the mortgage interest deduction as you employ this strategy? Does it affect your effective tax rate significantly? It’s the only potential downside to this strategy I can see, if one doesn’t need to use their cash flow for new investments, as you don’t.

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Mark Ferguson February 9, 2014 at 8:46 am

Hi Sharon, my feelings are that I am increasing profits, not losing tax deductions. With any business the more profits you have the more taxes you will pay, but in the long run I would rather have a really high profit and really high taxes then no profits and no taxes.

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Sharon Tzib February 9, 2014 at 8:51 am

Well I have to say I agree with you there. My dad was a business owner, so he told me at a young age that the more money you make, the more taxes you will pay, so enjoy paying taxes lol!! I guess I’m just a sucker for those write offs :)

This is definitely a strategy I can see myself employing down the line (not right now, as I need the cash flow to invest), so again, thanks for sharing.

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Mark Ferguson February 11, 2014 at 3:54 pm

Sharon, I agree with your dad! Although I don’t like paying taxes, they are a sign of making more money which I do like.

Dennis February 9, 2014 at 8:25 am

100 free and clear properties, you want to be Rockefeller?

I agree 100% pay them off as quickly as possible, the bubble allowed me to sell three (junk) properties. The proceeds of these went towards paying off three good properties, if only the bubble had lasted just a while longer all would be paid off.

At the present time I am buying businesses, and so becoming a tenant.

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Mark Ferguson February 9, 2014 at 8:51 am

I would need about 200,000 properties to be Rockefeller. Rockefeller and Carnegie were in a contest to see who could give more of their money away to charity and te public good. That’s not the worst thing in the world.

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Frank February 9, 2014 at 9:21 am

I like the idea of paying principle however I try not to be too aggressive. The reason is because of tax liability. If your cash flow for a portfolio of properties is $60,000 for the year (including phantom appreciation) and you use the cash to pay off a mortgage then your screwed come tax time. The principle is not a write off. Wouldn’t it be nice if the IRS let you deduct principle payments over and beyond your scheduled monthly payment.

Nothing wrong with free and clear properties…

Frank

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Mark Ferguson February 9, 2014 at 3:12 pm

Hi Frank, Your right the principal is not a write off, but the only way for the money to be counted as a write off is if it was used for expenses right? If it were used for more down payments it would not be a write off either? Even though I stop receiving the tax break for the interest on the loan, I am making much more than that tax break would provide me in increased cash flow.

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Sharon Vornholt February 9, 2014 at 10:06 am

Mark-

I think your plan is great. My hat’s off to you for getting one paid off so fast. I believe that if more people had a “plan” for their business, they would hit bigger goals faster.

This always brings up the question, “How many paid off properties in good areas do you need to have a great lifestyle? That is all you need, and you will have a whole lot less headaches too. Nice post.

Sharon

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Jim Walker February 9, 2014 at 10:56 am

Mark,
So it has been left to me to be the thrower of cold water.
At the 3 year point, you had about two more years of a low rate. If you obtain new purchase money financing for the next deal will you be able to match or improve on that rate?
If you obtain new purchase money financing you will pay loan origination costs for borrowing new money that you would not have had if you used your loan payoff money to buy the next property for cash.

Example: Mark Payoff Scenario:
Pays off $150,000 loan on property A. Turns around buys additional $200K property with new loan of $150,000. Cost of loan origination, processing, appraisal, lenders title insurance for new loan: $3,000
Cash scenario: Leave old loan in place. Use the payoff money to loan to self.- no points, no loan fees. Cash offer, with no appraisal or loan contingency allows Mark to negotiate price down to $195,000.
Mark would be $8,000 to the better to keep the first rental house loan in place, and simply use cash to buy the next property.
Marks payoff scenario makes sense if the new interest rate on the new loan is far below the rate on the old loan. In the above scenario, with two years left before adjustment, it must be at least two and a half percent better if the cash offer results in the $5,000 purchase price saving that I imagined or just one percent better if there is no benefit to making a cash offer.

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Mark Ferguson February 9, 2014 at 3:30 pm

Hi Jim, I could do that. I am able to pay cash if needed right now if I think it would make a big difference on the price I could get. The most I have ever paid for a rental is my 9th which is under contract for around $133k.

You may be right about the savings, but it does look better to have a loan being paid off to the bank I believe. You made my brain hurt a little thinking about it.

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Sharon Tzib February 9, 2014 at 3:47 pm

Mark, if I’m doing my math right, you have a goal to buy 100 properties in 13 years. There’s no way you can do that without leverage (unless you make crap loads of money – and maybe you do lol!), but paying all cash will significantly slow down the time frame you can purchase in.

Also, the points, fees, etc are all tax deductible – helps offset your lack of mortgage interest deduction. And who knows how long rates will stay at this level. You might as well pay off the ones you can and then get more at this low rate. Have you discussed with your portfolio lender how many loans until you “hit the wall” with them (at this moment in time)?

I totally get what you’re saying, Jim, and it’s interesting seeing both sides of the coin here. But sometimes you have to spend money to make money, and I think for what Mark is trying to do, what he’s doing makes the most sense for his goals at this time. I think having the ARM’s is the biggest rub here, but if that’s all his lender will give him, then….

Mark Ferguson February 9, 2014 at 3:53 pm

Sharon, You are correct. I have to use leverage. I think Jim is saying I should continue to buy homes with leverage, but also use cash I save from cash flow instead of payoff a home. He is saying it would have the same effect I am looking for, but be cheaper due to less costs. He may be right, but I will run into multiple houses coming due in the following years, not just one and I think that is where the ARMs could significantly decrease my cash flow at that point. To stay ahead of the game I chose to do it this way.

I have thought about it and if I was able to invest the cash flow into something that made decent returns in the mean time, that may be advantageous. The question is how much risk do I want to put that money meant for payoffs at?

Mark Ferguson February 9, 2014 at 4:15 pm

Sharon, My portfolio lender has “no wall” right now. They said they will do as many loans as I can qualify for.

Mark Ferguson February 9, 2014 at 3:14 pm

Hi Sharon, Thank you! It all depends on what you consider a nice lifestyle. I like to push things and I am very competitive. I think a lot of it is pushing myself and not just creating a lifestyle.

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Jonathan February 9, 2014 at 10:24 am

Hello Mark
Great article, my goal has always been to be successful in real estate rentals, I currently have one now with good cash flow. My problem is not finding good deals it’s finding the financing. How to you continue to get mortgages, I would be happy if I could just get one more for my next purchase. Congrats!

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Mark Ferguson February 9, 2014 at 3:32 pm

Hi Jonathon, Are you having trouble qualifying or finding a lender that does multiple rentals? I have a great local lender.

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Tim February 9, 2014 at 11:19 am

Great job Mark. I too was very excited when I got my first free and clear property. You are right. The banks do look at you differently. They look at you as a professional, an expert, someone who knows what they are doing and someone they are not afraid to work with in the future. It really does make a difference.
I currently have 11 paid for free and clear. My strategy is to take a 7yr ARM (which my bank lets me do because of my history with them) put about 10% from each property into a reserve (over and above what I really need for taxes, insurance and capital reserves – did I forget to mention that I do not have to escrow taxes or insurance with this bank due to my history). When the balloon comes due I can either roll it over or pay it off with the reserves (accumulated from all properties). I have been paying 1-2 per year off this way for about 4 years now and the bank loves it. Because of this strategy, I have accumulated a total of 66 houses. That is 17% free and clear and the rest with LTV anywhere from 10% – 60%.

Another strategy I use is this. ALL my mortgages start out with a 20 year amortization. When a balloon comes due after the initial 7 years and I chose to roll it over, I keep the payment the same even if the interest rate has gone down. This pays the balance down faster and I have become uses to the cash flow it was generating so I am not losing anything. Now I have a 13 year amortization with an extra $10-$50/mo going toward principal for the next 7 years. By the end of that time, I will most definitely pay it off.
Sorry to be so long but wanted to share with everyone other ways to get the same results.

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Mark Ferguson February 9, 2014 at 3:35 pm

Tim, Thank you for sharing your strategy! I am curious what you do with the cash when it is accumulating. Do you invest it in something else?

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Robert Anders February 21, 2014 at 10:13 am

How do you manage 66 properties? The keys alone must be daunting.

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mark ferguson February 21, 2014 at 12:02 pm

Robert, I know quite a few investors who have well over 100 houses they manage themselves. It can be tricky, but if that’s all you do it seems to work well for them.

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Brad 20,000 Grayson February 21, 2014 at 9:27 pm

Robert,
If this helps, I manage 400 locks with iCore locks. Swap out the core in seconds with a special key (no tools or skill required!) and a masterkey system which lets me into ALL my units. Replacement keys arrive by mail in a day or two. A few bucks more than Lowes but the freedom due to better quality and convenience makes me more profitable.
Easy swapping means every resident gets fresh locks – reducing my liability and Momma LOVES fresh locks on her new home!

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Jeff Rabinowitz February 9, 2014 at 12:45 pm

I have unencumbered rental properties myself so I understand the comfort of collecting several thousand dollars more in monthly rent than your monthly nut but I don’t understand why it is an advantage to go through the mortgage process, pay points and closing costs, then pay the loan off early if you are planning on applying for another mortgage and paying more fees to borrow the same funds after a short period of time. Yes, it may be easier to qualify for the next loan (depending on the lending environment–it also may be more difficult) but you already qualified for those funds once. Why go through the process again?

There is a drawback to having many unencumbered properties. They may become the targets of lawsuits. Make sure you give some thought to your asset protection strategy as you build your portfolio.

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Mark Ferguson February 9, 2014 at 3:40 pm

Jeff, I do plan to get a line of credit on the property show it actually will not show as free and clear to others even if it is.

It is tricky getting into the depths of paying off versus buying another with cash. I think the fact the ARMs could go up significantly is the main reason. Not just the first ARM, but I will have multiple ARMs each year that could adjust starting in 2016.

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Hi Mark, February 9, 2014 at 2:06 pm

To add to Jonathan’s question, what type of financing and which bank would you recommend for first or second home buyer investor?

Regards,
HH

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Mark Ferguson February 9, 2014 at 3:41 pm

For your fist or second property I would go with a traditional bank that offered a 30 year fixed because you can.

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Jerry February 9, 2014 at 2:08 pm

I’m curious to know why you’re using ARM’s. Why not just get a 30 year fixed from the get-go instead of using a loan product that is forcing you to pay them off before it adjusts? The rush to pay the property off and then go get a LOC on it seems odd.

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Frank February 9, 2014 at 3:18 pm

I haven’t seen 30yr fixed products if you have more than a handful of loans.

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Mark Ferguson February 11, 2014 at 3:55 pm

Frank, I have seen lenders that will do fixed loans for 4-10 properties, but they want 25% down and they are at a much higher rate than my ARMs.

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Mark Ferguson February 9, 2014 at 3:44 pm

Jerry, I would use a 30 year fixed if I could. My portfolio lender does not offer a 30 year fixed and I have ten mortgages in my name. I do think the ARMs are cheaper if you use an advanced payoff schedule than a 30 year fixed.

The LOC is not just for buying more rentals but for my fix and flips as well.

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Brad 20,000 Grayson February 9, 2014 at 4:10 pm

Mark, CONGRATS!!!
on 2 levels:
1. PAID assets which produce income is the goal of RE investing. ONE paid rental is worth 3, 4, or 5 rentals with mortgages!
The debt which helped me build with leverage was the exact same debt that forced me this >< close to bankruptcy, to losing 30 years worth of investing, toilets, and tenants.
2. Stayed true to your goal. Too many RE investors get drunk on growth and forget that PROFIT is the reason. Low interest rates are seducing many. 5 years form now, many will be gone.
Many of us started in RE because we learned to buy and build equity while broke. We must grow and graduate from that small investor poor-boy, I-NEED-the-bank thinking.
I spent 36 years as a conduit, passing my tenants' rent money to the bank, and MAYBE keeping a few bucks for myself along the way. The banks made MILLION$$ from my effort.
When we started eliminating debt (slavery) our income skyrocketed.
Again, CONGRATS!!!
-BRAD 20,000

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Mark Ferguson February 9, 2014 at 10:06 pm

Thank you Brad! What does the 20,000 stand for?

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BRAD 20,000 GRAYSON February 10, 2014 at 12:51 am

Mark, BRAD 20,000 is a nickname I picked up a few years ago when teaching a landlording session. I was trying to help the students understand to seek advice from experienced landlords. A LL with one unit over 10 years (2 or 3 tenants) has less experience than a one year LL with 10 units (10 tenants, 10 buildings, 10 inspections…).
At the time, I had 20,000 “lease months” (20,000 rent checks).
Like most nicknames, it stuck!
(can you imagine where we’d be if those 20,000 rents were without debt!?!)

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mark ferguson February 10, 2014 at 10:36 am

Very cool! Thanks for the explanation.

Paula Pant February 12, 2014 at 10:03 pm

@Brad — “Too many RE investors get drunk on growth” — well said!! I agree with you wholeheartedly.

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Michael mcewen February 9, 2014 at 5:38 pm

Hi mark,
How on earth did you get a 96k property with monthly rentals of $1100. That’s double what the normal yield is even in high yield regional areas,

Michael

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Mark Ferguson February 9, 2014 at 10:07 pm

Micheal, You may need to look at some different areas! I have 8 rentals and they are all similar. This home did not need any repairs when I bought either.

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Patrick February 10, 2014 at 1:47 pm

Hi Michael,

I agree with Mark. It’s really a matter of where you choose to purchase. I own a property that I purchased for $85,000 and am currently receiving rents of $1625/month. Mine is a duplex that is in a high demand, young adult area in central NY. Cash flow is around $750/month.

I’m currently under contract for a second property in that area that I’m purchasing for $68,000 and receiving $1550/month. Should be about $800/month positive cash flow. The down fall of my area is that there is little to no appreciation in property values.

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mark ferguson February 10, 2014 at 3:59 pm

Those are great numbers Patrick! What kind of shape are the properties in when you buy them and what are your taxes like?

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Patrick Fallon February 10, 2014 at 7:29 pm

Hi Mark,

The first property was in pretty good condition. There were a bunch of minor repairs and upgrades but nothing too major.I did replace a few kitchen cabinets, but lucky for me, it wasn’t more than the cost of 3 cabinets, new counter and new sink and I could handle the work on my own. It really just seemed like the previous owner didn’t take care of the minor tasks and it scared a lot of buyers away.

The second property does have a few more things wrong with it, but the sellers have already told me they would take care of things if needed to complete the deal (I think the owner is in Arizona and is willing to just get it off his own books and enjoy retirement). We’ll see how that goes as the inspection just came in yesterday.

To be fair, the properties are both up there in years. They are about 100 years old, so there’s some inherent risk, but that’s shown in the higher insurance levels.

The taxes are about $3,600 per year for both properties. It’s rather ironic because my mortgage payments are actually less than my taxes and insurance. Just another cost of investing in NY, I suppose!

mark ferguson February 11, 2014 at 9:07 am

Even with those taxes, those are great numbers!

michael March 21, 2014 at 7:35 am

More like which COUNTRY you choose to purchase.

Australia is about a 5% yield. You’d get $300 rent a week on a $330,000 if you were lucky.

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Mark Ferguson March 22, 2014 at 8:26 am

Michael I have heard from many people how expensive real estate is in Australia. To me it would not make sense to invest with those ratios. I think that is why so many Australians are investing in the US. I wonder f it even makes sense to buy there for your personal residence.

Michael mcewen March 22, 2014 at 9:29 am

Hey mark, I know! I’m 23 and should be able to invest in a damn property! I have 50k and it’s just ridiculous that the lowest end of the market in sydney is 300k and neg geared.

I don’t know what to do, as I really want to start a portfolio.

Mark Ferguson March 22, 2014 at 10:09 am

Have you looked into investing in other areas of Australia or turn keys in the US? I have a few articles on turn keys on my blog and there is a lot of info on BP about them.

Michael mcewen March 22, 2014 at 5:24 pm

I am considering a couple of regional cities of around 30-50k population. Capris growth would probably be pretty slow but the yield is around 9% and the price is half that of a sydney property.

Does that even matter if I want to buy and hold just for rental yields?

Mark Ferguson March 22, 2014 at 5:32 pm

I think of appreciation as a bonus. I don’t want to invest in places that have negative growth potential, but I am fine with little appreciation if I make money cash flowing.

Janet February 9, 2014 at 6:31 pm

Can you tell us who you bank lender is and how to contact. Am having a hard time in our area finding any this reasonable.

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Mark Ferguson February 9, 2014 at 10:08 pm
Ken February 9, 2014 at 9:36 pm

Hi Mark

Great job and an inspiration. Appreciate all the comments and feedback on the article. and appreciate explaining your strategy on using ARMS, and paying loans off early. I am trying to use the same model and was able to pay off my first rental last year. I now use that cash flow to 1. snowball into paying off my second longest rental, and 2. build fund for my next down payment. . I have a total of 5 properties now (4 rentals and my primary) and 4 conventional loans left. After paying off the 2nd rental (current int rate 5.5) my three other conventional loans will all be at 4% or lower. If you (and alot of other people) believe rates will be going higher, should I attempt to pay these off early as well, or keep the loans and use teh excess cash flow to buy other properties

Appreciate any comments you have

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Mark Ferguson February 9, 2014 at 10:09 pm

Hi Ken, Thank you. Are they 30 year fixed rate loans?

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Ken February 10, 2014 at 9:18 am

Yes they are. Earliest is 2004, int rate 5.5% that is the one I am making extra payments on now. next is 2008 , rate 4.00. then 2010, rate 4.125, and then 2013, rate 3.375 (primary residence)

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mark ferguson February 10, 2014 at 10:33 am

If they are fixed rate loans I would be in no hurry to pay them off unless you are close to paying them off now.

Sara Cunningham February 10, 2014 at 1:25 am

Mark, I really enjoyed this article. We use exactly the same strategy. We have 12 properties right now and 4 of these are free and clear. We have 4 more that will be paid off by 2017. We have done the same thing rolling all our extra cash into paying down the loans we have early. Our goal was always to have as many free and clear properties as possible by the time we retire so we have that as extra spending money on top of pensions, retirements and investments etc. I believe this is a strategy that won’t work for everyone though. We had 2 incomes from jobs for the first 4 years but 3 years ago I was able to quit my job. My husband still has a good income from his though. If REI is your full time job then I can see it would be much more difficult or nearly impossible to achieve. Your article has confirmed that our strategy does make sense. When I first found this site about 3 months ago I started second guessing quite a bit. So many articles and comments advocate using the banks money not yours, using interest only loans, keeping mortgages for tax breaks etc. We are in the process of looking to buy another 3 properties and when I saw this yesterday it help to solidify our thought process. Thank you.

Sara

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mark ferguson February 10, 2014 at 10:35 am

Hi Sara, I think there are many strategies for many people. Not everything works for everyone. Like you said my strategy won’t work for everyone and some like to use as many loans as possible. I am not against leveraging my money either to buy as many as I can.

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djopgenort February 10, 2014 at 2:16 am

Rent/property price ratio is a local thing. San Diego $1000/month rent would be a $250k house (NOTHING is under $250k unless it’s under gunfire or a condo). Rural area where my property is $1,000/month is a pretty nice house, but it’s likely to cost $150k-170k. Finding good tenants is harder though — if they can afford $1k/month rent they can often qualify to purchase their own house…

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mark ferguson February 10, 2014 at 10:36 am

Thanks for the comment. Your are right about the regional thing. That is why so many people are looking to invest in other markets now.

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Adrian Tilley February 10, 2014 at 11:06 am

Congrats on your progress, Mark. I’ve been following your journey and hope to not be too far behind!

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mark ferguson February 10, 2014 at 11:10 am

Thanks Adrian! Keep in touch!

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Alan Mackenthun February 10, 2014 at 1:24 pm

Congratulations. We’ve got about the same # of properties. We bought one for cash. It is nice to have it free and clear and closing was so quick and easy… Of the one’s we financed we went with 15 yr fixed mortgages for almost all of them. They have a lower interest rate than 30 year rates and they still each cash flow a couple hundred a month. In 9 years when they all start getting paid off, we’ll be sitting pretty. In the mean time, we’re hoping we can get a couple more conventional mortgages on quads before trying to find a reasonable portfolio lender. If they were ARM’s we’d be looking to pay them off earlier, but I still remember my parents paying obscene rates in the late 70s and I wouldn’t ever take a lot of money on an adjustable rate loan.

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mark ferguson February 10, 2014 at 3:58 pm

Thanks for the comment Alan. All of my ARMs have caps on them at 8% I believe. A very high rate in todays standards, but not obscene.

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Matt R February 10, 2014 at 3:59 pm

Awesome write up and congratulations! I had it in the back of my head that combining the (seemingly different) schools of thought as presented by Dave Ramsey and Robert Kiyosaki could lead to great things.
-Matt

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mark ferguson February 11, 2014 at 9:05 am

Thank you Matt! I am not a big Dave Ramsey Fan due to his extreme hatred of debt, but I think he can help a lot of people.

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Shaun February 10, 2014 at 11:01 pm

That is awesome Mark.
It is pretty nice to have unencumbered assets.
If you plan on doing the same for each subsequent mortgage they will start going down faster and faster as you will be applying quite a bit more money towards the paydown each time ($400/month more on #2 with the increased cash flow from #1) without even taking into account you will pick up more and will put that cash flow towards it too.
I bet that once you get the 3rd one paid you will be knocking them off like 1 every year.

Leverage is awesome but debt sucks. The goal isn’t to own as many little cash flows as possible it is to get as much overall cash flow as you want and have a high net worth. While leverage is usually needed to get there the debt it saddles you with is only a hindrance once it serves its initial purpose.

I’ll guess that most of those questioning the strategy don’t own any free and clear properties. It seems like everyone who does can’t stop gushing over how awesome it is.

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mark ferguson February 11, 2014 at 9:07 am

Thank you Shaun! I have planned out ten years with my plan and after I think in year five I start paying off multiple properties a year. Then it keeps increasing like you say. It is cool to start realizing those first milestones!

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Bilgefisher February 11, 2014 at 7:55 am

Mark,

I read all the comments and your post, but did not see inflation anywhere in the discussion. Your borrowing likely at 5-6% interest rates on these properties when inflation is higher than that. In 20 years how much is that $72,000 loan going to be really worth? The other point is returns. I imagine you can easily do better than 6% returns on many investments out there. Would it not be better to achieve a higher level cashflow with the returns than to pay off a mortgage early.

Btw, I think you have a solid plan, I just want to vet it out a bit. I hope we see a response from Jeff Brown on this post.

Jason

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mark ferguson February 11, 2014 at 9:04 am

Hi Jason, You are right. If I was only focused on the returns then it would make more sense not to pay them off, unless the ARMs adjusted and then it might not even make sense unless they adjusted very high. My biggest concern is being able to buy as many properties as I can. Because of the other factors I am making sure I am putting myself in a position to keep getting loans and keep purchasing properties.

I have thought about this a lot and I think I could actually increase my returns if I saved up my cash flow and invested it in something else until I was ready to pay off a loan. The question is, what to invest in that is liquid enough.

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Ben Leybovich February 11, 2014 at 4:15 pm

Nice Mark! It just so happens that this month I am cashing out one of my balloons as well – something in the air I guess :) The methodology is very similar to yours.

Congratulations! What now? Are you going to leave it free and clear? Is it protected?

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Mark Ferguson February 11, 2014 at 4:38 pm

Nice Ben! I am going to get a line of credit on it. I got my appraisal back at $160,000 so I can get a $120,000 line to help out when I have a shortfall for more flips or rentals.

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Lamar Cannon February 14, 2014 at 7:21 pm

Mark, you will get to 100 no problem!

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Mark Ferguson February 14, 2014 at 7:26 pm

Thanks Lamar!

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Dave Tanner February 15, 2014 at 6:47 am

If you want to own $1,000,000 worth of properties free and clear, you must 1st buy $1,000,000 worth of properties (leveraged). Then, let your renters pay them off over the next 15 to 30yrs (but you do pay them off). This will leave you with, in my area, around $100,000/yr rental income on free and clear properties, netting ~$50,000 / yr passive income after all expenses forever. In Ohio that’s a decent income if you don’t have debt of any kind. This can be done with 10-12 properties, so why have you chosen 100? I’d rather have 10 income properties to manage than 100. Admittedly though I don’t chase shiny things, I live a modest lifestyle and I’m fine with that. BTW- Congrats on your accomplishment! Also, each of us having different goals and plans is what makes this place so awesome. We learn from each other.
Dave Tanner

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Mark Ferguson February 15, 2014 at 12:46 pm

Hi Dave, I have really big goals. I think they push me and help me achieve more. I do like shiny things, especially cars and Lamborghini’s. it may seem crazy to have goals like that, but I want the most out of life and I love cars. Would I rather have $50,000 a year or $500,000 a year? 500,000 for sure.

The other advantage that big money brings is the ability to help others; friends, family, even strangers. The more money you make, the more you can give away.

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Paul February 22, 2014 at 6:10 pm

Mark,
Congrats on paying it off. Now that you paid it off, turn around and 1031 that thing and put the money into an apartment. I’m going to assume your real goal is to become financially independent and not own 100 homes. With the kind of money you have access to you’ve actually progressed from buying SFHs to buying apartments. You can buy a 100 unit apartment and all your doors will be located in one place. You won’t have to be driving around town managing them and you can accomplish your goal in way less time than it will take you to buy 100 homes. Just one loan to worry about. Your personal tax return owning 100 homes is probably going to be about a foot thick and it will take you a while to write out those property tax checks. Another nice thing about apartments has to do with the economies of scale; the bigger the complex the better and more staff you can hire to run it for you moving you to a position of working “on” your business and not “in” your business Like you I wanted to buy a bunch of homes and pay them off quickly. I got to house 11 and then it struck me that buying homes like this is like trying to get rich SLOW… i am now selling all my homes and pumping the money into apartments. I now own over 400 apartment units. You won’t believe me when I say this but owning 400 apartments is LESS work than owning my 11 homes. Again, the reason for that is that I have staff that take care of everything. A good rule of thumb is if you have less than 50k to invest you should stick to single family homes, if you have over 50k you should go to apartments. Sounds like you’re way over the 50k mark. Good luck,

Paul

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Mark Ferguson February 22, 2014 at 10:46 pm

Thanks Paul!
I have multiple reasons I don’t invest in apartments. The first is cap rates in Colorado are stupid low for multi, at least in my area. I can make much more on a SFR for the same amount of money invested. I also have my team managing my properties for me, so I am not dealing with them directly. I know how to buy SFRs cheap, where I don’t know how to by multis cheap. There are more SFRs in my area and much better deals to be had. I realize this is not the case in many areas. I know where Ben Leybovich is, multi is the way to go.

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Dayna February 26, 2014 at 1:42 pm

Paying off one property at a time is a good, low-risk, strategy. A goal of 100 rental properties is very ambitious, but it’s good to have BIG goals.
thanks for the post!

~Dayna at http://www.flipt.co

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Mark Ferguson February 26, 2014 at 1:52 pm

Thank you Dayna! I like big goals.

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Seth Williams March 5, 2014 at 10:18 am

Thanks for sharing your strategy Mark. I’ve often pondered this approach with my rental properties and I can really see the pros and cons both ways… perhaps it would be nice to have just ONE (or a percentage of your rental properties) owned free and clear, just to give you some leverage on future projects.

Good stuff to think through either way. Thanks again!

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Mark Ferguson March 13, 2014 at 4:22 pm

Thank you Seth!

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John Thedford March 13, 2014 at 4:48 pm

As you said, different strategies for different goals, investing areas, and pocketbooks. I just purchased rental number six. I paid cash. That lowers the return BUT I don’t have more debt. My current loan to value is less than 13%. At 58, I don’t have the fortitude to take on huge amounts of debt. I have everything structured to be debt free in four years. I won’t have 100 houses, but I will enjoy the peace of mind of being debt free and living on the income. If your program works for you that means you know where you will be in five, ten years. Great for you!

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mark ferguson March 14, 2014 at 2:19 pm

Nice job John! Like you said we all have different goals. I am happy to have debt at this point in life as long as it makes me money!

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Sal Adamo March 20, 2014 at 12:45 pm

Hi Mark,

Curious why you don’t use HELOC(s) to pay off your remaining mortgages. The interest rate should be lower by ~100 bps or so. With that done, would you be better able to qualify for mortgages? Thanks.

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Mark Ferguson March 21, 2014 at 7:26 am

Hi Sal, There are a few reasons I do not use HELOCs. I don’t have a problem getting more mortgages at this point, but that may change. HELOCs on my investment properties are only 2 year terms and that is a pretty short term. I would have to pay points and fees on each property I got a HELOC for. I am not even sure how the big banks think of HELOCs in terms of number of mortgages.

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michael March 21, 2014 at 7:37 am

My only question is…

If rental yields are so damn high, why don’t people buy rather than rent??

Surely these rental yields are articially inflated and won’t last that long – makes no sense as to why people wouldn’t just get a mortgage.

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Jim Walker March 21, 2014 at 5:39 pm

“why don’t people buy rather than rent??” wasn’t your only question.
Your other implied question was surely these rental yields are artificially inflated. –
Surely, you jest. Sellers inflate rental yields, buyers inflate anticipated expenses.

Why do people rent?
1. they can’t qualify.
2, 3, 4, 5 they can’t qualify for a mortgage.
6. Some are afraid to spend a $100,000 or more all at once. Pretty scary if you only make $30,000 per year.
7. What they can afford is awful. Maybe even worse than the hole they are renting.
8. Their jobs are not secure, they need the flexibility to move to where the work is
9. Their income is not reliable, they need the flexibility to downsize their monthly housing costs even further if their income drops still further.
10. They are hoping that they will get a better job and be able to buy something.
11. They are planning to buy, when they can have finally saved a down, cleaned up their credit, been on the job for more than a year. blah blah.
12. They know deep down, that they are not ready for home ownership for any of the above reasons or other reasons.

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Mark Ferguson March 22, 2014 at 8:33 am

Great info! I think the biggest cause of high rents is a lack of housing. Some markets don’t have the demand from buyers yet, but there is certainly demand from renters. The markets determine the prices.

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Mark Ferguson March 22, 2014 at 8:28 am

As Jim mentioned the biggest reason is qualifying for a loan. It is not as easy as it may sound. The biggest hang up I see are most lenders require a buyer to be at teir job for two years. They have special down payment programs, but you can’t make too much money to qualify for many of those, yet most Americans don’t save any money.

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Marty March 21, 2014 at 9:54 pm

Mark,
Great job! Able to share your lenders contact info???

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Mark Ferguson March 22, 2014 at 8:24 am
Daniel Tan May 22, 2014 at 11:57 am

Mark

Just shot you an email … would love to hear your responses to the questions!

And for the sake of this forum, congrats again! But also, what methods have you found to free up that equity (in the free/clear place) after you’ve paid it off … there is more leverage sitting there but I can’t figure a way to get to it.

Cheers!
Dan

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Mark Ferguson May 22, 2014 at 10:03 pm

Dan, Like I said in my email, find a portfolio lender!

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Lynne July 10, 2014 at 4:42 pm

I have some extra cash and have decided to pay down some principal. I have ARMS so paying on principal will increase cash flow by lowering my monthly payment and decreasing my APR for the life of the loan. However, I wonder about paying off one property vs. decreasing principal on multiple properties. I know everyone talks about cash flow vs. paying taxes, etc. I feel that by putting money on all my ARMS, lowering my payments but not paying one off gives me the best of both worlds, more cash, less interest, and a better tax advantage. I really want the full cash flow at retirement (I need all properties paid then) when we don’t have regular income anymore so balancing them out seems to accomplish that. That is my strategy :-)

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