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

Mark Ferguson
3 min read
I Paid Off My First Rental Property! (Here’s How… and Why)

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.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.