Want to Secure Your Family’s Financial Future? Before You Pay Off Your Properties, Consider THIS.

by | BiggerPockets.com

Recently, I was at a breakfast with an investor buddy, and I was telling him that I was thinking about paying off my properties, as I’m starting to get closer in age to retirement.

Those of you who know me know that for most of my life I’ve been more of a leverage type of guy, who was always looking to keep the equity in my properties working, especially as long as I had earned income. I’ve always been in what I call “accumulation mode,” but lately I’ve been in more of a “preservation mode,” or in other words, thinking about simplifying my life.

At least, that’s what I thought I was going to do until I ran into my buddy.

The Great Debate

I’m not talking about the Democratic or Republican debates, but rather the big debate on BiggerPockets: to pay down your mortgage debt or to utilize more leverage.

In the past, I was never really afraid of debt, and I was willing to go after a lot of residential and commercial real estate before I ventured into note funds.

Lately, I’ve been thinking about things like gaining more peace of mind. But as my buddy pointed out, “Do we ever really own our properties?”

He was then referring to some folks we both knew who had lived in an adjacent town where we grew up. Their houses were condemned in order to expand the Philly airport (72 homes to be exact).

It made me think back to when I was a young kid and my parents sold the home that they had built because Interstate 95, which connects Florida to Maine, was being built literally three doors away, at the end of our street.

My friend then mentioned that our neighbors over in the next town who got bought out probably would’ve been paid more money by the government if they had bigger mortgages on their properties, especially since real estate values had been down since the economic downturn.

He was right. I’m not sure we ever own our houses; we just think that we do. Try not paying your taxes, and you’ll quickly learn who really owns your property.

Related: To Leverage or Not to Leverage? Why the Answer Isn’t as Simple as You Think

Opportunity Cost

He then proceeded to point out the huge opportunity cost and amount of liquidity I’d have lost by paying down the debt. Not only would I lose the write-offs from the mortgage interest, I’d be using my hard-earned money or cash flow from my tenants to pay them down, when I could have been using that money to invest in more real estate or something more liquid, like notes.

He said that one of the worst things was when people like us who get older sell off their properties in retirement, pay a lot of taxes (especially capital gains and depreciation recapture tax), and then pass on, leaving whatever was left of their estate to their heirs. It was then that he pointed out the insurance option.

Life Insurance Options

He went on to say that a better option may be to keep his cash and his cash flow from his properties and put some of that money into insurance contracts instead. This way, he has peace of mind that upon his death, his heirs would have more options. Besides, they would be able to inherit his real estate with a stepped-up basis (meaning they’d be starting off with the current market value, thus avoiding capital gains taxes if they decided to sell his properties after he passed).

If he needs money, he can always borrow it out, and if he leaves his heirs a few million dollars from insurance, they can either pay off the real estate, keep the real estate “as is” and keep the insurance money, or they can sell the properties and keep the insurance money.

Now, that’s what I call using leverage in a smart and strategic way. To be honest, this concept sounds pretty good to me, especially if it gives me the freedom to do what I want now, instead of living some frugal lifestyle while paying things down.

Related: Used Wisely, Debt Can Absolutely Produce Wealth: Here’s How

After all, who cares when you pay down good debt in this scenario?

If I keep my cash and keep re-tapping the equity in my properties, I can buy some performing notes and put some money into private money deals (similar to hard money). I do love the diversification of notes and mortgages that are backed by real estate and the fact that I can sell my notes very quickly for cash, or to pay off a property at any time, if I do decide to go that route someday.

As you can see, I’m starting to rethink what I’m going to do. Maybe more leverage isn’t so bad, with plenty of insurance, more total assets, more cash flow, more liquidity, and a lot more options.

So, what do you think my strategy should be this New Year?

Let me know your thoughts with a comment!

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


    • Dave Van Horn

      Hi Kris,

      Thanks for the comment!

      I agree that there’s nothing wrong with NNN leases, although commercial properties tend to be more capital intensive. You are correct though, Insurance at an older age is harder to obtain but one of my goals of the article is to reach those Real Estate investors who haven’t hit the uninsurable stage yet. I still believe it might make sense to invest and re-invest equity rather than pay it down, no matter the age of the investor.

      Of course insurance isn’t meant for a high yield in and of itself, it’s merely a safe bucket that gives you the freedom and comfort to reinvest your property’s excess equity into more assets (whether that’s SFR’s, notes, Commercial Real Estate, etc). Plus it passes favorably through to heirs and some policies even build income tax free.


  1. Adam Schneider

    Another good Van Horn article! The risk/reward, “amount of leverage to carry” debate is obviously alive and strong! The life insurance protection is a good add-on to hedge the risk! And, the opportunity cost is a big deal for people who have quick alternatives such as being a private lender. Sometimes folks talk about what else they’d do with their time/money, but they don’t easily have ways to take advantage of ti.

  2. Jerry W.

    I am trying to change my percentage of debt. I find that as I get older I want to be free from the what if 10 or 20 rentals all come empty at once. I used to be confident that would not happen, but I just had 6 come open last month. If I strike a balance of having say one third of my properties paid off I don’t worry as much about bad things happening. I am worried about a downturn coming to my area due to massive layoffs in the oilfield area. I slowed to a single house purchase this year from 7 last year.I think I am going to end up with a 4plex in January. While it fits a part of my growth plan it causes me more heartburn than it would have 2 years ago when the oil patch was running hard. Being able to weather say 30% of my rentals being empty a few months would make me feel much better.
    One thing I don’t like is the argument that you can deduct the interest. If you pay $100,000 in interest a year it offsets maybe $24 to $30 of income. So you lose $70K to $76K in profit to save $24K to $30K on taxes. I just don’t see that as good math. You could get a credit card at 24% interest and only make the minimum payments, would that be a good business idea?

    • Dave Van Horn


      I understand your concerns but this is seems like more of a reserves/access to cash and liquidity issue. In regards to reserves, I think back to when I started out in Real Estate. Back then there was such a thing as Investor FHA loans (that required only 15% down). It was with these loans that I saw my mentor acquire an incredible amount of property fast. I also saw him spread himself too thin and go bankrupt, by not having enough money to take care of his portfolio. So I learned that reserves are pivotal (my rule of thumb initially was $2 to $3K reserved per property in case of vacancy or other issues). This number of course has gone down for me with the more properties I own (because it’s statistically less likely that they would all require this amount of money, especially if investing in multiple areas) and especially since I learned about HELOCs.

      HELOCs can be a great safety net for your property in the event you need capital. Even for a paid off property I would recommend taking out a HELOC because you can have one and not touch it unless you need it.

      Now what I was getting at in the article is this: I have investments, such as notes, that I find more liquid than hard property, that I invest my HELOC money into. The returns from this leverage are much better than the return I’m making on paying down my mortgage. And if something were to go wrong with the property that I took a HELOC out on, I could always liquidate my investment and get the capital together if need be.

      Part of me understands the piece of mind that one gets from paying off property but my question is this: even if you paid off these houses and they all became vacant, how would you address the issue of paying the taxes, insurance, maintenance, and possibly utilities (i.e. heating)?

      If these worries don’t go away when property is paid off, then why not utilize leverage? If I didn’t leverage and invest the bank’s money, I wouldn’t be able to acquire all of the investments I have today. And I definitely wouldn’t have been able to obtain them as quickly.


      • Alan Mackenthun

        You can never avoid all risk, but you can manage and minimize it. Death and taxes cannot be avoided, but you can pay off the mortgage. Residential real estate is classified as passive income, but it really isn’t. If you have renters, you have maintenance calls, you have to collect the rent, and you have to turn over properties and re-lease them periodically, and occasionally you have more significant rehab. You can contract all this out, but you still have to manage it. When building your net-worth leverage allows you to magnify your net-worth. You build equity faster, but at the cost of less monthly income and increased risk. When entering retirement, the goal shifts from building net-worth to generating income and reducing risk. At the same time, you’re probably looking to do less work. Paying off your debts allows you to keep more income and eliminate those debt payments. You still have to pay taxes through vacancies, but you don’t have the mortgage debt and with fewer properties, you’ve got less risk and less work overall.

        It’s always a balancing act. I’m almost 50 and have been blessed enough to be able to be consider retirement in the next few years. We’re going to focus on paying off our debts in hopes of being mortgage free in 4 years. Then if (when) the market crashes again, we’ll be in prime position to get financing and make some significant buys. Until then we can live off the cash flow and be comfortable. We’ll be just fine either way.

  3. Mehran K.

    Dave, awesome article! I’ve been on the fence about paying down my debt as well, perfect timing. What kind of good debt do you have? Is it long term fixed rate financing, or are these balloons/adjustable rates? I imagine this would make a difference considering the risk. Thoughts?

    • Dave Van Horn

      Hi Mehran,

      For me, most of my debt is now fixed rate. I actually just wrote on article here on BP how, with the help of the HAMP program, I was able to make that happen.

      But I should say, adjustable rates have never been an issue for me. When I purchase a property, I make sure I can still cashflow at the cap level of the adjustable rate.


  4. Mindy Zimmerman

    This is something I struggle with as a new investor. My brother (with good intentions) often comments on me paying interest and being in debt. I’ve pretty well convinced him that purchasing real estate is “good” debt and that basically I’m paying $1 interest to get $3 from other people’s money. He’s still of the opinion that I should be paying down these rental properties early, though.

    I understand the whole concept of leverage – one of the reasons I love real estate! I have to agree with Jerry and, for my own peace of mind, I’ve been considering paying off a certain % of my properties as I grow my portfolio. I recently paid off my 1st rental property, partly because it was already close, but mainly because it was a USDA loan with a high interest rate. Now I’m at the crossroads of: do I put a home equity loan on it to purchase a 3rd property or just take a little longer to save up the extra income for a down payment? A home equity loan would really eat into any/all cashflow from a 3rd property until the equity loan is paid off.

    • Omg — I’m thinking about the same thing for one of my rentals – home Equaty loan – but why would that eat up any/all of your cash flow? You don’t have to take out the whole 70-80% LTV the bank gives you but get what works for you.

      • Dave Van Horn

        Hi Mindy,

        I agree with Richard on this one.

        I would also never tap into my equity line if it could only obtain an investment that isn’t always actively cashflowing. But that doesn’t meant I wouldn’t take out a HELOC on said properties though (even if I don’t touch it) because I like to utilize them for asset protection through debt and liquidity.


        • Mindy Zimmerman


          Thanks for giving me food for thought. I don’t want to derail your topic too much, though!

          Unfortunately, the lender I’m working with can only give me a cash out refi on the 1st house. He isn’t local to where the house is, so that could be why he’s limited. If I decide to stick with SFRs I will check with banks local to the house to see about a HELOC because I wouldn’t need to pull as much equity at once. I do like the idea of having the HELOC available, like you said, just to have as a safety net.

      • Mindy Zimmerman

        Maybe it’s just my way of thinking about it. 🙂 I say that it would eat up the cash flow because I would basically be taking out two loans to purchase one property. I’m counting both loans against a new purchase versus considering the 1st (paid off) property to have less cash flow with the new loan against it. Potayto, potahto, I guess?

        I want to get into a multi-unit next so the down payment could be 70% LTV on the 1st house. I know they have their own challenges but I think I’d like to “move up” to a small apartment complex at some point instead of only having single family homes.

        Good luck with yours, Richard!

  5. Brad Lohnes

    I’m not a grizzled veteran like some are here on BP! But my strategy is to have the tenants paying the principle – I’m willing to borrow against the equity in the home as the rent increases cover the additional mortgage. I find that borrowing chunks of equity specifically to reinvest in another property works, while trying to save the incremental cash flow from properties is very difficult. I’d rather use that cash flow to pay down principle, but be willing to borrow against the equity when the cash flow is sufficient to do so.

    As for what happens in retirement – that is a very interesting one and something that I’ll be giving a lot more thought in the next few years. The idea of using life insurance to cover the downside for heirs is interesting. I’m interested in more thoughts on how to handle investments in retirement.

  6. David Befort

    I personally utilize life insurance policies as the warehouse for my wealth…I just consider the life insurance to be a bonus. I am replacing traditional banks entirely with this strategy. And FYI, you don’t have to just get policies on yourself. You can be the owner of policies on anyone for whom you have an “insurable interest,” i.e., spouse, children, business partners, etc. This strategy is referred to as the Infinite Banking Concept, made popular by R. Nelson Nash. Unfortunately probably 90% of insurance agents don’t even know how it works, so you have to find the right person to set it up for you.
    If you are considering adding whole life insurance as part of your portfolio, I highly recommend researching this concept. Or send me a message, I love to discuss this topic. By the way, I am not an agent and get no money for referring anyone…I’m just passionate about this topic because it is the single best way I have ever seen to maximize my wealth growth.

    • Dave Van Horn


      Although I don’t think it’s for everyone and it’s certainly not without it’s controversy, I too am a fan of utilizing life insurance contracts as well. This strategy has definitely been one of the pillars to building/preserving wealth for me.


  7. walker seid

    What do you guys think of paying down the mortgages at a 15 year pace on a 30 year note, then doing a cash out refi for a down payment on another property at say the 5 year mark? Would it be better to save money on interest and refinance when you get to 50% LTV or just save the cash flow in a bank account for the next property? I don’t need the cash flow from my properties so I want to maximize the growth potential.

    • Dave Van Horn

      Hi Walker,

      The problem with paying down debt, is what if the property value falls? Like in 2008 for example, when properties worth $100K dropped down to $60K where most banks refused to write HELOCs. And even if they did, it’s based on the new value so you wouldn’t even be able to pull out the money you paid down.

      In my opinion, I think the best strategy is to take the cashflow and equity and invest in something more liquid (such as institutional notes, non-secure low cost notes – i.e. lending club, or short term private private money). My philosophy is be like the bank, always keep my money moving and generating income until I have enough for my next big investment.


  8. Kim Tucker

    We look forward to learn more on this when you are here in KC in March – at MAREI we just had the guys from Lifeonaire speak and I am going to their workshop next week and they advocate paying off debt and if you have to have debt, have equity partners, not banks that must be paid. Then in February we hosted Wealthy Code and they spent a lot of time advocating for debt – or at least using leverage to acquire assets for positive cash flow and using equity partners for the down payment. The debate will continue into March with your thoughts and into April when we talk about using the banks forumlas to pay their mortgage debt off faster.

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