Mortgages & Creative Financing

If You’re Well-Prepared, You Can Lower Your Loan Length

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2 Articles Written
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I will never understand why someone will put a $60,000 car on a five-year note but won’t put a $60,000 house on an eight0- to 10-year note. At this stage in my real estate investing career, putting a house on a 20-year note to profit $300 per month is not worth it.

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I’m not saying $300 per month isn’t a lot of money. What I’m saying is look at the big picture, and you will see giving up that $300 now will save you big in eight to 10 years. Im not living off the income of my short-term note properties because I want them all to be paid off sooner so I can leverage them in the future and increase my net worth.

Be Experienced

Don’t do this if this is your first few deals or cash flow is not strong—or if you don’t have a W-2 job to help support this. This is not for the weak of heart or the newbie investor. This is for those of you that are on a good path with investing and want to crush your debt and build your net worth and equity. If you have great, long-term tenants then this type of investing is for you.

The investors that can handle the curve balls that are thrown at them can take this on. Make sure you have a sufficient reserve. Make sure that your properties big ticket items are in good working order such as the roof, furnace, etc.

I like to start off with turnkey rentals that I either purchased or recently flipped. You want to make sure everything is going to have at least a 10-year life span left, and that my tenants are in for the long haul and not just a 12-month lease. I also make sure I have a back up plan such as a savings account or line of credit to use just in case something bad happens.

Don’t Live Off the Income

When  you’re putting a property on a very short-term note, don’t expect to live off the income. You don’t want to buy a negative cash flowing property, but you also don’t want to have to depend on paying your personal bills with the profit. I like to take every dollar I make from these short-term notes and put it right back in the principal. This way I am paying down the debt with the renter’s rent check, while simultaneously increasing my net worth and increasing the equity in the property.

When running the numbers on a short-term note I am always conservative on vacancy, repairs, and unexpected problems. This way when things go great I have more to throw at the principal. Again, do not live off the income or attempt to live off of it. Things can go wrong. Things will go wrong. Be prepared.

Related: 5 Reasons I’m Obsessed With Paying Off My Mortgage

Pockets of Joy

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I like to look at my short-term notes as little pockets of joy that, sooner than later, they will be free and clear and catapult my real estate portfolio into much larger deals. By using shorter notes I’m creating little savings accounts all over my market. These are on auto pilot thanks to my property manager. I have discussed this with my property manager and we have adjusted our renting practices to accommodate this. We generally give rent breaks to those that sign longer leases and are more lenient on our pet policy.

All throughout my portfolio are these single-family homes that are going to be paid off all at different times, which are essentially getting paid for by my tenants. I’m not living off the profit, and thanks to my property manager I’m not getting calls about it. Once a month I get a report on my portfolio and adjust my investing plan if needed.

My Emergency Plan

When I started this process I had a large line of credit and plenty of passive income to fall back on. Now that I have been doing this for a few years and built up substantial equity, I no longer need that line of credit as my primary back-up plan. It is now my back up to my back-up plan—two is one, one is none.

Because most of my properties’ loans have had a huge chunk paid down, I have more equity to fall back on in case something went wrong. For example, one of my loans is 22 percent of the property’s value. In case of an emergency, I can barrow money against it to fix that property. Now this is only in case of an emergency, but it is there if I need it.

Another great emergency plan, if needed, is selling. Because the loan is being crushed down at a remarkable rate, and I have more equity in the property, I can afford to sell at a discount if I need fast cash. With paying closing costs, real estate agent commissions, etc., I will still walk away with cash at closing all thanks to my short-term loan. This is my absolute last plan of action but at least my lender and I know it's there in case I need to sell.

Related: How to Boost Profits (& Reduce Hassle) When Selling Your Investment Property

The Exit Plan to Expand

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You will be sitting on a large amount of equity and need to make a plan. There are a lot of different ways you can approach this. My plan, as of this writing, is to sell either as an entire portfolio or in small groups. My plan is to use a 1031 exchange in order to buy much larger multifamily properties. Of course with owning these free and clear I have a few options. I can either live off the income or use them as leverage to buy more property. Before doing anything, you need to talk to a tax consultant to come up the best plan for your future.

No matter what you decide to do down the road, you will have a lot of equity by playing the patient game and crushing your loan. By being disciplined and sticking to short-term notes you have not only saved mega bucks in interest, but you have greatly increased your net worth and buying power. Just make sure that before you go down this equity-building journey you prepare for the worst and stick to your plan.

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How do you go about lowering your loan payment timeline?

Share with a comment below!

Matt DeBoth has been an active real estate investor since 2011. Matt served in the United States Marine Corps for eight years as a Force Recon Marine and has done multiple deployments to Iraq, Afghanistan, and the Middle East. Matt bought his first investment property while on a combat deployment to Afghanistan. Since getting out of the Marine Corps, Matt has flipped over 25 rental properties and currently owns over 140 units. He specializes in landlording, creative financing, and using the BRRRR method for mid- to large-sized apartment complexes.

    Wenda Kennedy JD from Nikiski, Alaska
    Replied 8 days ago
    You're a man after my own heart. I believe in huge equities. I took out a 10 year, $200K commercial, blanket loan, 5 1/2 years ago. I'll have it paid off by mid-next year. Yes, it takes a lot of discipline and a whole lot of guts to take this tact -- but, it works. I would rather have less rentals units and more equity than to rack up debt. Having debt is like being mired in quicksand. It will bury you faster than you can dig yourself out. And that's the biggest truth I have learned during my 43 years in the real estate business.
    Katie Rogers from Santa Barbara, California
    Replied 8 days ago
    Even better is leave your property on its 30-year note, but pay it off as if it were on a much shorter note, that is to say, pay down principal aggressively without sacrificing too much reserve. If the unexpected happens, and you cannot sustain the aggressive paydown, you can always return to the lower REQUIRED monthly payment. Keep your options open.
    Josh Jenkins Rental Property Investor from College Station, TX
    Replied 8 days ago
    I was going to say the same thing! For a certain rate and payment, the interest will be the same regardless of term of note (meaning paying the extra principal on a 30 year note as a 15 year note results in same interest). Shorter loans usually have a slightly lower rate but I'd rather have that flexibility. Also, instead of trying to pay all of my loans off quickly, I try to pay off the smallest balance so that I can get a line of credit against the paid off property then move to next smallest balance.
    David Pizzi
    Replied 8 days ago
    I have an internal struggle with this same question often...pay off the debt quickly or ride the low interest rate. I don't know that 10 years makes the loan worth cost (after fees and all). Are you doing any cash out refis or buying them with a mortgage to start? How big are the loans and are you in an area with high and sustainable value and rent appreciation? The macro question I debate internally is how will my money work harder and safer for me. Paying off a low interest, relatively low debt loan on a property in a steady long term market is definitely one way to go about it, but wouldnt it be better to just build a war chest over a fee years and redeploy that money to other purchases, while locking in low rate loans? Should credit tighten in a recession, the HELOC tap will likely get turned off. Mortgages will likely be harder to execute with banks. So, leveraging an all cash property portfolio with new debt may not be an option. Then you may just have a lot of equity trapped innthe portfolio. I think what your saying makes good fiscal sense. I'm somewhere in between. I've tapper equity in a few all cash properties after I completed my 1031, but left a couple with no debt. This way I can still build my portfolio, still generate cash in any market and keep my number of loans at a low number.
    Dave Rav from Summerville, SC
    Replied 6 days ago
    I think making the decision to payoff or pre-pay largely depends on the individual and where they are in their investing career, as well as age. And more importantly maybe, the actual investment. Some deals make more sense to capture the cashflow. I am in several deals right now that make more sense to capture cashflow now, as it makes nominal difference to hold out and wait to pay down principal. For example, I am into a property with owner fi where the cashflow is amazing. Bought it at about 55% ARV; so it will appraise no problem when the OF note matures. I like the cashflow now - and I pay myself from this. Why not. Don't get me wrong, deferred gratification is important to me. However, you also have to pay yourself. Deferring all capital and be quite a "grind".