Many rental property owners are debating between two choices:<\/p>\n
Should they focus on paying down the handful of properties that they already own? Or should they buy more properties?<\/p>\n
In this article, we\u2019ll discuss two questions that you should ask yourself in order to arrive at the answer.<\/p>\n
I\u2019d like to give two caveats before discussing this problem.<\/p>\n
First, the term \u201chandful<\/strong>\u201d (when used to describe the number of houses that you own) relates to your personal experience and debt tolerance. Some people think a \u201chandful\u201d of properties is one or two units; other people think it\u2019s 15 or 20 units.<\/p>\n Almost every investor will start to seriously contemplate this question once they\u2019ve accumulated a number of properties \u2013 though that number differs wildly. And that’s totally okay. Personal finance is personal<\/em>.<\/p>\n Secondly, this article focuses on what an investor should<\/em> do<\/strong> as opposed to what an investor can<\/em> do. I\u2019m not going to focus on whether or not an investor CAN buy more properties (i.e. qualifying for loans). I\u2019m going to focus on how to make the decision as to whether or not you WANT to buy more<\/a>.<\/p>\n The “buy more or pay down?” question relates to your debt tolerance and the goals that you set for your life. Let\u2019s look at these two factors.<\/p>\n Risk tolerance\u2014and its corollary, debt tolerance\u2014lays on a spectrum. On one end of the spectrum, you\u2019ll find people who aren\u2019t even reading Bigger Pockets because they would never foray into real estate investing in the first place. They are comfortable keeping their money in bonds, cash, and bank CDs.<\/p>\n On the other side of the spectrum, you\u2019ll find people who enthusiastically use margins to leverage their penny-stock purchases and who take out massive loans to fund all types of businesses.<\/p>\n These are extreme examples. The majority of us lay somewhere in the middle.<\/p>\n On Bigger Pockets, you\u2019ll find investors who represent every side of this issue. Some investors believe you should never put your own money into an investment, while others only buy properties with cash.<\/p>\n \u201cDebt tolerance\u201d may be a more accurate description of this question than \u201crisk tolerance.\u201d<\/p>\n Why? Some investors think that using their own cash is riskier than using other people\u2019s (lenders) money. But other investors, who are exclusively cash buyers, disagree. The rest of us lay somewhere in the middle.<\/p>\n So if you\u2019re deciding whether to pay down your properties or accumulate more, the first question you should ask yourself is: What\u2019s my debt tolerance? How close am I to \u201cmaxing out\u201d my comfort level?<\/p>\n The second issue is a question of your life goals. What are your goals for your real estate business? How well do your investments align with these goals?<\/p>\n We don\u2019t create profit in a vacuum. We do it for a higher purpose. What is your purpose? Is your goal to have a lot of money when you\u2019re in your 60\u2019s, or is it to have decent cash flow when you\u2019re in your 30\u2019s?<\/p>\n Related: Not Another Goal Setting Post! Really? Really! (With a Twist\u2026)<\/a><\/em><\/p>\n Joe is 30. He owns four single-family homes as rental properties. Each house collects a gross rental income of $2,000 per month. After paying the mortgage, repairs, management, vacancies, and all other expenses, Joe collects $800 a month in passive cash. His goal is to have his rental properties provide him with a nice fat retirement when he is in his 60\u2019s.<\/p>\n Based on this goal, he chooses not to pay down his houses. Instead he makes the minimum mortgage payments on his properties, and he focuses on accumulating even more houses. This will allow him to enjoy a heftier cash flow when he\u2019s in his 60\u2019s.<\/p>\n Jill is also 30 years old. She also owns four single-family homes as rental properties, each of which have a gross rent of $2,000 per month and a current passive cash flow of $200 each ($800 total). In other words, her current situation is identical to Joe’s.<\/p>\n However, her goal is to enjoy passive income and financial freedom when she is in her 30’s. This will allow her to spend her youth focusing on other endeavors, such as moving to Europe, launching a different business, joining the Peace Corps or raising a family. Rather than focusing on accumulating more properties, she focuses on paying down the rentals that she owns.<\/p>\n When all four houses are paid-in-full, she\u2019ll gross $8,000 per month. Assuming that roughly half of her gross income will get spent on non-mortgage related operating expenses, she will collect $4,000 per month in passive income. And if she aggressively pays those houses down, she can enjoy that money in her 30’s.<\/p>\nDebt Tolerance<\/h2>\n
Goal Setting<\/h2>\n
Two Examples<\/h2>\n