Snow balling VS 15 year notes on rentals

68 Replies

Snow balling vs 15 year notes on rental properties....?  Have any of you ran the numbers to see which is a better strategy on paying down the loans on your properties? We currently have 2 rental properties, one a 4 plex with a 240k balance at 4.5% interest and a duplex with a 155k balance at 5% interest. They are both on a 30 year am.  With an extra 1100 a month I can pay these BOTH of in 15 years OR... would it be better to pay off the duplex first with the extra 1,100 a month and then snow ball it into the 4 plex? Other concern is we are continuing working on adding more properties to the portfolio so within 5 years we could have 5-10 more properties. How do you keep track of them all while paying them off as fast as possible? Or is it best to just save the cash flow and wait for things to calm down and buy more when the opportunity is greater? Thanks in advance for any advice and input. 

Paden.

I think the best option would be to take the cash flow that you have now and use that cash flow to buy more properties until you have 10 loans. Then once you have 10 then you can start to pay off the property that has the lowest balance with the cash flow from all 10 properties. Pay that property off, which will then open up another loan line for you to use and finance another property. 

Antoine Martel

@Paden Anderson

Phases of a RE businesss - Buy a Million(Acquisition), Own a Million (Growth/Optimization), Distribution (Maximize Cash Flow)

Since you are still in the Acquisition phase of your business, you should be setting all of those funds aside for acquiring new properties or investments to add to the portfolio.

Keep in mind that the ROI is often better keeping the property leveraged by cash out refinancing and putting those funds to work as well during your growth phase. This way your equity even is giving you a return.

Once your portfolio reaches critical mass, or you hit your target numbers or cash flow you can transition over to paying down debt to prepare for the final distribution phase.

However, people need to retire at some point this is called your distribution phase, so when that time comes be sure the properties are paid off by that time to maximize cash flow in retirement.

A great book on this topic and more is Gary Keller's  The Millionaire Real Estate Investor.  He goes into great depth on the different phases of your business and where you should be focusing your time and energy at each phase.

Hope this helps.

If you have the ability to get 30 yr mortgage, then thats the correct approach for your phase.  It allows you to cash flow more monthly which in turns allows you to save up for the next deal quicker and growing your portfolio faster...  which is the goal of the acquisition phase.

Jeff V

Why would you want to hoard cash in a rental property. Based on it's opportunity value you would be losing a minimum 5% return annually.

You can invest money or you can hoard money you have no use for. You can not be/do both.

@Antoine Martel @Jeff V.

Thank you guys for your reply's. This was very helpful and informative. I like the idea of preparing to buy 10 properties and then doing the snow ball effect from there. 

I will get the Millionaire Investor book and study it as those phases makes sense. 

Thanks again guys. This was helpful! 

@Paden Anderson , I am in the same camp as Thomas S., but to specifically answer your question it is less expensive but riskier to go to 15 year mortgages as opposed to snow balling. Personally, I would pay the extra interest to have the flexibility associated with the lower payment of the 30 yr. If you switch to 15s you will be locked into that higher payment regardless of whether your financial picture and/or goals change.

@Edward B.

Thanks for your reply. I keep all my properties on a 30 year fixed but run the numbers on what it would take extra to pay off in 15 years and can pay that if desired. Then if things get tight I can revert to paying it at the 30 year schedule. BUT... I think this is not the best option. I am 27 years old and can be much more aggressive for now. I make good money with my job, live in our rentals for "free", and can save 12-15k a year on rental cash flow for more properties or investments. We are already sitting on a good chunk of cash but I struggle finding anything that meets my criteria in this market. I guess patience key. 

This post has been removed.

Originally posted by @Antoine Martel :

Paden.

I think the best option would be to take the cash flow that you have now and use that cash flow to buy more properties until you have 10 loans. Then once you have 10 then you can start to pay off the property that has the lowest balance with the cash flow from all 10 properties. Pay that property off, which will then open up another loan line for you to use and finance another property. 

Antoine best post I have ever read that you have done.. free and clear assets is where real wealth is gained in real estate. 

@Paden Anderson ,

Ever heard of a guy named @Jeff Brown ? It sounds like you may like some of his strategies. He recommends aggressively paying properties off as part of his overall strategy. I don't necessarily agree with that, but I do like a lot of the other things he does, i.e. notes, EIUL, etc. Google bawldguy and you will find his stuff.

Originally posted by @Jeff V. :

@Paden Anderson

Phases of a RE businesss - Buy a Million(Acquisition), Own a Million (Growth/Optimization), Distribution (Maximize Cash Flow)

Since you are still in the Acquisition phase of your business, you should be setting all of those funds aside for acquiring new properties or investments to add to the portfolio.

Keep in mind that the ROI is often better keeping the property leveraged by cash out refinancing and putting those funds to work as well during your growth phase. This way your equity even is giving you a return.

Once your portfolio reaches critical mass, or you hit your target numbers or cash flow you can transition over to paying down debt to prepare for the final distribution phase.

However, people need to retire at some point this is called your distribution phase, so when that time comes be sure the properties are paid off by that time to maximize cash flow in retirement.

A great book on this topic and more is Gary Keller's  The Millionaire Real Estate Investor.  He goes into great depth on the different phases of your business and where you should be focusing your time and energy at each phase.

Hope this helps.

If you have the ability to get 30 yr mortgage, then thats the correct approach for your phase.  It allows you to cash flow more monthly which in turns allows you to save up for the next deal quicker and growing your portfolio faster...  which is the goal of the acquisition phase.

Jeff V

also keep in mind when you do pay off a property your cash flow just doubled so its like buying another property without having to manage another tenant or cap ex or anything else.. those that I know that are truly and I mean truly wealthy have little to no debt.. unless they are in the business of owning mega portfolios and have no personal gurantee's or credit risks IE syndicators..  

I snowball the highest rate, highest risk loans and knock  them out 1 by 1. Having 1 paid off vs 2 half leveraged gives you more financial options if you need them.  Also gives you focused intensity as you punch it in the face and the balance drops.  Just be sure to protect it in some way if it's sitting there paid off in your name.

That said, fixed rate resi loans at 5% or less don't bother me enough to get rid of them.  Mine were much worse on multiple levels and had to go. If you plan on expanding, maybe save the money to pay off your 1 least fave in a savings acct, but have it liquid in case an opportunity arises.  If you get the savings acct up to pay it off and no opportunity has struck you, pay it off then in one swoop!

Originally posted by @Jay Hinrichs :
Originally posted by @Antoine Martel:

Paden.

I think the best option would be to take the cash flow that you have now and use that cash flow to buy more properties until you have 10 loans. Then once you have 10 then you can start to pay off the property that has the lowest balance with the cash flow from all 10 properties. Pay that property off, which will then open up another loan line for you to use and finance another property. 

Antoine best post I have ever read that you have done.. free and clear assets is where real wealth is gained in real estate. 

 Thank you Jay. Means a lot :) 

Antoine Martel

Originally posted by @Paden Anderson :

@Antoine Martel @Jeff V.

Thank you guys for your reply's. This was very helpful and informative. I like the idea of preparing to buy 10 properties and then doing the snow ball effect from there. 

I will get the Millionaire Investor book and study it as those phases makes sense. 

Thanks again guys. This was helpful! 

 Great man.

Good idea and good luck

Antoine Martel

I am on the leverage side. Your return on equity goes down as your loans are paid off, so it makes sense to me to keep leverage on them and invest that 'equity' in higher returning assets aka more homes. If mortgage interest is tax deductible, it makes sense in my mind to keep paying it. At a certain point, I can see the scales tipping to paying off the loans, but if you are in your growth phase, leverage is the name of the game.

Originally posted by @Jay Hinrichs :

also keep in mind when you do pay off a property your cash flow just doubled so its like buying another property without having to manage another tenant or cap ex or anything else.. those that I know that are truly and I mean truly wealthy have little to no debt.. unless they are in the business of owning mega portfolios and have no personal gurantee's or credit risks IE syndicators..  

Yep, yep! I think my average is double cf with no debt service. Paid off a house and the cf went from $300 to over $1100. Multi's can be as low as 50% depending. My 10 unit cash-flow only went up $1700, but it was a fat payment with a low balance (old loan) so it was messing with my DTI.

Not all debt is the same.  30yr fixed rate resi loans below 5% are much different than hybrid or commercial loans in the 6%+ range with calls, adjusts, balloons, etc bothering you to report your financial every year. 

Originally posted by @Edward B. :

@Paden Anderson,

Ever heard of a guy named @Jeff Brown ? It sounds like you may like some of his strategies. He recommends aggressively paying properties off as part of his overall strategy. I don't necessarily agree with that, but I do like a lot of the other things he does, i.e. notes, EIUL, etc. Google bawldguy and you will find his stuff.

Thanks. I just subscribed to his work. 

Originally posted by @Jeff Brower :

I am on the leverage side. Your return on equity goes down as your loans are paid off, so it makes sense to me to keep leverage on them and invest that 'equity' in higher returning assets aka more homes. If mortgage interest is tax deductible, it makes sense in my mind to keep paying it. At a certain point, I can see the scales tipping to paying off the loans, but if you are in your growth phase, leverage is the name of the game.

someone posted above on how you go through phases and no question debt is necessary to scale.

and its a balance of those things and personal decisions if you want to Dave Ramsey it or BP it..

for me though and having a front row seat to the 08 to 2011 melt down and the 89 to 93 CA melt down..

thinking your protected when you have 75 to 80% LTV loans is just kidding yourself.. you have no equity.. in those scenarios ... and exits can be painful if values drop even a little. and you are in need of exiting..

or your leveraged to the hilt and your cash flow drops by 20% most folks would be in trouble..    

Thank you all. This is helpful. 

I am leaning towards building larger cash reserves and getting a few more properties under my belt and then working on the debt buy down with more cash flow. I agree the yields will be much greater however there is a nice piece of mind to properties paid off, more cash flow with less tenants. That will come however. 

Originally posted by @Jay Hinrichs :
Originally posted by @Jeff Brower:

I am on the leverage side. Your return on equity goes down as your loans are paid off, so it makes sense to me to keep leverage on them and invest that 'equity' in higher returning assets aka more homes. If mortgage interest is tax deductible, it makes sense in my mind to keep paying it. At a certain point, I can see the scales tipping to paying off the loans, but if you are in your growth phase, leverage is the name of the game.

someone posted above on how you go through phases and no question debt is necessary to scale.

and its a balance of those things and personal decisions if you want to Dave Ramsey it or BP it..

for me though and having a front row seat to the 08 to 2011 melt down and the 89 to 93 CA melt down..

thinking your protected when you have 75 to 80% LTV loans is just kidding yourself.. you have no equity.. in those scenarios ... and exits can be painful if values drop even a little. and you are in need of exiting..

or your leveraged to the hilt and your cash flow drops by 20% most folks would be in trouble..    

 This is a good point as well. All our properties are multi family and if we are 50% vacant then all the debts are still covered. We also have multiple years of cash reserves saved if needed. We are trying not to get wrapped up into the hype of this market with all its appreciation. If only I had a crystal ball ;) 

Originally posted by @Paden Anderson :
Originally posted by @Jay Hinrichs:
Originally posted by @Jeff Brower:

I am on the leverage side. Your return on equity goes down as your loans are paid off, so it makes sense to me to keep leverage on them and invest that 'equity' in higher returning assets aka more homes. If mortgage interest is tax deductible, it makes sense in my mind to keep paying it. At a certain point, I can see the scales tipping to paying off the loans, but if you are in your growth phase, leverage is the name of the game.

someone posted above on how you go through phases and no question debt is necessary to scale.

and its a balance of those things and personal decisions if you want to Dave Ramsey it or BP it..

for me though and having a front row seat to the 08 to 2011 melt down and the 89 to 93 CA melt down..

thinking your protected when you have 75 to 80% LTV loans is just kidding yourself.. you have no equity.. in those scenarios ... and exits can be painful if values drop even a little. and you are in need of exiting..

or your leveraged to the hilt and your cash flow drops by 20% most folks would be in trouble..    

 This is a good point as well. All our properties are multi family and if we are 50% vacant then all the debts are still covered. We also have multiple years of cash reserves saved if needed. We are trying not to get wrapped up into the hype of this market with all its appreciation. If only I had a crystal ball ;) 

 your already WAAAAAY ahead of the game  carry on  !!!!

Hi @Paden Anderson ,

Since it looks like your are still looking to buy properties, that you have great terms (30 year fixed at good rates), and that you have a good financial position, I will wait to pay down the loans. Once you pay down loans, that cash is gone. Do you need a down payment to buy another property that fits your investing criteria? well, the bank is going to ask you to qualify again and put down X%. They won't care you used your cash to pay down another loan.

I will invest the cash you have and the cash flow from your properties in something safe (hopefully you can get ~1% interest) while you wait for your next deal. Once you reach the number or properties/CF you want or simply when you no longer want to buy more properties, then that is the time to start paying down your mortgages. You don't need the cash in the near future to buy more properties, so pay down what you owe, reduce the risk on your investments, and get more cash flow. 

Some will argue that by paying down your debt, you are losing on the benefits of leverage. I agree with that when expanding your portfolio, but at some point, there is no need to be leverage to the top and it getting rid of all debt is a better play, IMHO.

If you can carry 50% vacancies without investing personal funds, you are in pretty good shape. You're young enough that you have to decide how much RE you want to eventually own, because you have plenty of time to either leverage and get that growth now or go the slow and steady one-at-a-time route. There's advantages and disadvantages to each approach. In general, faster gains = greater risk. That's the trade-off for return. 

@Jay Hinrichs

"your cash flow just doubled"

Come on Jay. That is a extremely deceptive statement. You know full well there is a distinct difference between doubling cash flow and buying cash flow. A property can only actually increase the cash flow it puts out one of two ways...either increasing rent or decreasing expenses. Debt repayment is not factored into expenses there for paying down a mortgage, as we all know, creates it's own income stream separate from that generated by the property itself. As a highly experienced investor you know that better than anyone. This is the primary reason we factor ROI into investing and why cash hoarders do not acknowledge ROI.

You pay down a mortgage and the income it generates is equal to the prevailing mortgage interest rate plus the principal pay down, which you already get anyway.

You get maybe a 5% return on your cash in todays market and reduce your ROI to what most rational investors would view as ridiculously low.

Investors of this type are like farmers. Land rich and cash poor. They work sun up to sun down for pennies on the dollar.  

Why would you not leverage the equity out and invest it in a different vehicle. You still have the property, you still have the cash and you generate a descent return. Why is hoarding it in real estate, especially in todays economy, a rational decision when you can eat your cake and have even more cake. Instead of doubling your income my way you would be tripling your income at no greater risk.

Are you hiding a hoarding disorder :)  

Originally posted by: @JD Martin

If you can carry 50% vacancies without investing personal funds, you are in pretty good shape. You're young enough that you have to decide how much RE you want to eventually own, because you have plenty of time to either leverage and get that growth now or go the slow and steady one-at-a-time route. There's advantages and disadvantages to each approach. In general, faster gains = greater risk. That's the trade-off for return. 

 Thanks JD. We would like to own a lot of real estate but are ok with waiting as well. Im hoping for a more favorable market for investors in the next 5 years. Im in the position to buy now but are just letting the numbers determine.

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