Pay off mortage fast or collect cash flow for new unit

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Pay off mortage fast or collect cash flow for new unit

Shawn McenteerBusiness Member
Realtor · Boonton Township, NJ · Member since 2013 · 2k+ posts · 1k+ votes

I am looking for feed back on what looks to be a debatable topic: Do you think it is best to pay off your rental unit fast and be free and clear or save the cash flow for a new unit so you keep growing your portfolio?

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  • Brie SchmidtBusiness Member
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    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    12y

    My personal strategy is to set a goal (mine is 15k a month in rents) and to buy enough properties to generate that amount. Once I do I will be switching gears and using all the profit each month to pay the mortgages down as fast as possible.

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  • Brett Russell
    Investor · Chelsea, MI · Member since 2013 · 350 posts · 138 votes
    12y

    In my mind, the answer, like many things in REI, is all in the numbers. How can you best put that cash to work?

    If you can put it into another property (or other investment) and get a cash on cash return higher than the interest rate on the current rental, then it should be a no brainer. If not or if you don't want/need more property/investments, then by all means pay off that loan.

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  • Christian CarsonPro Member
    Cleveland, OH · Member since 2011 · 400 posts · 223 votes
    12y

    Goal-setting is very important as @Brie Schmidt mentions.

    The answer really depends on how averse to debt you are, and people have very different tolerances for debt. Since I had no money when I started in real estate, I have no problem with taking on debt.

    I also buy properties well below their market value, and create equity out of thin air through repairs. Thus, a $30k loan on a house worth $80k doesn't scare me too much. The cash flow is just too good.

    In more robust markets, leveraging is far more dangerous since a long-term vacancy or some kind of casualty loss could really sink you. This will really depend on your potential return on investment. For me, a $200 mortgage payment on a house renting for $1200 isn't that much of a risk!

    Calculate how much vacancy you can afford in a rental property. Add together the costs of a 2, 3 or 4 month vacancy. Leverage is just fine if you maintain a contingency fund to keep you afloat during periods of distress.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    You can do both .... though probably not right out the door.

    Like @Brie Schmidt mentioned, if you have goals and know where you want to go, then you will know when you should pay down and when you should leverage.

    We set an initial goal (12K/month in rent revenue), once we achieved {actually exceeded} that, we shifted gears and focused on deep energy efficiency retrofits on the older properties with a target of improving the building efficiency by 40 - 70%.

    Once the rehabs were complete, we refinanced several properties and set-up equity line(s) of credit to give us access to the accrued and forced equity built-up in the properties.

    Now we are routing any extra cash-flow into paying down the mortgages with the knowledge we have ready access to it in the event we need it for an acquisition.

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  • Duncan Taylor
    Real Estate Investor · Member since 2013 · 866 posts · 487 votes
    12y

    It is only a debatable subject for those without goals. If you have your plan to implement your goals and you are working your plan, you already know the answer.

    Whether you payoff or leverage up depends on your goals, your current resources, where you are in your progress toward your goals, how long until you retire, what resources you have set aside for retirement and your estate planning.

    The only 'right' answer is the one that is right for you.

    I've always leaned toward paying off assets for a whole lot of reasons. Others try to leverage right up to the edge.

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