using your cash to payoff a rental property

23 Replies

GOOD MORNING  JUST A  QUICK  QUESTION   ABOUT  SAVING  ON  INTEREST  PAYMENTS ON  RENTAL  PROPERTIES . 

WOULD IT BE GOOD IDEA TO PAY  OUT   A RENTAL  HOUSE  AND SAVE ON THE INTEREST  ON THE LOAN OR  LET  THE  LOAN RIDE  AND  CONTINUE  TO MAKE PAYMENTS  LONG TERM ?  JUST  HAVING  AN  ISSUE  WITH  THIS  QUESTION THANKS  FOR  ANY  GOOD  ADVICE

If you pay down debt, your return on that cash will be the interest rate of your loan.

Hi Lou,

It depends on your goals- is your goal to have a payed off rental property or to invest in more (or something else)?  

Our goal is to continue to invest, so we use the cash flow to fund the next down payment.  Loans are cheap right now and I can make more on rental property than I save if I pay off a low interest loan.  For example, my lowest loan balance is about $47k with the principal and interest portion of the mortgage payment being only $247.  I can get much better cash flow than $247 by purchasing another property worth almost $200k with the $47k as my 25% down payment.  We are using the leverage to gain more cash flowing property, and allowing the renters to pay down the principal over time.

Kelly

Originally posted by @Kelly N. :

Hi Lou,

It depends on your goals- is your goal to have a payed off rental property or to invest in more (or something else)?  

Our goal is to continue to invest, so we use the cash flow to fund the next down payment.  Loans are cheap right now and I can make more on rental property than I save if I pay off a low interest loan.  For example, my lowest loan balance is about $47k with the principal and interest portion of the mortgage payment being only $247.  I can get much better cash flow than $247 by purchasing another property worth almost $200k with the $47k as my 25% down payment.  We are using the leverage to gain more cash flowing property, and allowing the renters to pay down the principal over time.

Kelly

In my mind, it's a matter of which situation gives you a better return now and later. If you have $10k and you're trying to decide to either pay down a loan or use it for a down payment for the next property, would the additional property's returns be greater than the interest being paid on the current property?  At the end of the current property's loan, what would your returns  look like versus what would your portfolio look like if you were to continue to grow? There are so many variables that come into play and a lot of them depend on your goals and circumstances.

To me and for my situation, it's important to grow my portfolio of properties sooner than later because it's the summation of income streams that amount to wealth. It's the number of properties that make the paycheck. 

my goal is to buy 12 rental properties but I'm not sure if you buy 2 and pay off one before buying another and so on just trying to gain some experience thanks 

Originally posted by @Frank B. :

If you pay down debt, your return on that cash will be the interest rate of your loan.

thanks for the reply 

Originally posted by @Justin B. :

In my mind, it's a matter of which situation gives you a better return now and later. If you have $10k and you're trying to decide to either pay down a loan or use it for a down payment for the next property, would the additional property's returns be greater than the interest being paid on the current property?  At the end of the current property's loan, what would your returns  look like versus what would your portfolio look like if you were to continue to grow? There are so many variables that come into play and a lot of them depend on your goals and circumstances.

To me and for my situation, it's important to grow my portfolio of properties sooner than later because it's the summation of income streams that amount to wealth. It's the number of properties that make the paycheck. 

I'm in it for growth just don't want to get over leverage not sure what's the limit of debt I can take on just yet . Thanks for the info 

If you pay off a loan on a rental, you are NOT saving on the interest since you are not paying the interest...your tenant is.  If you pay it off with your own cash, you just put yourself behind from a cash income status.  

Example #1:  Holding Financing

Down payment:  $20,000...assuming 20% (your cash in)
Net Cash Flow:  $250/month = $3000/year
After Year #1:  $20,000 - $3000 = $17,000 behind
After Year #2:  $17,000 - $3000 = $14,000 behind
.etc....until,..
After Year #7: $20,000 - ($3000 x 7yrs) = $1000 AHEAD...Hurray!!!  Finally, after 7 years.

Example #2: Paying off Financing

Payoff amount + DP: $20,000 + $80,000 = $100,000  (your cash in)
Net Cash Flow after payoff: $500/month = $6000/year
After 1st Year after payoff: $100,000 - $6,000 = $94,000 behind
After  2nd Year: $94,000 - $6000 = $88,000 behind
.etc....until,..
After 17th Year after payoff: $100,000 - ($6000 x 17yrs) = $2000 AHEAD...Hurray!!! Finally, after 17 years.

I'm thinking that "payoff" cash might be better served using it on more than this one property.

thanks I really need to  take a couple of real estate class my financial IQ is way off 

@Lou Francis

I like a balance of paying interest and principle.  We can not deduct the principle expense as a write off.  Taking all you taxable income and paying down principle will set you up for cashflow problem when taxes are due.

Frank

Depends on your strategy. One of the best things about real estate is its ability to leverage your funds. Paying off your loan is the opposite of that, but that doesn't make it wrong. Its just a more conservative approach.

Medium apartment logoAndrew Syrios, Stewardship Investments | http://www.StewardshipProperties.com | Podcast Guest on Show #121

Hi again Lou,

That's what's so great about this site- lots of people want to help you figure out what is best for you!

There are limits on how much you can borrow and how many conventional loans you can have, but there are other means of financing once you get to that point. You can have 10 conventional mortgages in your name (including your home). You have to put 20% down on each investment property (25% if it is multifamily) for the first 4 loans, 25% (30 for multi) after that. Are you married? Put the loans in one name only, and you can have 20 loans between you. The bank will look at your DTI (debt to income) ratio, and want to see 43% or less, however a cash flowing rental will count as income rather than debt once it is "seasoned", 2 years of rental history at the most. There is an upper limit on how much you can borrow at one time, but at that point you can likely find financing through other means.

Kelly

thanks guys experience is key , I'm getting more comfortable with holding two and not worried about rushing to pay off the loans 😎

you guys are great thanks for the info when  I get to  a one million plus network your help won't be forgotten 😎

@Lou Francis

Hi Lou,

It really depends on what are your goals. If you just want to sitck with the property, then paying off the loan might be a good idea to save you on interest payment. However, the interest rate will be somehow your return on investment. If your goal is to maximize your ROI, then it is not the best solution.

You could get a much better ROI with buying an additional property that will provide you a good leverage effect. The key to growth is to maximize your leverage and accumulate as much assets as you can with the least money you can but that's a complete different topic.

Here's the deal :

1) Pay off your loan, get a 4% return (estimated interest rates) and that's it.

OR

2) Buy another rental property, get anything from 8-30% return but you have to deal with the management of it.

Hope this helped you.

Kevin

Originally posted by @Kevin Bellavance :

@Lou Francis

Hi Lou,

It really depends on what are your goals. If you just want to sitck with the property, then paying off the loan might be a good idea to save you on interest payment. However, the interest rate will be somehow your return on investment. If your goal is to maximize your ROI, then it is not the best solution.

You could get a much better ROI with buying an additional property that will provide you a good leverage effect. The key to growth is to maximize your leverage and accumulate as much assets as you can with the least money you can but that's a complete different topic.

Here's the deal :

1) Pay off your loan, get a 4% return (estimated interest rates) and that's it.

OR

2) Buy another rental property, get anything from 8-30% return but you have to deal with the management of it.

Hope this helped you.

Kevin

 H

ok thanks did you take a real estate course?

Or a finance class I need to learn these things thanks again 

@Lou Francis

I have a Bachelor Degree in Finance. And I read a dozen books on real estate.

Therefore, I would suggest you to read books on real estate or business or finance/investing. Understanding ROI, leverage and other aspects of investing is crucial to be a successful investor. There's no need to get a Finance Degree like I did, but just getting comfortable with the basics and you'll be perfectly fine !

I wish you best of luck, feel free to ask if you have any questions !

Kevin

Originally posted by @Kevin Bellavance :

@Lou Francis

I have a Bachelor Degree in Finance. And I read a dozen books on real estate.

Therefore, I would suggest you to read books on real estate or business or finance/investing. Understanding ROI, leverage and other aspects of investing is crucial to be a successful investor. There's no need to get a Finance Degree like I did, but just getting comfortable with the basics and you'll be perfectly fine !

I wish you best of luck, feel free to ask if you have any questions !

Kevin

thanks hopefully I can get as smart as the people who replied to my post today have a great day thanks again 😎

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