Dilemma: Save up to buy 1 more or begin paying down properties more aggressively

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Dilemma: Save up to buy 1 more or begin paying down properties more aggressively

Kuriakos Mellos
Member since 2020 · 133 posts · 90 votes

HI everyone:  I keep on going back and forth on this but want to ask others who have made moves in either direction this year (or gone down the route of paying off properties early in general).  The higher interest rates and more challenging (but not impossible!) landscape this year has given me the opportunity to really pause and look at my portfolios performance.   I cut costs,  maximized efficiencies, raised rents accordingly (that alone will increase my cash flow this year by about $1,000 per month); and streamlined landscaping/pest control/rehab work and on.  That being said,  I started calculating the interest paid per month and was a bit astonished. Yes, I am fortunate that a lot of the properties are 3.75% or lower, but I do have 4 above that, and all with mortgages under $140 K.  (One is $61K, one is $124 K, one is $133 K and one is $134K).     

I got into this journey to provide a easier retirement for my parents, and provide cash flow for them. I do enjoy my day job and hope to stay there as long as possible, with the hope of peeling off by 45 (just turned 40 this month) and after that would consider maybe using the cash flow to benefit me a bit.  Beginning to pay down properties more aggressively will help get to not only having more income coming thru each month; but also help me when I am ready to maybe buy more down the line with less mortgages tied to my name?   Yes, I know I will lose some of the tax benefits by doing so; but owning something out right sounds appealing to me.  Has anyone done this?  I do intend to keep saving a little on the side for another future purchase but realistically don't see that happening till maybe January? 

Help! Perplexed, confused and banging my head against the wall.

K-Man

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John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
3y
Quote from @Kuriakos Mellos:

@John Morgan appreicate the insight. What is OPM mean?  I've thought about doing cash out refis as well but does that only work with a primary or would it be doable with an investment home that has quickly appreciated?

OPM is other people’s money. Leverage your way to wealth with only 20% down on each property. Yes, I’ve done 7 cash out refis (6 on rental properties) to scale up. I usually buy 3 new rentals for each cash out refi. I use the cash for 20% down payments and all my closing costs. I’ve bought 12 rentals like this. And they didn’t cost me a penny out of pocket. It’s an easy way to buy rentals for free. Learn the power of leverage and scale up. Your ROI off a 20% down payment will be around 60-80% when you factor in principal pay down on your mortgage (which your tenant is paying off), 5% normal appreciation and monthly cash flow. Many of my houses are earning 100-140% ROI when you factor all that in on a small 20% down payment. You can pull out equity every 4-6 years and keep repeating with cash outs. My goal was only 10k/month cash flow then eventually pay them off. But it’s too much fun to keep buying and letting my tenants pay these things off. 
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  • Henry ClarkPro Member
    Developer · Member since 2020 · 4k+ posts · 4k+ votes
    3y

    1.  If you pay down early do it on higher interest rate and smaller balance.  
    2. Don’t pay down early.   Keep cash handy for the next year.  See if the economy goes south.  Then buy.  
    3.    if inflation keeps going up, don’t pay early.  Pay with cheaper dollars in the future.

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    3y

    The biggest mistake I made in my RE investing career early on was being so conservative that I only bought homes for cash, i.e. I had everything saved to buy the home. I could have easily had double the portfolio I now own, and while I'm not complaining by any stretch of the imagination as RE has been very very good to me, it slowed my progress down significantly when interest rates were excellent and I should have been more willing to use leverage. I came around to leverage, and my portfolio is about 35% leveraged these days, but I really missed the boat by insisting on paying everything off early. 

    So no, I wouldn't pay any of those low-interest notes off. Stockpile the cash and put it into any number of things that can pay you 4-5% these days. Then when you get ready to retire, if rates have come back down and you want to "earn" more cash flow by getting rid of your debt, have at it. 

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  • Sebastian MarroquinPro Member
    Real Estate Agent · Pasadena, CA · Member since 2015 · 477 posts · 263 votes
    3y

    This is as personal as it gets. :) 

    You have to ask yourself about your job? Are you on commission or W2 and how stable is it? 

    If you have a stable job then ask yourself, how much in passive income monthly would you like to retire with? 

    If your current homes have the potential of a total of $4k per month gross : maybe $3k current net, then are you happy with that number in retirement or would you like more like $5k or higher? 

    If the answer is yes: most people would buy another 3 homes to net what you want. Once you know your goal number then you can start using all cash flow from the properties and your own income to start paying them down to what you feel comfortable with! 

    Maybe you are ok with $0 mortgages and that’s great! or maybe you are ok with a 30% to 50% leverage? 

    You have to decide and what ever that is, it will be ok. 

    personally - My number is $10k per month. Once i have 10 properties that each generate $1k per month, then I would pay them off as soon as I can. Just because it is a personal goal of mine! Then once the allure of the 0 balance goes away…. :) I would put about 40% loans on them to buy bigger and more cash flow. 

    While always having at least 6 months of expenses for each property in an emergency fund that maybe is invested in mutual funds or something liquid. 

    At some point, you have to stop buying, if not what’s the point… 

    Also depends if you have kids or not… etc 

    Sounds like you are in good standing so, congrats! Do you know that most people have about $1k in their bank accounts and the average american has about $5k in CC debt… 

    You are doing well my friend and time you appreciate yourself for it!  

    Let me know if I can help in the future? I have lenders and realtors all over the US. 

    2Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    3y

    If you are planning on retiring in 5 years, I'd save up to get more rentals especially as your current mortgage interest rates are low.  With retirement, you will have more problems getting a mortgage.

    You do pay a lot of money in interest over the course of your loan, but that should be tax deductible (it is in Canada for rentals).  Plus your tenants are actually paying for it, not you.

    If the rentals are income for your parents (ie their rentals), what do they think?

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  • Kuriakos Mellos
    OP
    Member since 2020 · 133 posts · 90 votes
    3y

    @Henry Clark I appreciate the insight. You are dead on with what I was thinking, the one first on my list was the one just under $62 K with a 4.99% rate.   I will not be using my own money on it but rather the rent coming in on putting towards the mortgage.

    @JD Martin I was a huge leverage player in 2020 and 2021. Took advantage of the 15% down investor friendly loans and house hacked 3 times over 3 years with 5% down.   Are you still buying in 2023? Or still stockpiling at the time being?

    @Sebastian Marroquin I am Greek..we like to share our emotions..I can't help it!  Ironically my goal was intiially (when I first started) to hit $5K a month in passive in the first ten years of my journey. I have surpassed that in about 2.5 years, and do feel that the $10 K number is where I would feel 'safe and content with' while having a mortgage payment down to almost 0.  I expanded fast and my reserves for sure suffered temporarily ( was taking some reserves for future downpayments) , but am aggressively building those back up, while growing my personal savings bucket, and do very strigegent tenant background checks and references.   The facts you shared about 'most people' having $1K in their bank accounts is so sad but true..I look at my friends UberEats bills and then laugh when they say they are nervous about making rent that month. ;-)

    @Theresa Harris hello!  Interest is a write off in the states as well and I have learned to really appreciate all the write offs that the real estate portfolio can provide.  But you make a VERY valid point about getting more loans post W2 world. Thank you for the mental check on that.  My parents keep telling me to slow down with a few curse words thrown in, but they did so in 2020, and if I had done that then..well..they wouldn't be benefiting so much now ;-). Parents are not ALWAYS right.

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    3y
    Quote from @Kuriakos Mellos:

    @Henry Clark I appreciate the insight. You are dead on with what I was thinking, the one first on my list was the one just under $62 K with a 4.99% rate.   I will not be using my own money on it but rather the rent coming in on putting towards the mortgage.

    @JD Martin I was a huge leverage player in 2020 and 2021. Took advantage of the 15% down investor friendly loans and house hacked 3 times over 3 years with 5% down.   Are you still buying in 2023? Or still stockpiling at the time being?

    @Sebastian Marroquin I am Greek..we like to share our emotions..I can't help it!  Ironically my goal was intiially (when I first started) to hit $5K a month in passive in the first ten years of my journey. I have surpassed that in about 2.5 years, and do feel that the $10 K number is where I would feel 'safe and content with' while having a mortgage payment down to almost 0.  I expanded fast and my reserves for sure suffered temporarily ( was taking some reserves for future downpayments) , but am aggressively building those back up, while growing my personal savings bucket, and do very strigegent tenant background checks and references.   The facts you shared about 'most people' having $1K in their bank accounts is so sad but true..I look at my friends UberEats bills and then laugh when they say they are nervous about making rent that month. ;-)

    @Theresa Harris hello!  Interest is a write off in the states as well and I have learned to really appreciate all the write offs that the real estate portfolio can provide.  But you make a VERY valid point about getting more loans post W2 world. Thank you for the mental check on that.  My parents keep telling me to slow down with a few curse words thrown in, but they did so in 2020, and if I had done that then..well..they wouldn't be benefiting so much now ;-). Parents are not ALWAYS right.


     I'm stockpiling right now and just taking advantage of liquid accounts that are 4-6%. There's very little inventory in my area right now, and honestly after a decade of renovations I need a break anyway. I expect this will be the first year I haven't bought anything since the early 2010s. Maybe that will change towards the end of the year if I start to see any deals but I believe the Fed will be forced to drop rates precipitously in the next 24 months or so and borrowing will again be advantageous. 

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  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    3y

    @Kuriakos Mellos

    Definitely don't pay off those mortgages. Especially with interest rates under 5%. That's like a bank paying you $ to borrow it from them with inflation. I paid off my first two rentals which was the dumbest thing I've done investing. My cash flow was only $1500/month and my CoC return was only around 6%. I learned to leverage and use OPM. I went from 2 paid off properties to 18 rentals in 5 years by using equity in those two properties to buy a bunch more. I also did a cash out refi and HELOC on my primary to snag another 5 rentals. My cash flow went from only $1500/month to 13k/month in 5 years. And I was able to scale up and get 12 houses basically for free by deploying equity from my rentals to buy more. Leverage your way to wealth by using OPM vs having only a handful of paid off houses that could take you a decade or two to pay off. Your cash flow will be a lot higher while your tenants pay off your mortgages, not to mention the mortgage interest tax write off so your rental income is tax free. You'll build legacy wealth this way and your kids will inherit them all tax free when you die.

    3Reply
  • Kuriakos Mellos
    OP
    Member since 2020 · 133 posts · 90 votes
    3y

    @John Morgan appreicate the insight. What is OPM mean?  I've thought about doing cash out refis as well but does that only work with a primary or would it be doable with a investment home that has quickly appreciated?

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    3y
    Quote from @Kuriakos Mellos:

    @John Morgan appreicate the insight. What is OPM mean?  I've thought about doing cash out refis as well but does that only work with a primary or would it be doable with an investment home that has quickly appreciated?

    OPM is other people’s money. Leverage your way to wealth with only 20% down on each property. Yes, I’ve done 7 cash out refis (6 on rental properties) to scale up. I usually buy 3 new rentals for each cash out refi. I use the cash for 20% down payments and all my closing costs. I’ve bought 12 rentals like this. And they didn’t cost me a penny out of pocket. It’s an easy way to buy rentals for free. Learn the power of leverage and scale up. Your ROI off a 20% down payment will be around 60-80% when you factor in principal pay down on your mortgage (which your tenant is paying off), 5% normal appreciation and monthly cash flow. Many of my houses are earning 100-140% ROI when you factor all that in on a small 20% down payment. You can pull out equity every 4-6 years and keep repeating with cash outs. My goal was only 10k/month cash flow then eventually pay them off. But it’s too much fun to keep buying and letting my tenants pay these things off. 
    4Reply
  • Allan C.
    Rental Property Investor · Member since 2018 · 828 posts · 810 votes
    3y

    @Kuriakos Mellos for sure don’t pay down your principal. At a minimum you can put your extra funds into a high yield savings account, or even better 4-week treasury bills that give you state tax exemption and keeps you liquid for your next acquisition.

    0Reply
  • Sebastian MarroquinPro Member
    Real Estate Agent · Pasadena, CA · Member since 2015 · 477 posts · 263 votes
    2y

    More important question now is: How much equity does each home have now? Depending on how many years you have own each property, maybe it is time to assess them: their individual performance, ROI, what type of tenant do each attract? and what is your ROE (return on equity?).

    For recent purchases: less than 3 years, you probably have to grow with them and think about how can you maximize returns: maybe ADUs, or Coin-laundry or e-pay, renting space on the property for storage, air b and b or mid term rentals, splitting the lots, Tic sales etc... or value add to increase appreciation faster!! 

    For properties you have owned for more than 3 to 5 years + 

    Take a look at what is performing and 1031 the problem children... :) 

    For some, I imagine you will have more than $200k sitting in them as "potential equity" 

    you could sell 2, 3 or more of them and now trade them for a 6 or 10 + unit property. Increase your cash flow and wealth and reduce overhead and management time. 

    Many of my my investors started with 2 or 3 homes, used a value add strategy , and renovated or added adus or sq footage, and now 1031 into a 6 unit property with the same amount of money, but now going from about $1,500 cash flow from 3 properties to a 6 unit property that now gives him $3,500 gross profit. 

    Now he re-started buying single fam. homes which are less costly to buy with 5% down owner primary loans. Buy, live in it for 1 to 2 years and then rent it out to buy the next one! 

    Good luck! 

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