Pay Toward Rental Mortgage, or Save For the Next One?

12 Replies

Hi!  I haven't been on BP for very long.  We own five rental units in our area (four apartments and a house), so we're still small potatoes.  I really have big dreams of owning a lot more, but I don't know at this point whether to use our income surplus towards those rental mortgages or to start paying them off.  At the moment, we have two mortgages.  I'm sure I'll get differing opinions on this.  Part of me really wants to get things moving along with more profit, and then use that new profit to start paying off the other properties.  But then there's the other part of me that would feel really great about starting to pay them off now, but then there wouldn't be any new income coming in until they're paid off.  What do all you other investors do?  Are you willing to take on more debt if you know you're income will be more than your expenses?

Yes, I'm absolutely willing to leverage equity and cash in order to bring in extra cash flow.

Have you considered getting an equity loan on the properties that are fee and clear and using that cash as down payments on more property?

Yes.  If more debt brings you more cash flow income...do it.  That's the object.

Remember, as long as you have positive cash flow, you're not the one paying off the debt...your tenants are.  So why help them pay off your debt, when they are perfectly fine with doing all by themselves?

Linda, I have definitely thought about doing that, but my husband and I are not on the same page, and I don't see him ever being on the same page with me. A man in our local real estate investors group just recently bought a rehab house for $19K, and then he fixed it up to where the ARV was $60, and he did just what you said. And then he went out and bought a couple more properties. I'm totally on board with that, but my husband feels that it's awful to add on more debt. And unfortunately, this is something we can't disagree over. Blah.

Can I edit my original post?  I just realized that my first question doesn't really make sense...but I can see that you know what I meant.   lol

This post has been removed.

@Jen Faulkner I agree with the other guys. More leverage will bring more cashflow for more purchases and more cashflow. Of course this assumes the deals are solid.

Our philosophy is to use cashflow to fund more purchasing for at least the next 10+ years then start the pay down. We are in our 30's (which I still consider young), so growth is our aim. This is a personal choice. Good luck deciding. 

There's the concept of good debt and bad debt that it might make sense to see if it resonates with your husband.  

Essentially, debt for productive or appreciating assets isn't really debt.  I mean, obviously it is.  But like @Joe Villeneuve said, you're not the one paying for it - your tenants are.  It's also going towards something that should - in general - increase more in value as time goes by.  So you've got equity gained by retiring the debt with the tenant's payments plus the equity gained by the asset appreciation and it's like a double bonus.

Debt that is not productive or is for depreciating assets, such as for old credit card debt or automobiles, is the type of debt to avoid.

Jen, there is no right or wrong answer to your question.  Investors all have different risk tolerance and no two investors ever seem to look at things the same way.  In order to stay married, you can't discount the concerns of your husband.  He sounds a lot like my wife by the way as I am the risk taker and she is not.  I would suggest not immediately paying down the mortgages, but instead build enough reserves to put your husband at ease.  With enough reserves to cover the mortgage payments for an extended time and any required capital expenditures that may come up.  Once this is achieved, I would bet your husband is more on board to save more money for the next investment and with mortgage rates this low, let your renters continue to pay off your current mortgages.

My two cents as and investor, CPA and husband.

@Jen Faulkner

Would just like to add that whatever direction you head, make sure you're not paying off low interest loans when you have outstanding high interest debt. 

Personally I would leverage and keep buying. If you're buying right, you shouldn't get your hand caught in the cookie jar. 

Originally posted by @Ed Caldwell :

Jen, there is no right or wrong answer to your question.  Investors all have different risk tolerance and no two investors ever seem to look at things the same way.  In order to stay married, you can't discount the concerns of your husband.  He sounds a lot like my wife by the way as I am the risk taker and she is not.  I would suggest not immediately paying down the mortgages, but instead build enough reserves to put your husband at ease.  With enough reserves to cover the mortgage payments for an extended time and any required capital expenditures that may come up.  Once this is achieved, I would bet your husband is more on board to save more money for the next investment and with mortgage rates this low, let your renters continue to pay off your current mortgages.

My two cents as and investor, CPA and husband.

 I think this is an excellent point. If you have a huge amount of liquid reserves relative to your monthly expenses, and your husband is still worried, that may just be his nature, or he may not understand the concept of debt as a tool. If this is not true, however, he may be coming from a perfectly rational place in that a misstep or two could put you in serious financial peril. 

Thanks all for your input! We joined a local REI group, so it's my hope that my husband gets a little more in tune with the business aspect of it all (he's more of the maintainance/handyman, and I am the biz end). We've been landlords for 7 years, and I really feel like we could have been a lot further into this if we'd planned better from the beginning, but now is the time!

@Aaron Mercer, I'm in my 40's.  You're darn right 30's is young!    :P

@Jen Faulkner The only thing I would add to this discussion is that you and your husband need to figure out what your long term goals are for your real estate investments. Paying down mortgages make sense in some scenarios (I used this approach so that my rental income will fund my kids' college education) but it doesn't make sense in many others.

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