Pay off mortgage and snowball?
Rental Property Investor · Bloomington, IL · Member since 2017 · 26 posts · 17 votes
Pay off mortgage and snowball?
Most Popular Reply
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8yYou could do it your way but I’d recommend a bit of a hybrid model. Acquire 8-10 rentals and then start paying them off, using the combined cash flow to put towards one mortgage. If you have a day job you could combine both and make it go even further
61 Replies
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Kalo (Kyle) Atanasoff:
Not need to agree with, but the return on equity is always zero (0). Why would you want to keep it "behind the walls"? How about opportunity cost?In addition, when you have leverage you have the other benefits which @Ali Boone mention. Protection from lawsuits is a big item to consider as well, especially in higher price range properties.
Financially free always betas debt free, and taking on more "smart" debt is not only opposite of risky but actually the goal for the most seasonal investors.
until your financially free assets fail. .. actually most of the family office type folks I work with have little debt and LOTS of cash to invest... depends on where your assets are ... are they quality assets or subprime assets.
it also depends on your make up.. do your freak out knowing you have millions in debt or ?
but end of the day lots of Black on your balance sheet simply is not a bad thing..
Now reality.. unless your using funds from a super successful business.. most most starting out are not sitting on piles of cash or have family offices.. so debt is the only way to get in the game.
Also short term debt were your in and out can work.. but it also can bite you in the butt.. look at all the builders that went down in the crash. But then again everyone got hammered in the crash.. Landlords HML banks you name it.
my clients that had no debt they rode right through it..
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes8y
Originally posted by @Kalo (Kyle) Atanasoff:
Not need to agree with, but the return on equity is always zero (0). Why would you want to keep it "behind the walls"? How about opportunity cost?In addition, when you have leverage you have the other benefits which @Ali Boone mention. Protection from lawsuits is a big item to consider as well, especially in higher price range properties.
Financially free always betas debt free, and taking on more "smart" debt is not only opposite of risky but actually the goal for the most seasonal investors.
Ask yourself, If I had no debt or mortgages at all, how would that affect my monthly cash flow? I'm not talking about a return, CASH every month.
- Rental Property Investor · Los Angeles, CA · Member since 2014 · 259 posts · 55 votes8y
Return on investment is a function of how much you have to invest. If you have $1 000 000 to invest, would you:
1. Invest all cash on 10x $100 000 properties (not counting closing cost) with a return of 10% / annually
OR
2. Leverage and invest at 40x $100 000 properties ($20k down + $5k closing cost, 30 yeas fix rate loan) with a return of 10% where you have better asset protection (my keeping lower equity and higher bank position), you are hedge against inflation (agree with me, in 30 years $1 000 000 purchasing power will be less compare than $1 000 000 today)
Here is how looks mathematically:
1. 10% on $1 000 000 (10x $100 000) = $100 000 / annually
- No interest tax deduction
- No loan paydown benefit
2. 10% on 1 000 000 (40x $100 000) = $400 000 / annually - debt service
+ full tax benefits
+ loan pay down
+ hedge against inflation for 30 years
+ better asset protection (by maintaining lower equity position)
+ (not guaranteed of course) if appreciation happens, it happens on the all full asset amount, example:
If appreciate 10%:
In case "1" you will have 10% on $1 000 000 = $1 100 000
In case "2" you will have 10% on all 40x properties (40x $100 000 = 4 000 000) = $1 400 000
As far as cash flow, as long you buy "right" CAP 8% and higher you will have stronger cash flow on leveraged asset + all additional benefits.
- Rental Property Investor · Los Angeles, CA · Member since 2014 · 259 posts · 55 votes8y
@Account Closed : Why would I ever want to own investment property free and clear (no debt)? For my personal residence - yes, i would love to own it free and clear as it's not an investment but rather liability which I want to minimize as much as possible.
- Rental Property Investor · Los Angeles, CA · Member since 2014 · 259 posts · 55 votes8y
Agree on all with a little caveat that a lot of people with a lot of debt rode just fine through 2007-2009 because they bought right, meaning for cash flow (not appreciation) in "B" class areas.
- Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes8y
@Kyle Atans I don't need a math lesson. I already know all of that. You are missing my entire point, but maybe one day you will get it. All the math works as long as it works, but sometimes life interrupts your equation. Death, Divorce, Disease, Natural Disaster, etc.
- Rental Property Investor · Los Angeles, CA · Member since 2014 · 259 posts · 55 votes8y
Originally posted by @Anthony Dooley:
@Kyle Atans I don't need a math lesson. I already know all of that. You are missing my entire point, but maybe one day you will get it. All the math works as long as it works, but sometimes life interrupts your equation. Death, Divorce, Disease, Natural Disaster, etc.
True, I am 100% with you on that.
The point here is, when you analyze, you do based on what you know now (what is known as a fact today) and on what is highly likely to happened (again from today) and to accept the fact that things might change tommrow.
Life happened every day, that’s why we need to stay firm with our direction but flexible with our approach.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes8y
Originally posted by @Kalo (Kyle) Atanasoff:
@Account Closed : Why would I ever want to own investment property free and clear (no debt)? For my personal residence - yes, i would love to own it free and clear as it's not an investment but rather liability which I want to minimize as much as possible.
why do people pay $20m cash for a manhattan condo? Its a safe place to park money. Also at some point I want max cash flow and minimal risk to that cash flow. If I have no mortgage the cash flow is more secure. And I dont have to manage 100 units making me $100/month each.
- Rental Property Investor · Los Angeles, CA · Member since 2014 · 259 posts · 55 votes8y
Originally posted by @Account Closed:
@Account Closed : Why would I ever want to own investment property free and clear (no debt)? For my personal residence - yes, i would love to own it free and clear as it's not an investment but rather liability which I want to minimize as much as possible.
why do people pay $20m cash for a manhattan condo? Its a safe place to park money. Also at some point I want max cash flow and minimal risk to that cash flow. If I have no mortgage the cash flow is more secure. And I dont have to manage 100 units making me $100/month each.
Because, if you are a “regular” person meaning don’t make 5M a year W2 / legit bussiness which shows on tax returns, you can’t qualify for 20M loan
Also it mean, that people who buy 20M condo, chances are they have 100M-200M cash sitting and not doing anything.
Return of equity is 0, as it also the cash sitting in a bank.
Debt is cheap now days: 4-5%, but if you have “unlimited cash”, then not need to pay 4-5%
As far as max cash flow and minimum risk - it’s something a lot of members discussed already.
And last but not least - let’s not go off topic. The reason for this debate was because someone got his first rental property and thinking about his next steps.
Chances are (I could be wrong) he did not bought 20M condo all cash as his first rental, but 100k house with 20% down.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes8y
Originally posted by @Ryan Crowley:
Hey everyone, I accomplished my goal of getting my first rental property under contract by the end of 2017 and I close on this property soon. I have been calculating the best way to grow my portfolio, but I am curious if anyone else has worked to pay off the mortgage completely and then saved all the additional cashflow for their next property?? Then repeat for a snowball effect. Obviously would be a slower process, but would create very little debt hanging over your head. Let me know your thoughts. Thanks!How long will it take you to pay off this property? How many do you ultimately want to have?
- 8yKyle DwyerPro MemberRental Property Investor · Seguin, TX · Member since 2017 · 45 posts · 21 votes
I feel you must do what makes you most comfortable. The process would be much slower yes, but you would be preventing the debt pile up. However, with proper cash flowing properties, that would be well worth it in my opinion. You could purchase many more properties in a shorter amount of time, increasing your cash flow with each purchase, then start to snowball from that point. This way you do a little bit of both.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kalo (Kyle) Atanasoff for me for the younger investors or starter investors is at least use that 100 or 200 a month positive to paydown debt at an accelerated rate it will save them a ton in the long run and if they can get them paid off in 10 to 15 years that's a good thing.. its not like saving 1200 a year is going to materially affect their ability to buy unit number two and if its that tight not sure owning rentals is that great of investment anyway.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Kalo (Kyle) Atanasoff:
Originally posted by @Anthony Dooley:
@Kyle Atans I don't need a math lesson. I already know all of that. You are missing my entire point, but maybe one day you will get it. All the math works as long as it works, but sometimes life interrupts your equation. Death, Divorce, Disease, Natural Disaster, etc.
True, I am 100% with you on that.
The point here is, when you analyze, you do based on what you know now (what is known as a fact today) and on what is highly likely to happened (again from today) and to accept the fact that things might change tommrow.
Life happened every day, that’s why we need to stay firm with our direction but flexible with our approach.
having lived through the HORRORS of those years fully engrossed in the industry almost nationwide... it was regional on who did well and who had troubles..
no question well positioned landlords in Portland for instance no issue.. I had clients in PHX and Vegas that lost their 4 plex's because they went 100% vacant and stayed that way.. they owned 4 or 5 of them.. it only took about 3 months of negative cash flow and they were done.
Max leverage loss tenants lose property.. that's the formula.. we do have to remember and I know its 10 years ago and many on this site are post GFC investor and know no better.. but were do you think all these deals came from... back in 2010 to 2014 it was not from well performing assets it was from stressed and failed owners.
- Pittsburgh, PA · Member since 2016 · 126 posts · 18 votes8yI like the strategy of acquiring as many rentals as you can with Max leverage, then using the cash flow to pay off one property at a time (snowball method). My question for the people who do this is are you putting a 30 year mortgage on all of your properties?
- Rental Property Investor · Los Angeles, CA · Member since 2014 · 259 posts · 55 votes8y
Originally posted by @Jay Hinrichs:
Originally posted by @Kalo (Kyle) Atanasoff:
Originally posted by @Anthony Dooley:
@Kyle Atans I don't need a math lesson. I already know all of that. You are missing my entire point, but maybe one day you will get it. All the math works as long as it works, but sometimes life interrupts your equation. Death, Divorce, Disease, Natural Disaster, etc.
True, I am 100% with you on that.
The point here is, when you analyze, you do based on what you know now (what is known as a fact today) and on what is highly likely to happened (again from today) and to accept the fact that things might change tommrow.
Life happened every day, that’s why we need to stay firm with our direction but flexible with our approach.
having lived through the HORRORS of those years fully engrossed in the industry almost nationwide... it was regional on who did well and who had troubles..
no question well positioned landlords in Portland for instance no issue.. I had clients in PHX and Vegas that lost their 4 plex's because they went 100% vacant and stayed that way.. they owned 4 or 5 of them.. it only took about 3 months of negative cash flow and they were done.
Max leverage loss tenants lose property.. that's the formula.. we do have to remember and I know its 10 years ago and many on this site are post GFC investor and know no better.. but were do you think all these deals came from... back in 2010 to 2014 it was not from well performing assets it was from stressed and failed owners.
Great point! I would like to think in a way that investment in general, and the real estate investment, start with a solid economic reason - "Why do you Invest, where you invested".
To elaborate on below - Vegas is a great example where no real economic driver exists and when you invest there, you should be aware that is a highly volatile market (side note: i both 2 properties there in 2011 and 2012 and i sold both this year) and you should pay an extra attention and be prepare to reposition capital.
It's clear, if you invest in Vegas or Orlando (just 2x entertainment cities) you will expect ups and downs and you need to position yourself with extra reserves and extra caution if you are planning to stay in these market for long term.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Kalo (Kyle) Atanasoff or PHX when building stopped dead cold and they deported half the construction workers who happened to be 80% of the tenant base.. same with central CA building stopped no deportation though :)
I just bought in Vegas for semi retirement and tax purposes I kind of like were it sits now..
but no question your timing of that market was impeccable.. !!! congrats...
- Investor · Atlanta, GA · Member since 2017 · 16 posts · 9 votes8y
The answer is... it depends. It depends on how much risk you are willing to take, if you are only comfortable with managing properties that you own free and clear, then that is the right strategy for you. As others have said you will get less return on your money and prolong the process, but your strategy will still work! I am kind of like you I don't like to have myself over-leveraged, I bought a trailer park and duplex in 2017 with 11 doors in total, currently looking at around $460k in mortgages, with about $90k in liquid savings and that is about as stretched as I want to be. I never want to have less than that in savings, because in the event of a huge market turn I want to be able to bail myself out and survive. My goal for 2018 is to pay off both mortgages and search for more properties to buy at the end of the year or early 2019.
If I were you I would find out the 2008 price levels of your properties, where did they bottom out and pay down your mortgages till that amount remains, then buy more. In the event of catastrophic market conditions, you would still be even with your property value/mortgage. That is a very conservative approach in my opinion.
Hope this helps and good luck!
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Originally posted by @Bill E.:
I like the strategy of using the cash flow to pay off one property at a time (snowball method). My question for the people who do this is are you putting a 30 year mortgage on all of your properties?For me it depends on the interest rate. All being equal, I would take a 30, but sometimes the 15 is much much lower.
In 2012 I refinanced every residential mortgage I could as rates dropped to the lowest in 50 years. For instance, a 15yr rate was 3.375% on a 2-fam I did, but the 30 was 4%. Check the rate difference - sometimes it's 20%!
Overall, I am firmly with @Jay Hinrichs on this debate. For the couple hundred in extra 'cash flow' you get by doubling a payment's term, I'd much rather be done with it sooner. As properties have begun to be paid off for me, that few hundred a month becomes a rounding error as real wealth and options become available to you.
I have never paid something of and said, 'Gee, I'm sure gonna miss that payment. Wish I went with a 30 and still had 70% of my balance left and another 180 months to go!'
Not having a payment gives you patience to select good tenants and opportunity during the tough times when others are freaking out from vacancy and racing to offer better incentives to put a body in their place. But most here have never gone through what was only 6-8 years ago. They will continue to get 360 month loans for the 'cash flow'.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Steve Vaughan when we went through the 08 to 2010 debacle and over 200 landlords handed me back their houses.. and lost ALL their money... it was an eye opener and they were all landlords all west coast based a few on east coast.
but they walked.. and I was just one little mortgage guy with 450 loans out.. can you imagine the banks with hundreds of thousands of loans and servicing companies..
so having mass equity or paid for keeps this from ever being an issue. then when I sold these off.. most for cash but a lot I did a 30 to 60 month ZERO interest deal on.... and boy you should have heard the cash flow cool laid drinkers.. OH but it does not cash flow.. I said no but it maybe cost you 50 bucks a month other wise your tenant is paying off your principal and 3 to 5 years goes aweful quick then you own it free and clear and you just put 10% down and tenant paid of the rest what are you really going to do with 100 a month anyway... it was funny that was a hard sell. but I can tell you I did about 50 of the no interest and as they paid off you talk about a happy buyer getting their reconveyance deed in such a short amount of time.. and as a lender in possession the paper was rock solid .. never had one default.. 18 months in the house is half paid.
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes8y@ali Boone It’s simple because 100% of people ticket foreclosed on have mortgages. At least with the paid off property and you get yourself into a bad situation in life you can just sell it and there’s tons of equity but if you’re ever in we leverage with a mortgage in the market goes down you won’t be able to sell without a loss so it’s simple math.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes8y
Original poster: this is a debate you're never going to get agreement from on the extreme sides of this equation. You have the "no debt, ever" people such as @Anthony Dooley and you have the "maximum leverage, always" people such as @Thomas S (I can't link him because he doesn't believe in colleagues ;) ). The best answer, like most things in life, is somewhere in the middle. Right now, money is ridiculously cheap to borrow. If you are/were old enough to remember the early 80's (or ancient, like @Jay Hinrichs and remember the 70's :D ), you'd know that 3-5% rates for borrowing money is almost laughable. I remember getting a great rate on my mortgage 25 years ago and paying almost 9%. In fact, I just tossed away an amortization book of tables that I've had for almost 30 years, when we were doing some winter cleaning - the lowest rate it went down to was 7%. On the other hand, you can borrow yourself into oblivion, and guys that have no cash position better have a hell of a lot of liquidity - especially in more volatile markets. If you are clearing $100/door with mortgages, each month, and your rent is $1200, one month of vacancy killed your entire cash flow for the year - two months means you better have a job or some extra money sitting around to pay that mortgage.
So the real answer is do what's comfortable for you and what makes sense based on your own financial position, your age, your desired outcome, and your local market. Leverage is going to make you rich, faster, but it entails much greater risk by bringing in partners (your mortgage company). Paid off is slow and steady, and is simpler, but takes forever, and if you're 50 and just starting out and depending on this for your retirement, forget it. You'll never pay them fast enough to make it make sense. Your ROI needs to be much higher the older you get started because of the loss of the magic of compounding.
PS: A lot of the "no debt, ever" people feel a moral sense of superiority to those that carry debt. They truly believe their way is right and everyone else is misguided, so it is generally pointless to debate them. And I say this as a guy who owns most of his portfolio free & clear. It's kind of like the ex-smoker, in the company of smokers.
Skyline Properties - Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes8yMostInvestors don’t calculate for risk which once typi calculate for risk it is in such a great deal if you are leveraged. For me personally I’m somewhere in the middle and a little more risk adverse.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
Originally posted by @Kalo (Kyle) Atanasoff:
Return on investment is a function of how much you have to invest. If you have $1 000 000 to invest, would you:
1. Invest all cash on 10x $100 000 properties (not counting closing cost) with a return of 10% / annually
OR
2. Leverage and invest at 40x $100 000 properties ($20k down + $5k closing cost, 30 yeas fix rate loan) with a return of 10% where you have better asset protection (my keeping lower equity and higher bank position), you are hedge against inflation (agree with me, in 30 years $1 000 000 purchasing power will be less compare than $1 000 000 today)
Here is how looks mathematically:
1. 10% on $1 000 000 (10x $100 000) = $100 000 / annually
- No interest tax deduction
- No loan paydown benefit
2. 10% on 1 000 000 (40x $100 000) = $400 000 / annually - debt service
+ full tax benefits
+ loan pay down
+ hedge against inflation for 30 years
+ better asset protection (by maintaining lower equity position)
+ (not guaranteed of course) if appreciation happens, it happens on the all full asset amount, example:
If appreciate 10%:
In case "1" you will have 10% on $1 000 000 = $1 100 000
In case "2" you will have 10% on all 40x properties (40x $100 000 = 4 000 000) = $1 400 000
As far as cash flow, as long you buy "right" CAP 8% and higher you will have stronger cash flow on leveraged asset + all additional benefits.
Great explanation. I always forget about the hedge against inflation. By year 28 of a 30 year loan, you can expect your dollar to be worth half as much as it is today. You are basically paying $0.50 back on the dollar at that point. Your dollars are always worth more TODAY than they will be in the future.
Risk can be mitigated by having cash reserves. If the property is paid off and remains vacant for more than a couple months, it probably means something more serious is going on in the local economy. At that point leverage may be better. You can just stop making your payment and let the bank take the worthless property.
- Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes8y
I knew an older couple who lived through the great depression (1930s). They were so traumatized by it that years later at a restaurant they wouldn't pay an extra 30 cents for blue cheese salad dressing.
My point is, because some people got burned 10 years ago in the fiscal crisis doesn't mean one needs to be extremely conservative with leverage.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.