Pay off mortgage and snowball?

Rental Property Investor · Bloomington, IL · Member since 2017 · 26 posts · 17 votes

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!

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Caleb Heimsoth

Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes

You 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

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Ryan Crowley
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Rental Property Investor · Bloomington, IL · Member since 2017 · 26 posts · 17 votes
8y
This debate really has me excited about ALL the opportunities and strategies with real estate investing. Anyone know Josh or Brandon? Would love to get them in on this debate! You all have great points and I am excited to be finally getting started to learn what works best for me. Truly appreciate all the great advice from your experiences.
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
Originally posted by @Ryan Crowley:

This debate really has me excited about ALL the opportunities and strategies with real estate investing. Anyone know Josh or Brandon? Would love to get them in on this debate! You all have great points and I am excited to be finally getting started to learn what works best for me. Truly appreciate all the great advice from your experiences.
Keep in mind that BRRRR strategy advocated on BP by Josh and Brandon includes leverage and pulling all your cash out of the property. As I have listened to the podcasts, I have noticed Brandon has started talking more about paying properties off. I am sure this is a result of a maturing portfolio. When you are in the acquisition stage, using leverage helps you build a portfolio. Then at some point, paying down debt starts to make more sense. Once you have enough properties to support your life style, what is the point of acquiring more? It makes more sense to pay down debt.
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Andrew SyriosPro Member
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Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
8y
In The Millionaire Real Estate Investor, it profiles a couple who used this strategy. They had something like 25 or 30 rentals, all paid off. I think it works very well, but it is a very conservative strategy too. There are definitely faster ways to grow your portfolio fully utilizing debt. But if you want to use a conservative approach and use the extra cash flow to pay off debt versus further investing, I think that's a very legitimate way to go about it.
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Jeremy Z.
Tacoma, WA · Member since 2018 · 230 posts · 257 votes
8y
Originally posted by @Kalo (Kyle) Atanasoff:

@Anthony Dooley
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.
I agree that this was a great post comparing an all cash strategy vs using leverage. There are many benefits to using leverage. But I feel it is important to point out that the 10% appreciation example works both ways - if a property decreases, it decreases on the full market value. So if the market decreases by 10%, the all cash investor loses 10% while the leveraged investor in your example loses 40% of their initial outlay. Now if rents hold, the leveraged investor can still ride it out and be OK over the long haul, but if rents also decrease, well that is where problems start.
Others alluded to this fact, but I wanted to point it out directly.
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
@Jeremy Z. good point. I guess people forget that unemployment a few years ago was 10% nationally. The people who were foreclosed on in 2008-2012 thought they were doing fine until they weren't. Nobody plans to lose their property. I predict that the guys who are fully leveraged and cash flowing $100 per month will be motivated sellers when the next big correction happens.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y
@JD Martin @Jay Hinrichs @Joe Splitrock @Steve Vaughan and others.
I'm in the leverage camp but there is a good quote for those who have reached their goal.
"When you have won the game, it's time to stop playing."
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Aron D.
Rental Property Investor · San Diego, CA · Member since 2008 · 89 posts · 65 votes
8y
Investing in the market that you have knowledge of and the economic factors that support it is necessary. I personally leverage, but have a large rainy day fund. I can't see how some investors cashflow just $100 per door in some markets. It would be nice to cashflow that much with no money out of pocket, but everyone has their own strategy and circumstances. I started out with little to nothing when I was in the Army and building up properties slowly. Some properties appreciated double during this cycle and the rents still covered the mortgage after a cashout refi. I put the cash from the refi back into more mutlifamily units that produce more rental income. I like to stay in the working class areas as they make enough to pay the rent and bills, but don't have the financial discipline to save enough to purchase their own home. Most of my renters are nurses, engineers, and tax payer funded employees (Government workers). It amazes me the nice cars, clothes, and general stuff that my renters have compared to what I own. I sacrifice today in order to reap the rewards in the future. I can't work in a cubicle forever.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Anthony Dooley:

@Jeremy Z. good point. I guess people forget that unemployment a few years ago was 10% nationally. The people who were foreclosed on in 2008-2012 thought they were doing fine until they weren't. Nobody plans to lose their property. I predict that the guys who are fully leveraged and cash flowing $100 per month will be motivated sellers when the next big correction happens.
actually its either them or they walk and its their lenders selling that is what happened in that time period.. and was pronounced in certain markets.
for me personally I don't want to risk my credit and finances and borrow 75k to make 1200 a year... or even 2400 a year if its a market that has a history of no appreciation and I don't feel there is going to be any significant appreciation.. 2 to 3% a year does not cut it.
but I will take 500 a month negative or 10k a month negative if I think there are huge gains at the other end.. and many who reposition big multi do the same.. they have to vacate the units they have substantial negative cash flow then it starts to come back but they get big upside value add
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Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
8y
@Jay Hinrichs I'm with you on that. I'm doing a value add deal now in a flat appreciation market, but it will double in value when I'm finished. My SFR have flat appreciation, but the cash flow kills.
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Nathan G.
Investor · Prosper, TX · Member since 2018 · 15 posts · 3 votes
1y
Quote from @Caleb Heimsoth:
You 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
I agree with this approach. Get some leverage working for you, just not too much relative to how much your day job brings in. You don't want to be in a pinch if you have vacancies and need to pay notes out of pocket.
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Anil Shah
Real Estate Agent · Raleigh, NC · Member since 2025 · 31 posts · 15 votes
1y
Just remember that it would be a very slow process. Assuming that your interest rate is low, you are not increasing cashflow by a much by paying it off- you still have property tax, insurance and maintenance. But it also depends on your risk tolerance- if you have a decent safety net, you can leverage yourself a bit. Else your method is good.
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