Who here is paying off their long term rentals?
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
Who here is paying off their long term rentals?
Most Popular Reply
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
8yOriginally posted by @Jay Hinrichs:
@Steve Vaughan paging .
in areas of low asset values and high rent to purchase price values I like all cash.. mainly because tenant base tends to be tougher on the properties and the ups and downs etc.
Thanks for the page, Jay!
Before this turns into a 'you're stupid to pay things off' , ' fake cf' or 'dead equity' slant, I'll tell you my rationale.
Half my portfolio is paid off. As my reserves and opportunity fund swelled and deal flow got too difficult to bother hunting down anymore, I started punching my higher rate and higher risk mortgages in the face. Commercial loan bothering me for my financials again? Nah. Gimme a payoff quote. Old 7.9% funky commercial hybrid house loan? See ya. And so on.
Most of mine are commercial and in LLCs since day 1 so the asset protection already is in place. If a house, I slap a new d of t on it to at least appear encumbered at first glance.
Glad I paid off what I did. The cf increase was equal to buying another 15-20 units in my market now. Even after buying another one with cash in June I still have an opportunity fund and reserves. An awesome snowball, building while I do other things.
I wouldn't spend down through reserves to pay off a mortgage, especially if a low fixed rate below 5%. Nor would I start until I had at least 5 properties (I started at 36 units), but higher rate and higher hassle loans going bye bye has been nothing but a good thing for me. All loans I accelerated were above 5.75%, most in the 6s, one 7.9%.
134 Replies
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Steve Vaughan paging .
in areas of low asset values and high rent to purchase price values I like all cash.. mainly because tenant base tends to be tougher on the properties and the ups and downs etc.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Originally posted by @Jay Hinrichs:
@Steve Vaughan paging .
in areas of low asset values and high rent to purchase price values I like all cash.. mainly because tenant base tends to be tougher on the properties and the ups and downs etc.
Thanks for the page, Jay!
Before this turns into a 'you're stupid to pay things off' , ' fake cf' or 'dead equity' slant, I'll tell you my rationale.
Half my portfolio is paid off. As my reserves and opportunity fund swelled and deal flow got too difficult to bother hunting down anymore, I started punching my higher rate and higher risk mortgages in the face. Commercial loan bothering me for my financials again? Nah. Gimme a payoff quote. Old 7.9% funky commercial hybrid house loan? See ya. And so on.
Most of mine are commercial and in LLCs since day 1 so the asset protection already is in place. If a house, I slap a new d of t on it to at least appear encumbered at first glance.
Glad I paid off what I did. The cf increase was equal to buying another 15-20 units in my market now. Even after buying another one with cash in June I still have an opportunity fund and reserves. An awesome snowball, building while I do other things.
I wouldn't spend down through reserves to pay off a mortgage, especially if a low fixed rate below 5%. Nor would I start until I had at least 5 properties (I started at 36 units), but higher rate and higher hassle loans going bye bye has been nothing but a good thing for me. All loans I accelerated were above 5.75%, most in the 6s, one 7.9%.
- Investor · Sammamish, WA · Member since 2013 · 94 posts · 84 votes8y
I personally continue to conservatively leverage all of my properties for a maximum cash on cash return. By conservative, I mean a minimum of 25% equity in each property. However, I do manage a lot of properties in Seattle for foreign investors using all cash and have asked them this very same question. Their response to me has been that they are satisfied with a very low cash on cash return because it is better than they can get locally and because they consider a city like Seattle to be a safe place to invest as far as the government not seizing land, and because appreciation rates have been historically very good.
- Member since 2016 · 13k+ posts · 12k+ votes8y
I have been able to do the opposite for years. I pull out all my equity ,maximum possible, and invest the cash in income funds. I am no longer interested in growing my portfolio but instead of saving 4,5,6% interest by paying down a mortgage I reinvest and have consistently pulled 10%+ over the past decade in moderate risk funds. My cash is reasonably available if needed but I have never and likely will needed it. All my properties have positive cash flow with maximum leverage.
Cash is not easily accessible in real estate and simply does not generate enough return paying off a mortgage to satisfy my investment needs. Additionally the interest on my mortgage's are tax deductible. I understand how some feel secure owning their properties but for me I am very comfortable out performing conservative investors and consider my returns as much higher "cash flow" through leverage.
- 8yRuss SmithPro MemberRental Property Investor · Clearwater, FL · Member since 2017 · 36 posts · 70 votes
Originally posted by @Steve Vaughan:
Originally posted by @Jay Hinrichs:
@Steve Vaughan paging .
in areas of low asset values and high rent to purchase price values I like all cash.. mainly because tenant base tends to be tougher on the properties and the ups and downs etc.
Thanks for the page, Jay!
Before this turns into a 'you're stupid to pay things off' , ' fake cf' or 'dead equity' slant, I'll tell you my rationale.
Half my portfolio is paid off. As my reserves and opportunity fund swelled and deal flow got too difficult to bother hunting down anymore, I started punching my higher rate and higher risk mortgages in the face. Commercial loan bothering me for my financials again? Nah. Gimme a payoff quote. Old 7.9% funky commercial hybrid house loan? See ya. And so on.
Most of mine are commercial and in LLCs since day 1 so the asset protection already is in place. If a house, I slap a new d of t on it to at least appear encumbered at first glance.
Glad I paid off what I did. The cf increase was equal to buying another 15-20 units in my market now. Even after buying another one with cash in June I still have an opportunity fund and reserves. An awesome snowball, building while I do other things.
I wouldn't spend down through reserves to pay off a mortgage, especially if a low fixed rate below 5%. Nor would I start until I had at least 5 properties (I started at 36 units), but higher rate and higher hassle loans going bye bye has been nothing but a good thing for me. All loans I accelerated were above 5.75%, most in the 6s, one 7.9%.
I have to agree a lot with what Steve is saying. As the deals become harder and harder to find, it makes sense to retire some of the higher interest rate loans or loans with low balances, especially if your cashflow will take a big jump. I have a few loans that are halfway into their 15 year terms, and some older 30 year loans that are 10-15 years into their terms and the balances are really starting to dwindle. I've paid off a couple and I have a few more on the chopping block. It may not be the "highest and best" use of capital but I've had solid CF increases and having free and clear properties helps me sleep at night.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Thomas S.:
I have been able to do the opposite for years. I pull out all my equity ,maximum possible, and invest the cash in income funds. I am no longer interested in growing my portfolio but instead of saving 4,5,6% interest by paying down a mortgage I reinvest and have consistently pulled 10%+ over the past decade in moderate risk funds. My cash is reasonably available if needed but I have never and likely will needed it. All my properties have positive cash flow with maximum leverage.
Cash is not easily accessible in real estate and simply does not generate enough return paying off a mortgage to satisfy my investment needs. Additionally the interest on my mortgage's are tax deductible. I understand how some feel secure owning their properties but for me I am very comfortable out performing conservative investors and consider my returns as much higher "cash flow" through leverage.
in your market your tenant base is easier to manage over all and your properties are far more liquid ..
- Rental Property Investor · Apex, NC · Member since 2015 · 197 posts · 102 votes8y
I agree with Russ, having properties paid off helps to sleep easier. Currently I am paying down what i have and building my portfolio slowly. I could probably grow quicker if i pulled all the equity out of my properties but right now that is not my plan.
- Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes8y
When I first started I got to a point where it was about the same boost in cash flow if I paid off my house or did a cash out refi and hit a certain target. Loans were/are cheap so I figured I might as well do the cash out and grow the portfolio. I'm lucky that I came in when loans are low and I had the income/credit to secure a good rate... had I not had that then I'd consider paying those down.
The amount of money I would spend to get my properties paid off wouldn't really match the relatively low bump in monthly take home (compared to how much I'd have to put out to get that). I'm with @Thomas S. plenty of ways to put those funds to work rather than pay off historically low loans... - Investor · Columbus, OH · Member since 2016 · 30 posts · 59 votes8yCurrently have two units, but after I hit 8 or 10, I plan on paying off just for less hassle. That would be plenty of cash flow for my needs, and I’d much rather have 8 tenants than 40 and so many more loans. Don’t need to be rich, just financially free!
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8y@Andrew Neal The two other people who I would have deferred to on this are already on this thread in @Jay Hinrichs and @Steve Vaughan. I am already paying off some mortgages but slowly. I don’t need cash flow now and I have a certain limit in how much total debt I want. Eventually I will just buy residential houses in cash and leverage for larger deals. I like the simplicity of it. (Save thousands in closing costs) and I like the idea of less units for the same cash flow. All the rich people I know have zero debt. Which I know is crazy on BP but it’s my experience. You want a net worth of 5M or 10M those people I know have zero debt. That includes primary houses.
- Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes8y
@Caleb Heimsoth I like you're approach. I definitely agree that some mix of leverage and cash is what seems best and fits with my long term goals.
I also like what @Kurt Dieringer mentioned about dealing with 8 tenants instead of 40, very true haha.
@Jay Hinrichs good point about the type of tenant and type of property.
It really boils down to your personal goals and risk tolerance. As always, thanks to everyone for pitching in I am always fascinated about people's "why" since there are so many different strategies out there.
- Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes8y
I am paying off or refinancing everything that is at @ 8%+, or that is a variable interest that could shoot up soon, and adding as much 4-6% fixed rate debt as I can acquire.
I'm also still holding a few notes at 12-18% that are high LTV on funky properties, and am getting those borrowers to pay down the LTV a bit to make sure the notes continue to perform.
- Rental Property Investor · Member since 2018 · 483 posts · 956 votes8y
When I built my first portfolio to 32 doors I paid off 29 of the properties. I didn't really understand leverage then. The plus side was when I cashed out in 2007 due to medical reasons I secured our future.
Now we try to keep 25% of our portfolio free and clear. In the next 10 years we will just pay everything off because we don't care to own 100 doors.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes8y
@Andrew Neal we were paying off loans, but when house prices and interest rates started increasing, we decided to start saving cash instead. We have multiple loans around 4% or even under 4%. It is hard to pay those off and give up those low interest loans. We decided it makes more sense to save up cash to acquire more properties.
While building your rental empire, leverage helps you scale. One you have enough properties to meet your income goals, paying them off makes sense.
Look at it this way. Say your goal is $10,000 passive income per month. You could meet that goal by having $200 cash flow from 50 leveraged doors OR you could have $1000 cash flow from 10 paid off doors. The difference is future potential. The 50 door route will yield higher future income. So the point is, how much is enough? It just comes down to goals.
- Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes8y
@Adrew Neal for years I spent time building folks portflios with turnkey rentals. Did this my self as well. Best years were 2004-2006 . I was buying 2 to 4 at time most of the time just 2. Yet I would use hard money. Then fix flip and sell one to pay of the other one or close to pay off as possible. Fast forward to 2018. My focus is to pay off all rentals in 3 years or less. I diversify with in real estate. So I am building New Construction, buying apartment (small under 20 ) and some local flips if numbers make sense. As @Jay Hinrichs I don't mind the lower end. So those I don't want any debt as you got to understand the product more and the folks renting. I recently told a newer investor here in Charlotte. I would rather have 10 free and clear rentals then 30 financed rentals. Yes we shold use leverage but free and clear give me more control over the asset. What do I mean by that. Keep in mind 30 year note means I got 30 years to babysit tenants. To make sure my mortgage is paid. Its not saying that way does not work. As some folks buy in higher appreciation markets no cash flow but huge upside with the market prices. Bare with my rambling but I a shooting for 20 free and clear. This frees up my life( time ) and gives me more time to play in the garden.
just my two cents
Alex
Originally posted by @Andrew Neal:I know many of the posts focus on the forums focus on max leverage for scalability and I get that and to a degree (especially in the beginning) agree that leverage can be great.
I am curious who in here is buying with either cash or buying with the intent of paying off the entire mortgage for max cash flow.
Would love to know your rationale behind the strategy.
- Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes8yMakes perfect sense to me, thanks for sharing your insight. I also totally agree with @joe splitrock in that as far as using leverage to scale but once I get to a healthy number whether that’s 10, 20, 30 or whatever doors then focus on paying them off.
- Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes8y
Very true leverage and pay down debt asap
Free and clear is for me LOL
But then again Im cheap
Alex
Originally posted by @Andrew Neal:
Makes perfect sense to me, thanks for sharing your insight.I also totally agree with @joe splitrock in that as far as using leverage to scale but once I get to a healthy number whether that’s 10, 20, 30 or whatever doors then focus on paying them off.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes8y
Leverage is way down my list of concerns. I can't relate to purchasing properties where there are concerns about extended vacancy or the ability to pay mortgages.
Adding value also makes leverage less relevant as the LTV can be 50% +/- within a short period of time post-purchase after the value is added.
- Real Estate Broker · Windsor, CT · Member since 2015 · 1k+ posts · 268 votes8y
I am aggressively paying off my long term rentals currently. I would prefer to have more cash available to then purchase another property. I follow a buy and hold strategy. It really depends on your strategy.
- Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes8y@Enrique Jevons I assume you are talking about Chinese based in your “seizing land” statement. Could be south afrika now I suppose. Anyway I think you are missing their biggest rational which is their trying to avoid their own domestic currency risk
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes8y
The very advantage of RE is leverage as it magnifies your returns. Only when I go to retire or want to reduce risk would I pay off my loans. That said, I would not buy heavily leveraged properties during what could be the top of the market or near it (it's not IMO) unless I was buying it for enjoyment/to live in.
Outside of that, if the market bottomed out again, I'd go in heavy with much capital and leverage myself into another 10 properties or so.
- Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes8y
Originally posted by @Clifford Paul:
When I built my first portfolio to 32 doors I paid off 29 of the properties. I didn't really understand leverage then. The plus side was when I cashed out in 2007 due to medical reasons I secured our future.
Now we try to keep 25% of our portfolio free and clear. In the next 10 years we will just pay everything off because we don't care to own 100 doors.
Right? I like money as much as the next person, but when I have more than enough, I don't see the need to own 100 houses or apartment units. Sure, the money would be nice, but the headaches.....The point of the money is to buy you your freedom and life back, not add more stress and headaches.
- Pleasanton, CA · Member since 2016 · 73 posts · 48 votes8y
Originally posted by @Joe Splitrock:
@Andrew Neal we were paying off loans, but when house prices and interest rates started increasing, we decided to start saving cash instead. We have multiple loans around 4% or even under 4%. It is hard to pay those off and give up those low interest loans. We decided it makes more sense to save up cash to acquire more properties.
While building your rental empire, leverage helps you scale. One you have enough properties to meet your income goals, paying them off makes sense.
Look at it this way. Say your goal is $10,000 passive income per month. You could meet that goal by having $200 cash flow from 50 leveraged doors OR you could have $1000 cash flow from 10 paid off doors. The difference is future potential. The 50 door route will yield higher future income. So the point is, how much is enough? It just comes down to goals.
Well put. My risk tolerance is low so I'd be more inclined to go 10 door route but I think initially leveraging is the way to go.
- Rental Property Investor · Manhattan, KS · Member since 2018 · 12 posts · 13 votes8y@Thomas S. What do your deals look like? That is the pursuit that I am taking as well, maintain my reserves and funds, but anything else I pour into the stock market and see returns there. I refinanced once and took the cash out and invested in the stock market. Risky, but I figure $480,000 at 4.5% on my mortgage but then I average close to 9.1% in the stock market let’s me scalp 4.6%. I take that $19,000 return and deposit in my retirement account. It has worked well the last few years.
- 8yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
My stuff is all paid for at the moment-and I have some money in funds as well. Making offers from time to time but not much worthwhile in my market right now. Don’t really understand some of the prices and cap rates folks are buying into-to each their own I guess!
Join the conversationCreate a free account to reply, vote on answers and follow this thread.