Who here is paying off their long term rentals?

Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes

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.

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Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

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%.

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Ryan D.
Rental Property Investor · San Jose, CA · Member since 2013 · 188 posts · 228 votes
8y
I'm still in the growth stage of my RE career, but am conservative by nature. I've got apx 50% equity in my portfolio as a whole, and my loans (6 or 7 in total) are all at 3% to 5.2%. Its likely I'll never be able to borrow at rates that low again, so there is little financial incentive to pay them off any faster than I need to. If I owed at 7,8,9% as some of the other posters on the thread have mentioned, then I would likely move to pay those down faster, as that's no hassle investing & on par with what I could get with other no-hassle investments (i.e. stock market).
When acquiring new RE assets, I pay all cash (pulling from HELOC's against existing assets), then I refinance somewhere between 70-50% of the PP into long term debt, with the remaining 30-50% staying on the HELOC which I then pay off as fast as possible using all profits from the whole portfolio, & repeat the process typically buying 1 building a year.
15 Reply
Medi Sarwary
Pleasanton, CA · Member since 2016 · 73 posts · 48 votes
8y
@Bjorn Ahlblad @David Detweiler
What sort of funds are you guys investing in to stay relatively liquid for a deal? I have some of mine in vanguard ETF's but I'm wondering if I need it in a pinch for a deal how accessible it would be..
Sorry for hijacking your post Andrew :)
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Ryan D.
Rental Property Investor · San Jose, CA · Member since 2013 · 188 posts · 228 votes
8y
Originally posted by @Medi Sarwary:

@Bjorn Ahlblad @David Detweiler
What sort of funds are you guys investing in to stay relatively liquid for a deal? I have some of mine in vanguard ETF's but I'm wondering if I need it in a pinch for a deal how accessible it would be..
Sorry for hijacking your post Andrew :)
My "liquid" for future purchases generally comes from HELOC(s), & some money-market cash that I keep around for fast-access when unexpected opportunities arrise. Money that I have in stocks, funds, etc (Vanguard, etc.) while still being fairly liquid, is long-term investing, and I consider those to be "one way" accounts (money goes in, but doesn't come out).
4 Reply
David Detweiler
Rental Property Investor · Manhattan, KS · Member since 2018 · 12 posts · 13 votes
8y
@Medi Sarwary I put 100% in my self directed ira and keep a percentage semi liquid.
2 Reply
Brendon Woirhaye
Rental Property Investor · Whittier, CA · Member since 2014 · 325 posts · 268 votes
8y
I've very aggressively paid down my "short term" balances (pledged asset loan), but make no attempt to pay my RE-backed loans (fannie/freddie or commercial) which are all between 3.75% and 4.875%. If rates start to climb significantly, I'll start directing free cash flow towards paying down the variable loans.
2 Reply
Johnny Bravo
Specialist · Murrieta, CA · Member since 2016 · 24 posts · 18 votes
8y
@Andrew Neal I’m still super new and am still looking for my first deal but my plan is to pay off my mortgages. I will be investing for maximum cash flow on long term holds. Likely what I’ll do is get 5-10+ units in my portfolio then start paying them off using a snowball method (smallest amount first then add that amount to the next one once it’s paid off, etc etc). Then start growIng again This is a slower approach for sure but eliminates a massive amount of risk and will allow my growth to be potentIally exponential once the ball gets going and I am are no longer making mortgage payments. And essentially makes my business recession proof becuase (1) my equity positions will be spread out over multiple properties, (2) If the econmy tanks and vancancy goes up, ill be able to leverage the other cash flowing properties to cover expenses, (3) it gives me greater flexibility to keep the tenants I really like - if one is having a hard time I can position them with a new lease where maybe the first two months are free but are prorated over the rest of the lease I wouldn’t be able to miss 2months rent if I had a mortgage In addition this will allow me to have a large equity position in case a huge “can’t pass up” deal comes around. I can pull out a large chunk of equity if needed. But again, I’m new here but have put a decent amount of thought into my business plan.
7 Reply
JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
8y
I am probably more conservative than most on here (other than my friends @Steve Vaughan, @Joe Splitrock, @Jay Hinrichs) so I own most of my properties outright. We have taken out partial leverage on a couple of properties but even those properties have 40-50% left behind. I don't discount the ability of leverage to grow your portfolio dramatically - and the leverage I have was done just for that purpose, when a great deal came up and I was in too many projects - but for me personally I'm not interested in owning 100 doors. I make substantially more cash flow off my smaller portfolio than some people on here with triple my size, just because I have such low costs by owning outright. Yes, my ROI is not as good as if I leveraged everything heavily, but then there would be two issues:
1. I would have to be constantly working to obtain loans, service loans, and find places to put the money I drew out (I already have index funds, a pension, etc), and
2. I would be assuming more risk, because that is the trade off for return. Return and risk are virtually always inversely proportionate, which is why no one pays you anything on an FDIC guaranteed checking account but junk bonds might give you some crazy rate of return.
Personally, I don't want to work that hard to own rental property. The way I'm doing it works for me, which is pretty low effort once the home is rehabbed. I have houses I didn't spend more than a couple of hours on over the course of a year, which is almost as passive as you can get in real estate.
On a side note, the leverage I have is such low interest (below 5%) that I can't realistically justify paying it down early, because there is some value to having some assets liquid, especially when you buy & hold rental property.
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14 Reply
Luka Milicevic
Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
8y
I've reduced leverage this year.
I had been in acquisition mode the past 3 years. I am still buying, but looking to buy at more conservative LTVs.
This year I have been focusing on paying down debt.
I'm not thrilled with where the market is at the moment, therefore I have considered switching from acquisition mode to safety mode.
I do like leverage, and RE is one of those investment vehicles that allows you to leverage your funds. There is a 'balance' between leverage and risk. Everyone has to find out on their own what the balance is.
4 Reply
Wesley Bekkala
Member since 2018 · 8 posts · 1 vote
8y
Johnny,
I would stay away from offering two months free in the housing rental business, to "help" with a tenant hardship. This will most likely prolong a non-payment situation. You are in the right place to learn from many experts as you start this new business, wish you the best!
1 Reply
Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
8y
There is ONE risk to paying off your loans: Tax liens.
If you have your place 'free and clear', your people may not know they need to pay the property taxes if you become incapacitated. You COULD end up losing a house you are so wanting to keep.
In regards to the question: I am planning on paying off NONE of my properties. That is my tenants job. Similar to @JD Martin, my properties are about 50% LTV. All of which have good cashflow as I 'rebalanced' ALL my loans 3+ years ago @ 4.5% interest. I spend more time with my CPA than I do my 'business'. My business is 'push button'. ;-)
5 Reply
Andrew Neal
OP
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
8y
@JD Martin really liked your take and I am going to go back and re-listen to your episode for sure. My plan is to use leverage initially and then start paying off.
3 Reply
Jesse Harris
Flipper/Rehabber · Richmond, VA · Member since 2018 · 57 posts · 19 votes
8y
@Michael Badin well said. That's me in a nutshell.
1 Reply
Bjorn AhlbladPro Member
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
8y
Originally posted by @Ryan D.:

Originally posted by @Medi Sarwary:
@Bjorn Ahlblad @David Detweiler
What sort of funds are you guys investing in to stay relatively liquid for a deal? I have some of mine in vanguard ETF's but I'm wondering if I need it in a pinch for a deal how accessible it would be..
Sorry for hijacking your post Andrew :)
My "liquid" for future purchases generally comes from HELOC(s), & some money-market cash that I keep around for fast-access when unexpected opportunities arrise. Money that I have in stocks, funds, etc (Vanguard, etc.) while still being fairly liquid, is long-term investing, and I consider those to be "one way" accounts (money goes in, but doesn't come out).
Yeah they are one way because so much of the money gets chewed up in management fees! LOL
0 Reply
Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
@Alan Grobmeier paying taxes is no higher risk than paying a mortgage. I don't even have all my mortgages include taxes, so I pay a couple separately. It varies by location, but it generally takes a while of not paying taxes before they come for your house. They send you warning letters. I guess if you are incapacitated and nobody is checking your mail for months, that could be a problem. People should have a plan in this event. Name a responsible party and make sure they have access to instructions, documents, bank accounts and keys.
Still you bring up a good point, which is even if you pay off a home, you will always be paying taxes.
0 Reply
Johnny Bravo
Specialist · Murrieta, CA · Member since 2016 · 24 posts · 18 votes
8y
@Wesley Bekkala That was just an example and I agree that would not be my ideal solution. I was merely providing an example of the capability to do something like that. Thanks for the feedback and luck!
0 Reply
Leanna Green
Rental Property Investor · Holbrook, MA · Member since 2017 · 36 posts · 3 votes
8y
I am planning on paying off my single family (about 80K) left by the beginning of next year. This is because I am paying FHA PMI and I don't want to keep doing this. Also, at this point I would just like the extra cash flow. Right now, I am cash flowing around $500 per month. When I pay off the note, I will cashflow about $1350. As I am trying to replace a good portion of my W-2 income this make sense to me. Lastly, I might want to get an FHA rehab loan in the future so getting rid of this current FHA loan makes sense.
1 Reply
Mike B.
Flipper/Rehabber · Yardley, PA · Member since 2015 · 451 posts · 307 votes
8y
@Andrew Neal - great question! For me, I'm building up my REI portfolio and taking cashflow (residential, SFH investments with low interest rates and 30 year mortgages). My plan is only to do this for a few years until my kids are in school and our expenses decrease. Then I plan on switching my strategy to pay off the properties (one at a time, highest interest first) so that in 15-20 years, they're all paid off and I can retire early. I like having options and with REI, if done correctly, should give me the option to pay for my kids college, retire early, take care of my family, etc.
2 Reply
Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
8y
@David Detweiler
I am no longer buying and have not for several years. As equity grows in my properties through either mortgage pay down by tenants or appreciation I refinance, about every 3-5 years, and invest it in mutual funds. I have also done the same with my personal home. Pull it out with my HELOC and invest and then paying it back down with some of the cash flow from my income properties. Some of my cash flow is also automatically invested in funds monthly. In the next 3 years I intend to liquidate all my properties and will live off of the income generated by those investments. Regardless of market fluctuations I have set myself up for life.
I have zero interest in holding income properties into my senior years. Too much of a PITA.
1 Reply
Jess White
Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
8y
@Medi Sarwary 30% Vanguard 500 index (VTI), 30% Vanguard Bond, 40% Ally Savings Account at 1.8% interest.
1 Reply
Marian Smith
Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
8y
@Andrew Neal We are paying 5 sfh’s off on 15 year notes. I will say that it looks bad on paper because the monthly amount of cashflow is low (and the principle paydown amount is high). This has, for a fact, had a negative effect on a loan application. Riskier I assume. But we are good with it and look forward to having the earliest of them paid off in 6 years when my husband is retired. Mortgages are stressful when vacancies rise...something we haven’t seen in quite a while.
1 Reply
Jared Skov
Rental Property Investor · Lanai City, HI · Member since 2018 · 64 posts · 70 votes
8y
@Andrew Neal We have a duplex and a SFH that we live in, we make 13 payments per year on both, (pay every two weeks), both will be paid off after 26 years. Planning on adding to the REI, but for now, just saving unless something attractive comes to fruition!
1 Reply
Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
8y
@Andrew Neal Just made another principle payment today. The amount I just paid off today is the equivalent of roughly 5 months principle at the normal payment. That’s the best part because it’ll amortize my loan much much faster and over time I will save a lot in interest. Keep in mind this is one property so I still get all the benefits of leverage with other rentals.
4 Reply
Nathan Letourneau
Investor · Hudson, WI · Member since 2016 · 82 posts · 18 votes
8y
What is a "d of t" that is referred to by Steve?

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%.
0 Reply
Jon WahlmannPro Member
Rental Property Investor · Bradenton, FL · Member since 2016 · 13 posts · 4 votes
8y
@Nathan Letourneau by context I'm assuming it's deed of trust.
1 Reply
Jeffrey Holst
Investor · Chattanooga, TN · Member since 2016 · 676 posts · 543 votes
8y
I feel like no one has stated the obvious here. It's a rate vs return issue. If you can invest money at a rate higher than you can borrow it at it's doesn't make sense to pay down debt. Cost of money is still insanely low with commercial loans still well below 6%. It's simply way to easy to get more than a 6% return on investment property therefore unless one actually is in a situation where they don't want any more money they should be borrowing as much as they can and putting it in safe assets. All issues concerning risk and debt can be mitigated by making smart investments, for some that might be limited partnerships for others it might be large non recourse deals and others it might be single families in a market they know well but in all cases if one can get 7%+ returns and can borrow at 5.5% it makes no sense to pay down debt or hold free leverageable assets. Full disclosure I have some free and clear properties but I feel bad about them and I plan to sell them to buy bigger deals or leverage them to buy new deals as soon as possible.
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