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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John W.
Rental Property Investor · Buffalo, NY · Member since 2017 · 257 posts · 130 votes
8y
My goal is to eventually have them all paid off, sooner than later, and only have HELOC's so that there is money available if needed for any lucrative investment that comes about. As well as have cash in the bank to use. I will borrow money until I have what I think is enough to keep me busy and retire off of. Then I will work on paying them all off. To pay off my rentals I am wholesaling (where I actually close on the property) as much as I can and also working the w-2 as well as other endeavors. I don't like mortgages and paying interest but I can deal with them and they are a means to an end.
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Andrew Neal
OP
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
8y
@Mike B. Sounds like you have your priorities set. I have a toddler and it’s all about striking that balance and planning for our future and luckily my wife is fully onboard as well.
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Andrew Neal
OP
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
8y
@Ryan D. Interesting strategy, my buddy and I are considering that approach for acquisition.
0 Reply
Bryan Clement
Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes
8y
I think this depends a lot on our economic standing as a whole. Right now, leveraging to the hilt might not make much sense given the generally overvalued nature of real estate at the current market levels. After the crash of 08-09? I wasn't in real estate then but I would've leveraged everything I had and the neighbors' dog to buy all of the cheap deals at those low interest rates.
2 Reply
Cameron Carter
Real Estate Attorney and Investor · Scottsdale, AZ · Member since 2011 · 23 posts · 15 votes
8y
@Andrew Neal Conservative leverage to buy and then pay them off quickly. Repeat as necessary. A slow, delIberate portfolio build is not for everyone but it wIll keep you out of trouble when the market drops.
6 Reply
Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
8y
Originally posted by @Jeffrey Holst:
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.
Jeffrey, well explained. I find that many people who post their advice will at times lay out their numbers to justify their positions. However, those positions tend to be somewhat biased and I find they're lost in their own numbers which doesn't necessarily specifically apply to the BP member who posted the original question. There are simply to many variables involved. Your explanation breaks it down simply, which should/would apply to most investors. It also follows the strategy that my financial advisor walks me through. He always looks at my returns on properties I own, the interest rates on the loans, my risk factor (including the risk comfort of my wife) and the market. Then we approach the final decision to make a move based not on a priority to acquire more properties, but what are the numbers telling us to do.
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Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
8y
Originally posted by @Ryan D.:

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.
I like your strategy Ryan. Mine is similar. Thanks for sharing!
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
8y
Originally posted by @Jeffrey Holst:
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.
That is true (rate borrowed vs. rate of return) but there's one caveat: your mortgage is a guaranteed fixed rate of return for the bank; there's virtually no guaranteed rate of return available to you that's higher than the bank (if there was, the bank would be loaning them money instead). The investment vehicles you are going to avail yourself of to earn a higher return than what you're paying on the mortgage are all volatile in nature. That doesn't necessarily mean it's a wrong strategy - I employ this same strategy myself, otherwise I'd pay off the 3.5% mortgage on one of my properties instead of investing in the index funds I've been making 8-10% on the last year or two - it just means that you should not discount the security of guaranteed return. Paying down a mortgage is a guaranteed return of whatever your interest rate is minus tax benefits. Corporations do this all the time. When investment opportunities dry up or are too risky to warrant the investment, they buy back their own debt at a lower rate of return.
Whatever the strategy, there's one thing for certain: people with high levels of leverage and low levels of cash are the first ones wiped out in any kind of downturn. Investing is not just about knowing how to ride the wave, it's also about knowing how to survive the wave that's about to crash upon your head.
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Scott TitusPro Member
Rental Property Investor · Lake Ozark, MO · Member since 2017 · 102 posts · 86 votes
8y
I love BP! The discussions here are so incredible and thought provoking. I’ve had this exact same discussion with numerous investors and they are ALWAYS one side or the other. Either pay them off fully, or leverage them out fully. It’s amazing to read so many great responses.
6 Reply
Jeffrey Holst
Investor · Chattanooga, TN · Member since 2016 · 676 posts · 543 votes
8y
@JD Martin solid additional point. I completely agree and often consider guaranteed returns as an element of when to pay something down. I should have included that as well.
1 Reply
Karen Rittenhouse
Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes
8y
@Jeffrey Holst
Well explained. More things than return and interest rate effect buying/selling strategies, however.
For example, I've been doing this full time since 2005. I have well over 100 rentals and am now using a faster turn strategy (wholesales) for cash to pay those babies down. Rentals don't really produce a lot of cash flow until free and clear.
And, as @JD Martin explained,
"Whatever the strategy, there's one thing for certain: people with high levels of leverage and low levels of cash are the first ones wiped out in any kind of downturn. Investing is not just about knowing how to ride the wave, it's also about knowing how to survive the wave that's about to crash upon your head."
We made it through the 2008-2010 crash but a lot of investors around us were over leveraged and didn't. That crash hit in an instant and I know enough to stay diligent in case the wave hits that fast again next time.
9 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y
@Jeffrey Holst @JD Martin @Steve Vaughan @Jay Hinrichs @Joe Splitrock @Matthew McNeil and others.
I'm in the prudent leverage camp (although low right now after re-positioning properties) but there is a good quote that sums up the lack of a need for leverage after a certain point.
"After you have won the game, it's okay to stop playing it..."
11 Reply
Account Closed
Accountant · Philadelphia, PA · Member since 2013 · 303 posts · 210 votes
8y
It was interesting reading this discussion. I have always been a conservative investor paid for my rentals in case and thought that once I hit FI I would let things fly a little bit knowing I had filled my FI bucket. Try to hit some real home runs. Never thought I would scale down risk further, but that's what it sounds like many do.
2 Reply
Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
8y
Originally posted by @Mike Dymski:

@Jeffrey Holst @JD Martin @Steve Vaughan @Jay Hinrichs @Joe Splitrock @Matthew McNeil and others.
I'm in the prudent leverage camp (although low right now after re-positioning properties) but there is a good quote that sums up the lack of a need for leverage after a certain point.
"After you have won the game, it's okay to stop playing it..."
Thanks Mike! I think the quotation is; “When you've won the game, stop playing with the money YOU REALLY NEED” which is attributed to William J. Bernstein.
Fodder for a new Forum post perhaps. Go ahead and let her fly! I'll estimate at least 75 responses... :)
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Jeffrey Holst
Investor · Chattanooga, TN · Member since 2016 · 676 posts · 543 votes
8y
@Mike Dymski 100% agree if one feels they have enough it's okay to simply stop. However personally I think when one wins and quits they should probably lower overall exposure to real estate rather than cut out leverage. Keeping a couple choice properties might make sense if you aren't going to pay attention but mentally checking out on real estate is in my mind riskier than leverage. I do however see that it's fine to say I have a enough sell some properties to pay off others so you can take a less active roll and still have decent returns but when you do so you are less diversified and will get lower overall returns which is completely fine if you are at a point in life where you don't want more. Say you are retiring and want to maintain rather than grow or whatever.
1 Reply
Cory Gamble
Rental Property Investor · Davenport, IA · Member since 2018 · 19 posts · 11 votes
8y
@Andrew Neal my wife and I have paid cash for five properties, we're using the cash flow from them to give us a complete return on investment and are now looking to leverage a little bit of our equity in order to scale up in the multi-family. Moving forward in the next two years we plan on buying 20 more properties single family homes. And we are on our final day of negotiations for a 30 plex apartment. My wife is phenomenal with numbers if you need any help shoot me a text.
2 Reply
Yavor Tomov
Rental Property Investor · Houston, TX · Member since 2013 · 79 posts · 20 votes
8y
@Andrew Neal I think it is all about personal strategy and point of you investment business. Personally, I'm paying down my personal residence(15 year fixed mortgage, will be done in about 5-7years). But not paying down my investment properties due to they are on 30year fixed loans and they do cash flow. While I will love to own them at this point of my investment life I need to focus more on buying. So at this point I'm saving as much cash as possible so I can buy distressed properties cash. Rehab them and refinance into a fixed 30 year loan. When I get to a point, where banks will not give me more loans, will start to pay the loans down. The end goal is to have a pretty good passive income and not worry about retirement. Hope all this makes sense. All the best
1 Reply
Cory Gamble
Rental Property Investor · Davenport, IA · Member since 2018 · 19 posts · 11 votes
8y
@Jay Hinrichs Davenport iowa, Quad Cities. 25% of Downtown Davenport has been rehab and turned into multifamily units. There is a flood of good sfrs in our area that are renting above-average median. Rent o meter is absolutely wrong, I've got a property at 51 Crestwood Terrace Davenport Iowa 52803 rental meter says I will get $800 a month for it I'm getting $1,700 a month for it. I personally and buying two bedroom one bath with a big enough basement to add egress window and completely finished basement adding another bedroom and bathroom. I have had multiple appraisals done since a couple of my flips and I am a head 40% on most of my properties. If anybody needs any answers or somebody on the ground to physically touch an asset please get ahold of me.
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Hai Loc
Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes
8y
@Mike Dymski You stole the words out of my mouth. We built so much value add equity and plus appreciation our debt is 25% on one of our investments. I asked my wife last night if we had enough cash laying there would you pay off the debt.. She asked me what the terms were.. I said 5% fixed for duration of amortization with no balloon. She said no way in hell.. I would stick that cash into something else.. Depends on term of loan as well..
1 Reply
Wesley Read
Memphis, TN · Member since 2018 · 22 posts · 9 votes
8y
I am a newer investor and working on getting started and just wanted to say this thread is gold. Everyone has different opinions on what works for them and that's perfect to show all angles. Just wanted to add input on how great this thread is.
3 Reply
Al Pat
Rental Property Investor · Atlanta, GA · Member since 2016 · 325 posts · 253 votes
8y
I have bought most of my SFHs when market was low during 2011 through 2015. All we're bought with cash. My most recent purchases were couple more SFHs and duplex that I have a loan on at around 4.5% and 5.6%, I will continue to have that mortgage payment made from rent. All in all, ROI aside, it gives me better cash flow. My properties quadrupled in price since buying in 2011 and 2012 so temptation to cash out is there but these are my retirement income streams so not taking unnecessary debt.
1 Reply
Account Closed
Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes
8y
What do you mean pay off? I have zero debt.
I think there are pros and cons to leverage. It is hard to deny the numbers but, one thing no one really talks about much is the additional time all those extra properties take.
I think long-term, leverage is probably best.
But maybe for the person nearing retirement, who just wants a safe and tangible asset that makes them cash flow, cash might be a better option.
I think some people will do everything in their power to amass as much wealth as they possibly can until they die, so they may pass it on to their heirs.
I think others will get to a point where they want to cash in and at that point, the best cash flow comes from being debt free.
I am looking into leverage as a way to make the most out of my opportunities. However, I am looking to retire in 10-20 years, so a 30 year mortgage is not entirely appealing to me. I think my views would be much different if I was 20 years old.
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Elenis Camargo
Property Manager · Jacksonville, FL · Member since 2018 · 514 posts · 470 votes
8y
I intent to pay off each property I acquire. The rationale behind this is that I will have almost 100% of the rent as cashflow and the property should appreciate a good amount by that time. I can take out HELOCs or a portfolio loan once I have more equity in it. Or I can simply sell it and buy more properties.
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Michael MalonePro Member
Real Estate Agent · Macomb, MI · Member since 2018 · 4 posts · 2 votes
8y
New investor here looking to get my portfolio started still, but absolutely love this thread! Thank you all for the very informative responses!
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Dashawn Francis
Real Estate Broker · Member since 2018 · 5 posts · 1 vote
8y
@Thomas S. I’m just getting started in Real Estate. I just wanted to know how you receive more cash flow on your rentals if you leverage which includes the monthly mortgage...Isn’t the main goal trying to get expenses down so you earn more cash flow?
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