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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James Park
Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes
8y
Right out of college, I worked as a consultant with Accenture and rented an apartment in West LA. I bumped into the owner on day and asked him if he can give me some advice on how I can get started in real estate investing. I took him out for breakfast in a nearby restaurant and this is the advice he gave me.
"Real estate fortunes are made by buying houses and by the financing them so that you can afford to hold the house until it is free and clear of debt. He also told me borrow for the longest available term as a lower payment is a safer loan for you to owe. The key of having peace of mind and sleeping well at night while you are in debt is knowing that can repay the debt. When you buy income properties, your tenants will repay your debt if you buy and finance wisely.
The surest way to become a millionaire with real estate is to borrow a million dollars, buy property, and then pay it off. Even if the properties never appreciates, you would have your million dollars. If you learn how to borrow that million dollars safely so you can sleep well, then you are on your way to unlimited financial success. The safety comes from borrowing against property that generates enough income to repay the loan."
7 Reply
Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
8y
@Joe Splitrock, although your comment is true, most people have their mortgages on auto pay. Some places will allow you to autopay taxes, some won't. It depends on county.
By having a mortgage I KNOW that my heirs, even if 'braindead', will not lose a house to a tax lein. Money comes in for rent, goes out for mortgage, they get the remainder.
Some of you MAY find this hard to believe, but not EVERYONE cares about real estate like we do. ;-)
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
8y
Originally posted by @Alan Grobmeier:

@Joe Splitrock, although your comment is true, most people have their mortgages on auto pay. Some places will allow you to autopay taxes, some won't. It depends on county.
By having a mortgage I KNOW that my heirs, even if 'braindead', will not lose a house to a tax lein. Money comes in for rent, goes out for mortgage, they get the remainder.
Some of you MAY find this hard to believe, but not EVERYONE cares about real estate like we do. ;-)
If my heirs lose the empire because they're too stupid to pay the taxes, they deserve to lose it - I would consider that a suitable tax on stupidity :D
Podcast Guest on Show #243
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11 Reply
Sam B.
Lender · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes
8y
Maybe it's just my market but leverage is not my biggest concern. Other expenses far eclipse my mortgage payments. On average for every $1,500 in rent I'll try to keep it around $300 in debt service payments. Actually, I feel safer locking in 30 year fixed at ~5% and socking away the cash or putting it into something else that I know I have the ability to cash out on quickly if I need the money, rather than leaving it tied up in the property. I've seen more people go broke from lack of reserves (among other things) than not being able to afford their mortgage payments.
Leverage is great, if you're not overpaying. If you are overpaying, you're in a bad spot either way, unless you've got enough money that you can afford to do that and keep healthy reserves on top of it.
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Frank Wolter
Rental Property Investor · Cleveland, OH · Member since 2018 · 191 posts · 432 votes
8y
@Andrew Neal I never liked mortgages. I'm old school. All my 122 doors are paid off.
4 Reply
Bryce StewartPro Member
Investor · Bethlehem, PA · Member since 2018 · 7 posts · 20 votes
8y
I think there's an important dividing line, here - and one that needs to be mentioned. There's a difference between paying DOWN a mortgage and paying OFF a mortgage. If you begin making extra principal (DOWN) payments into a fixed mortgage, you are 'freezing' that money, and the same mortgage payment amount will be due next month. To me, that's a risky move. If you run into a situation where you need that extra cash, you either have to cash-out refinance or have a LOC somewhere to draw from or already be swimming in cash.
But if you have enough in cash to pay OFF an entire mortgage in one fell swoop, then next month there's no payment and you haven't endangered your cash flow position. My method has been to invest cash in good ROI projects on the properties I already own (renovating, dividing heat, converting a 1 bed to a 2 bed) in order to boost cash flows for every subsequent month, and as I run out of those projects I will be saving up to either pay off my highest rate or lowest balance mortgages. In this way, I can keep the number of tenants I need to manage static, increase my cash flow, and mitigate my risk.
The point of investing in real estate is to MAKE YOUR OWN LIFE BETTER. Keeping tenant counts at manageable levels and leverage to a minimum contribute to peace of mind and diminish what we like to call "forward time liability" - the threat of NEEDING to spend your primordial currency, TIME, to scramble to make more money or to engage in tenant butt-wiping.
Podcast Guest on Show #276
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Javier D.
Investor · FL · Member since 2017 · 266 posts · 220 votes
8y
@David Detweiler Hey David, I have a hard time analyzing this thought process. How do the numbers work exactly ? I cant seem to grasp the concept and get stuck on knowing if i have a 1000$ mtg and pay an extra 200 on principal i save 800 bucks the next month on an amortized mortgage. Am i looking at it wrong? Is it just a percentage play? Does it work out that simple of 4.5 vs 9.1 in stock market? like a simple apr loan? Excuse my brain fart lol. I think my two toddlers have my brain fried.
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David Detweiler
Rental Property Investor · Manhattan, KS · Member since 2018 · 12 posts · 13 votes
8y
@Javier D'Espaux So it’s like say I bought a multiplex for $2.3M, then a year later after some work refinanced it. Original loan was $1,840,000 or 80%. Upon refinance it appraised at $3M. I took out $450,000 ($410,000 from forced appreciation and $40,000 from equity gained) say its 4.5% at 30 years that is $2,280 a month. Then ignoring buy in costs on stocks for simplicities sake, $450,000 times 9.1% = $40,950 annually. After servicing the debt from earlier, it leaves $13,590 to either reinvest or take profit from. This allows me to keep the original $450,000 that I refinanced out semi liquid, plus pay the note off, plus gain a little compound interest. Triple win in my books.
1 Reply
Javier D.
Investor · FL · Member since 2017 · 266 posts · 220 votes
8y
@David Detweiler I def agree to compound the investment power of the same capital used. Talk about irr lol. I think its brilliant as long as reserves are somewhere very low risk. Ive always paid extra towards principal the first couple of years(when cash heavy) just because i looked at it as man im saving 8-900 bucks for sending an extra 200. I dont do that anymore. Ive gone through phases. When i had a good year in construction id pay off a house or two. Now construction is slow for me so im leveraging as much as i csn and cleaning up portfolio a bit. I diversified(wife forced me to) in the stock market but the appreciation and tax loopholes just arent there so its not attractive to me as im not very stock savvy. Lets nt even talk about the kids 529 plan. Pos in my opinion. Whatever happy wife happy life i guess... and smallerpockets.
1 Reply
Will Hanner
Palm City, FL · Member since 2018 · 24 posts · 8 votes
8y
MY STRATEGIC PLAN:
Understanding 7 homes w/no mortgages will return $1,400 rent ($1,050 cash flow), my plan is to aquire 14 properties by 2021. At the same time I'm 'HELOCing' my personal home to $0.00 mortgage by 2023.
Then, in 2025, sell 7 properties and utilize the proceeds to help pay off 4 loans. I'll then have a great balance between financial freedom & tax write-offs from the 3 remaining loans. Roughly $5,100 in cash coupled with no home mortgage. In the end I'll have 7 rental incomes cash-flowing over $7,000 per month.
That's my 8 year plan; it allows me Financial Freedom and will allow me to leave the abject dysfunction that is Korporate AmeriKa...
2 Reply
Mike Ventura
Member since 2018 · 1 post · 0 votes
8y
@Andrew Neal Paying off properties is for when you are done buying new ones! I’d chip away at the highest rate loans first.
0 Reply
Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
8y
I paid cash for my first buy/repair/hold SFH in 2007 as a hobby. 2008-2015, I used HELOCs several times simply because the opportunities were so good. Currently, I pay cash because I'm finding no great deals, only mediocre ones. My take is, use leverage when there are fish in a barrel and use cash when nothing is biting. RE allowed me to quit my W2 job a couple years ago and life is wonderful. If only I had known at 30 what I realized at 50. You smart young whippersnappers keep after it, the day you leave that W2 job behind and let RE cash flow your life will be unbelievable.
4 Reply
David Detweiler
Rental Property Investor · Manhattan, KS · Member since 2018 · 12 posts · 13 votes
8y
@Javier D'Espaux You say smaller pockets and forces you to diversify like it is a bad thing. While I think real estate is a very good tool, it is simply that, a tool. Most people would like to have a full tool box at their disposal, not simply a hammer. Look at me. I farm full time (run row crops, small graIns, hogs, cattle, and sheep), own rentals 20+ (sfh, multiplex, and commercial), own two turn key liquor businesses, dabble in the stock market and mutual funds. While I am not have the outstanding overall years someone that is non diversified does, at the same time I never have the horrible years. At the end of the day it is all about what allows you to sleep at night. Diversification is my primary risk management tool.
2 Reply
Terrell Garren
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
8y
@David Detweiler Enjoyed your post. Is a 'turn key liquor business' simply a still and a fast car?
1 Reply
Javier D.
Investor · FL · Member since 2017 · 266 posts · 220 votes
8y
@David Detweiler Im all about diversifying... Sfrs/duplexes/condos/warehouses/apartment buildings...lol What i do like is to have a recession proof plan. I hear you though its there its just annoying to watch the slow tinkle vs the direct deposits from the rentals every month. Tell you what though i have 12 sfr paid off out of my pirtfolio and i will never touch em. No matter what happens i can hold off the storm. I suppose it depends on each persons short term/long term goals. I had buddies that lost hundreds of properties and land in the crisis. Scares me a bit.
0 Reply
David Detweiler
Rental Property Investor · Manhattan, KS · Member since 2018 · 12 posts · 13 votes
8y
@Terrell Garren Thank you! Yes, actually it started with me investing in a guy that was trying to make vodka from Milo in western Kansas. I did end up buying a couple stills funny enough. Next thing I know I was balls deep in the booze business. It was an accident really lol.
1 Reply
David Detweiler
Rental Property Investor · Manhattan, KS · Member since 2018 · 12 posts · 13 votes
8y
@Javier D'Espaux Yes! I totally agree. It sounds like you are in a little less risky boat than myself. Being only 23, as of today :), I haven’t had the time to build the collateral. I am still purely in acquisition mode while trying to keep a reasonable amount of money in cash reserves or semi liquid form. I guess this goes to show how a couple different situations hold completely different options. But at the end of the day, it just matters how well you played the cards you were dealt because 9 times of 10 that will beat hoping to be dealt the right cards!
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Allen Henry
Mission Viejo, CA · Member since 2012 · 3 posts · 2 votes
8y
@Andrew Neal I love this discussion. I have a good share locked up in a SDIRA so it is more about a return than pulling money out and reinvesting. So in the end it depends how n your entry and your exit strategy.
1 Reply
Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
8y
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.
Andrew, I think you're top contender for winning the Best Post of the Month award! Lots of great information being laid out for BP members here. Its a gold mine. Thanks!
0 Reply
Carl Coe
Member since 2017 · 6 posts · 1 vote
8y
@Ryan D. Are you able to get HELOC with investment properties? We have $1m+ in equity in investment properties but have not explored a HELOC. Thx
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Andrew Neal
OP
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
8y
@Frank Wolter wow with 122 doors paid off I’m sure you sleep well at night haha. Thanks for sharing.
0 Reply
Andrew Neal
OP
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
8y
@Mike Dymski what a great quote! Comes back to your “why” and that goes for anything in life but certainly investing. I know I love real estate (always have) but at a certain point I will definitely ease up. For me, it’s all about affording the best life possible for me and my young family, I value my time with my wife and son so much.
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Andrew Neal
OP
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
8y
@Cory Gamble awesome, thanks Cory! Good luck on the 30 plex. I’ll shoot you a connection request.
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Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
8y
Originally posted by @Scott Titus:
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.
ALWAYS!
50% say get a prenup. 50% say don't get a prenup.
50% say put your assets into LLCs. 50% say don't put your assets tinto LLCs.
50% say focus on appreciation. 50% say don't focus on appreciation.
50% say move past SFHs. 50% say SFHs are good to stick with.
Ha! Just having a bit of fun here...
All that aside - We need this kind of dialog. Forces us to use our brains to help build our portfolios.
I've dug a lot of gold out of these BP posts which have solidified my personal investment strategy.
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Andrew Neal
OP
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
8y
@Terrell Garren love the fishing analogy. That is a good way to look at using leverage in easier deal finding times and cash when markets are tougher. Thanks for sharing your strategy with a 33 year old trying to figure things out!
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