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
- Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes8y@Matthew McNeil haha thanks, my other post did pretty well too. I’m on here a lot but just started jumping in with questions I see lacking. A lot of people ask the same questions over and over but I love hearing from all the folks who are far more experienced than I. These forums are a gold mine if you ask the right questions. Thanks to all who have been sharing.
- Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes8y
Originally posted by @Bryce Stewart:
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.
I used to practice the pay down model until I was introduced to recasting. It "unfroze" my money because "the same mortgage payment amount" is not due the following month and it gave me an immediate return on the paydown with increased cashflow.
- Member since 2018 · 27 posts · 12 votes8y
The main reason I am paying off my properties is that I can cash them out later on in my life (hopefully for a higher value). This would mean that my future is secure irrespective of my financial status.
- Rock Hill, SC · Member since 2015 · 1k+ posts · 597 votes8y
@mike Dymski
Good stuff I used leverage but a different form of leverage. I like to say I diversify with new construction. Using profits to pay down borrowed capital( raised capital). Adding improvements then refinancing if I need to. I am more after free and clear properties. More from previous experiences and lessons learned along the way.
Originally posted by @Mike Dymski:Leverage is way down my list of concerns. I can't relate to purchasing properties where there are concrns 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 undefined
- 8yGreg JeanfreauPro MemberReal Estate Agent · New Orleans, LA · Member since 2015 · 146 posts · 127 votes
Right now, all of our rentals are set on 15 year mortgages. The first double has 7 years left and a very small LTV...sort of. We opened a HELOC (when it was our primary) back in 2012 to use for acquisition and rehab capital for rentals. The first rental that we bought was a bit of a home run (a triplex that cash flowed and had a fair amount of instant equity). We then BRRRR'd 3 more doubles one at a time because the HELOC was only enough to do one at a time. However, we just opened a 2nd LOC securitized by that triplex and this will allow us to do maybe 2 at a time. So, for us (my wife and I), the 15 year mortgages are forced equity pay down savings accounts paid for by the tenants. We will keep this acqisition/paydown snowball going until we have enough to pull a sizable amount of capital out of them all, stack it, look for a much larger complex and either buy it or do a reverse 1031 from the smaller rentals into said complex. This is the plan as of now in this tight market. It's genius if it works or dumb if it backfires. In theory, the pay down is a hedge and the LOCs allow us to keep growing.
- Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes8yKaren Rittenhouse - Thanks for your insights! Elenis C. Melissa Gittens Joe Splitrock Jack B. At Wharton our professors taught us that corporate value (your net worth) increases anytime you can borrow money and earn a higher rate of return than the cost of your debt. The tax code allows us to deduct interest expenses as cost to do business. So essentially if you can borrow at 5%, your real cost is like 4% and if you can make 4% or more on your next investment you should borrow as much as possible. The higher the differential the more money you’ll make. I borrow and pay on private money monthly at 7% while my friends are paying off 4% loans? 7% doubles your money every 10.2 years while 4% is like every 18. If you don’t have reserves, then you can definitely go bankrupt. If you’re pulling out money and parking it elsewhere, you may be in a great position for the next downturn to BUY. If you pay down everything, you need to remind yourself the in downturns LENDING DRIES UP and it’s a LOT harder to get any kind of loan. So you can have a great performing portfolio but not able to get the cash you need to do the same next deal you could have done today. Case 1: You have 10 properties worth 100,000 each, you paid them off 100%. You get all the cash flow and no interest tax deductions. You’re probably earning 5-10% NOI on your money annually after expenses. In 3 years, asset prices fall 50%. Your home’s are worth 500,000 and you are still generating say $50,000/yr cash on them. But except for this cash you can’t buy more properties at $50,000 each because nobody’s lending. When the downturn comes, lending DRIES up so it will be hard for you to pull out money to BUY. In 5 years when house prices rise back to 100%, maybe you own 1-8 more properties based on your purchasing power with your accumulated cash. So at best your net worth is now 1.8m. Case 2: You have 10 properties worth 100,000 each and you get 70% loans at 5%. That’s 700,000 in your pocket to invest or park elsewhere. Say you put it in something hedged against real estate where you earn 5% just breaking even. When the downturn comes and your properties are worth $500,000 and you’re generating 50,000 in cash flow which pays the 5% interest, you still have $700,000 cash to buy 14 more properties at half price without a loan which you can’t get at that time. In 5 years when asset prices are back to 100%, you now have 2.4m in assets. In the downturn when you’re underwater, you just have to perform and make your loan payments. But if you’re smart like Blackstone or another private equity company, sometimes you can get your debt holders to let you buy off the mortgage at like $0.60 per $1. That’s how they made billions off Hilton even though it fell in value between when they bought it and when they IPO again.
- 8yGino BarbaroPro MemberRental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
Hi Andrew
It really depends on your own personal strategy, your tolerance to risk and your objectives. I would never have been able to scale with my partners to over 900 units in only 5 years if I did not refinance and repurpose the money. I would rather own a larger portfolio at 75-80% LTV than a smaller portfolio. The economies of scale has allowed us to build a very successful business with multiple streams of income.
The question reminds me when someone makes the point of renting vs owning your own home. Everyone has their own reasons and goals in life. I don't think one answer fits all, just present the facts and then make a rational decision based on your situation.
Gino
- Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes8y
I love your conversation. I do, however, have a question on Case 2. That is pretty much how I've invested over the years. One of the fabulous things about real estate is the ability to leverage, and I certainly have for a long time. Now I'm in a position and stage in life where paying off is my goal.
At any rate, in Case 2, I don't see how the $700,000 is in my pocket to invest or park elsewhere. I buy 10 properties with 30 percent down and that $700,000 borrowed is debt (mortgages) that my tenants are paying back, not a stash I can use to invest or to buy the 14 more properties.
Am I missing something? Thanks for your insights.
Originally posted by @Terrell Garren:
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.
I am extremely lazy and the first one to advocate early retirement.
That said, it's a lot easier to leave a $100K job you dislike than it is to leave a $300-400K job you actually kinda like (and spent about 14 years training for).
I vocalize to everyone I meet that if you wake up in the morning, you should be doing exactly what you want to be with your time. Whether that's working, playing with your kids, climbing a mountain, reading a newspaper for 3 hours, etc. For 90%+ of people when you really dig deep, they aren't. Usually, people created obligations for themselves that prevent them from achieving this elusive thing.
- 8yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Natalie Schanne:
Karen Rittenhouse - Thanks for your insights!
Elenis C. Melissa Gittens Joe Splitrock Jack B.At Wharton our professors taught us that corporate value (your net worth) increases anytime you can borrow money and earn a higher rate of return than the cost of your debt. The tax code allows us to deduct interest expenses as cost to do business. So essentially if you can borrow at 5%, your real cost is like 4% and if you can make 4% or more on your next investment you should borrow as much as possible. The higher the differential the more money you’ll make. I borrow and pay on private money monthly at 7% while my friends are paying off 4% loans? 7% doubles your money every 10.2 years while 4% is like every 18.
If you don’t have reserves, then you can definitely go bankrupt. If you’re pulling out money and parking it elsewhere, you may be in a great position for the next downturn to BUY. If you pay down everything, you need to remind yourself the in downturns LENDING DRIES UP and it’s a LOT harder to get any kind of loan. So you can have a great performing portfolio but not able to get the cash you need to do the same next deal you could have done today.
Case 1: You have 10 properties worth 100,000 each, you paid them off 100%. You get all the cash flow and no interest tax deductions. You're probably earning 5-10% NOI on your money annually after expenses.
In 3 years, asset prices fall 50%. Your home’s are worth 500,000 and you are still generating say $50,000/yr cash on them. But except for this cash you can’t buy more properties at $50,000 each because nobody’s lending.
When the downturn comes, lending DRIES up so it will be hard for you to pull out money to BUY.
In 5 years when house prices rise back to 100%, maybe you own 1-8 more properties based on your purchasing power with your accumulated cash. So at best your net worth is now 1.8m.
Case 2: You have 10 properties worth 100,000 each and you get 70% loans at 5%. That’s 700,000 in your pocket to invest or park elsewhere. Say you put it in something hedged against real estate where you earn 5% just breaking even.
When the downturn comes and your properties are worth $500,000 and you’re generating 50,000 in cash flow which pays the 5% interest, you still have $700,000 cash to buy 14 more properties at half price without a loan which you can’t get at that time.
In 5 years when asset prices are back to 100%, you now have 2.4m in assets.
In the downturn when you’re underwater, you just have to perform and make your loan payments. But if you’re smart like Blackstone or another private equity company, sometimes you can get your debt holders to let you buy off the mortgage at like $0.60 per $1. That’s how they made billions off Hilton even though it fell in value between when they bought it and when they IPO again.
This all really depends on where you want to be in your work life.. more doors is more work.. keep in mind 90% of the folks on this site believe that if they get 10k a month coming in they will be done and retired.. no need to add more.. Or do anything else and valuations while they may fluctuate they are not sellers in the trough.. the risk is rental demand.. as long as your rentals stay rented your fine..
if they go vacant like 08 and your leveraged up with not a lot of reserves your in big trouble.. keep in mind 50% of the foreclosure last go around were failed landlords.. Landlords with little to no debt don't lose properties. I understand the math that's easy math not complicated but it does not take into consideration that your income stops or is severely degraded... That's the risk/reward part of this.
So for many on Bp who are ascending in their land lording careers debt is mandatory cant do it without .. for those that might live in a fly over state were they area or can buy nice little rentals for 10 to 20k a door.. no problem just paying cash for them and let them stack up.. values never go anywhere and no reason to have debt on them.. Its a long game..
I sold a 80 unit in 04 to a family from Hawaii and they paid cash just under 5 mil.. and I asked them why are you doing that.. Answer we don't like debt.. so I guess if you got it.. ( cash) and they made it ALL in appreciation in Honolulu over a 4 decade run up.. and some southern CA.. and the property they sold in 04 was a MF in Vegas.. they owned free and clear that a developer wanted for a condo convert.. perfect timing for them.. Vegas crash Portland has been rock solid..
But the reality is starting out you MUST have debt.. the question becomes when do you retire it... Many of my clients I work with these days are switch from owning the asset to being the bank.. for every transaction there are two movements usually the bank and the operator..
- Rental Property Investor · Cedar City, UT · Member since 2016 · 209 posts · 45 votes8y@Caleb Heimsoth I agree with your recommendation of @jayhinrichs. I appreciate everyone's comments.
- Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes8y
@Karen Rittenhouse - I was trying to show two cases where your net worth is $1,000,000 cash. Case 1 you have 1m cash inside 10 homes. Case 2 You have $300k cash in 10 homes and 700k cash you can now invest. Not 70/30 down purchase loans, where your net worth is actually $300,009 Total and you control $1m in homes. like a refi out when appraisals are high and lending terms are good
- Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes8y
That's what I thought you meant. Refi out, too, would be nice, but no lender will give you 100 percent out on a refi. Maybe 75 percent.
Borrowing is always tough. Cash is king, for sure.
Thanks for your info. Very well said.
- 8yJoseph CatalanoPro MemberRental Property Investor · Lewiston, NY · Member since 2014 · 192 posts · 97 votes
I would never pay off the mortages. I will continue to refinance and pull money out of the properties and let the tenants continue to pay my mortgage. Pulling money out is much better way of cashflowing.
- Member since 2018 · 16 posts · 14 votes8yWe decided when we started doing this that we were not going to carry any debt for our rental house business. Our goal was to buy the single family homes for about 40k and Do all the work our selves up front. This included things like pex water lines - new pvc plumbing items - sharkbite connectors - upgrading the electrical fuses/panel - new floors - new paint. Renovations budget was $6000-$8000. The goal was to be in the house for $50,000 or less. Each rents for about $800 a month or $10,000 a year. I also manage the properties myself. Each month we continued to add money to the business and left all the rental income in the business. After about 48 months we now have 40 homes. The rental income each month allows us to purchase an additional house every 3 to 4 weeks. In summary, no debt in my eyes creates a lot less risk in the long term. It also makes large expenses on the house a lot easier. (Entire ac swaps, roofs, or main sewer lines). I understand leveraging every property to buy more is good for some people, just too risky for me.
When they are paid off (working my way there after the accumulation period ended) you can get that comfort level ($10k month free and clear) on 10 houses. You can run 10 houses on 1-2 hours a month.
How many houses do you need at 70% LTV to earn the same $10k cash Flow?
I do appreciate people with the drive that makes them $100k/month but I don’t need it, I was able to collect 10 houses in 5 years (1 primary and 1 rental per year) pretty easily. I use the cash flow to pay one off every 2 years. Sure there are better uses for the money and I could make more, but instead I’ve got a nearly zero stress life and free time I couldn’t imagine before real estate.
If I had to cut all my rents by 50% (or had 50% vacancy), I could cover all my expenses and learn to live on $5k/mo until the problem was solved. (Ps. I’ve raised rents every year since 1999 even through the recession. Maybe that’s a vegas thing, maybe it’s a house thing, maybe I’m charging lower rents to tennats that stay longer.)
There’s a reason for leverage, especially at the beginning that made it possible, there’s a reason to pay it off. As the lawyers and CPAs would say. It depends....
- Member since 2018 · 4 posts · 0 votes8y@Steve Vaughan Steve, I had this same thought process. How about this case?I know that I will be using a rental management company( this will be my first rental property and I’m still working full time) would it be better to buy cash knowing that I will have the expense of a management company?
- Yuma, AZ · Member since 2015 · 140 posts · 137 votes8y@Andrew Neal I'm 56 wanted to semi retire 5 years ago. I decided pay cash for my properties. If your younger than leverage. Really depends what you want. I own 8 rentals paid off but will be leveraging a few more 4 plexes. Do what feels right to you.
Definitely depends on your goals to be able to answer this. We are still growing our portfolio so we are looking for the leverage. Regarding the risk tolerance I don’t really worry about that. For affordable housing, rents don’t really fluctuate. So even if the economy takes a hit the rents pretty much stay the same. We average an above 10% cap rate on our portfolio so even if rents went down a little we would still be happy.
The only thing one needs to be careful about is if property prices take a hit and you are at the end of your mortgage cycle and the bank decides to not refi the loan or only refi at the new lower value. For example a 10 year mortgage ammortized over 25 years. This will put ones self in a position that you will have to bring a lot of cash from home. This has to be planned ahead of time and have reserves put aside. For that reason we do not leverage at more than 75%.
- Real Estate Agent · Arlington · Member since 2016 · 162 posts · 100 votes8y
I'm not sure it's optimal having a few houses that are fully paid off vs. a larger portfolio of homes acquired through leveraging. If you're ever sued, I can see a lawyer licking his chops when he realizes how much equity you have in a few homes - easy lunch for him. Seeing smaller amounts of equity over a larger number of homes in different markets seems like it would make the job a lot harder and reduce the appeal of going after them. Additionally, if you ever have some catastrophic event that wipes out a property (or properties!) then 1.) A giant chunk of your CF is gone indefinitely, and 2.) Insurance companies are much less incentivized to respond to your claim than if you had a relatively young mortgage with a bank (those bank lawyers WILL make sure action is taken!).
I'm open to other opinions and I definitely see the value and appeal of a fully paid off home, but it seems riskier than leveraging widely over different geographic areas.
Best,
Jonny
- Rental Property Investor · Dallas, Austin · Member since 2018 · 246 posts · 213 votes8y
Great to read all the responses and what works best for everyone. For me, it’s simple: cash is king and having the reserves to weather through anything.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes8y
Originally posted by @Craig Moore:
@Steve VaughanSteve, I had this same thought process. How about this case?I know that I will be using a rental management company( this will be my first rental property and I’m still working full time) would it be better to buy cash knowing that I will have the expense of a management company?
Just be sure you factor in about 16% for annual PM expenses. With an 8% placement fee (1/12), calling the Maytag Man for every little thing and slow turnover times, it ain't cheap. I paid off entire apt bldgs by saving the money and avoiding the apathy. I would strongly suggest self-managing, at least at first, if the property is local to you.
I usually leverage residential property that is in good enough shape to put a loan on. Can't beat long term fixed rate money below 5%. The ones I paid off were higher rate and higher risk like commercial or seller-financed.
- Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes8y@Gino Barbaro I definitely agree and that is some impressive scaling in 5 years. No two people’s strategies are exactly the same but thanks for sharing yours!
- Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes8y
Originally posted by @Account Closed:
I'm not sure it's optimal having a few houses that are fully paid off vs. a larger portfolio of homes acquired through leveraging. If you're ever sued, I can see a lawyer licking his chops when he realizes how much equity you have in a few homes - easy lunch for him. Seeing smaller amounts of equity over a larger number of homes in different markets seems like it would make the job a lot harder and reduce the appeal of going after them. Additionally, if you ever have some catastrophic event that wipes out a property (or properties!) then 1.) A giant chunk of your CF is gone indefinitely, and 2.) Insurance companies are much less incentivized to respond to your claim than if you had a relatively young mortgage with a bank (those bank lawyers WILL make sure action is taken!).
I'm open to other opinions and I definitely see the value and appeal of a fully paid off home, but it seems riskier than leveraging widely over different geographic areas.
Best,
Jonny
Your second point regarding bank pressure incentivizing the insurance company is something I've not considered before. Thanks for that comment.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.