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
- Investor · Indianapolis, IN · Member since 2017 · 145 posts · 158 votes8y
Was talking to my older son about this, and I think his take on leverage is pretty smart. Here's what he says.
If you own properties on the coasts, where housing costs are high, your mortgage costs are big enough to be scary. Here in the Midwest, where you can find income properties in the $60-100k range, they are not.
On an 80k house with a 60k mortgage, the payment might be 300/mo. Other expenses might add up to $300, so the mortgage is not an overwhelming part of your expenses.
When the unit is standing empty, you need $600 / mo, half of that going to expenses you will have whether you take out a mortgage or not: taxes, insurance, and maintenance.
So taking out that mortgage doesn't create a huge payment; what it does, assuming you had the money to pay cash in the first place, is leave you money either for an emergency fund, or, better, to invest in another house which, even if also mortgaged, should also cash flow. Either of those things is good when you have a vacancy at the first house.
But this only makes sense when you live in a place like the Midwest, where there are 80k houses that rent for $1200-1600.
On the west coast, I don't even know the numbers. But in the DC suburbs, you can easily plop down close to 500k for a modest house that might rent for $2300 / mo. If you get an 80% mortgage with a payment of $2000, you are roughly breaking even every month the place is occupied.
When it's vacant, you are bleeding $2300 / mo. If you have kept the money in an emergency fund, you can cover that. If you've invested it in other properties in the same area, probably not cash-flowing either, you have a problem.
People still invest in these areas, hoping for appreciation. But they are taking more risk with leverage than a guy in the Midwest who has small modest properties that cash flow a bit. In fact if you do some thought-experiments with the latter scenario, you might find that there are situations where a little leverage reduces your risk.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes8y
Originally posted by @Pete Barrow:
Was talking to my older son about this, and I think his take on leverage is pretty smart. Here's what he says.
If you own properties on the coasts, where housing costs are high, your mortgage costs are big enough to be scary. Here in the Midwest, where you can find income properties in the $60-100k range, they are not.
On an 80k house with a 60k mortgage, the payment might be 300/mo. Other expenses might add up to $300, so the mortgage is not an overwhelming part of your expenses.
When the unit is standing empty, you need $600 / mo, half of that going to expenses you will have whether you take out a mortgage or not: taxes, insurance, and maintenance.
So taking out that mortgage doesn't create a huge payment; what it does, assuming you had the money to pay cash in the first place, is leave you money either for an emergency fund, or, better, to invest in another house which, even if also mortgaged, should also cash flow. Either of those things is good when you have a vacancy at the first house.
But this only makes sense when you live in a place like the Midwest, where there are 80k houses that rent for $1200-1600.
On the west coast, I don't even know the numbers. But in the DC suburbs, you can easily plop down close to 500k for a modest house that might rent for $2300 / mo. If you get an 80% mortgage with a payment of $2000, you are roughly breaking even every month the place is occupied.
When it's vacant, you are bleeding $2300 / mo. If you have kept the money in an emergency fund, you can cover that. If you've invested it in other properties in the same area, probably not cash-flowing either, you have a problem.
People still invest in these areas, hoping for appreciation. But they are taking more risk with leverage than a guy in the Midwest who has small modest properties that cash flow a bit. In fact if you do some thought-experiments with the latter scenario, you might find that there are situations where a little leverage reduces your risk.
Actually a typical $500k house in thr DC suburbs will rent for $3000-$3400. I target low to mid $400s that rent for $2800 or so.
District Invest Group545 Reviews - Rental Property Investor · Manhattan, KS · Member since 2018 · 12 posts · 13 votes8y@Javier D'Espaux Thank you. By 25 I plan on being a multimillionaire, owning 100 doors, 1,000 acres of land, then atleast 3 other side businesses that pump out 50k a year after debt servicing. Originally the goal was to have a $250,000 cash flow by 25 annually, but I have surpassed that. As far as long term goals, don’t laugh at me, but by 45 I intend on being worth 25 million, atleast 5 in cash. I plan on retiring then and setting things to auto pilot. Men in my family typically don’t live to see 60, so I want to enjoy life before I die. Hopefully I will be married by 30 and start to raise a family, allow my wife to be a sahm if she wants and put my kids through college plus have a little left over for them to start with. Most importantly I want to have the power through money, intelligence, skill, luck, however to earn a spot in a history text book, so my name will be mentioned in 100 years. No big goals here at all :)
- Investor · Indianapolis, IN · Member since 2017 · 145 posts · 158 votes8y
==>Actually a typical $500k house in thr DC suburbs will rent for $3000-$3400. I target low to mid $400s that rent for $2800 or so.
I was just going by houses I knew about in my old neighborhood, North Woodside. There must be better deals.
- Portland, ME · Member since 2016 · 3 posts · 0 votes8y
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.
Thomas, who is financing your lines of credit to just allow you to pull out max equity on your properties? Are you acting as a personal guarantor?
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes8y
@Andrew Neal I take a very simple approach to this-
R.O.E. Return on equity.
What yield am I getting on my current equity position? What yield could I be getting on my gross equity position if I were to distribute it across other assets? What are the risks in diluting equity in a single property to grow my portfolio? How big is the upside?
Of course there are a ton of smaller factors, but I just look at my goal (and it's growth), and constantly ask myself if I am doing it as quickly as my resources would allow me to.
- Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes8y
Originally posted by @JD Martin:
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.
This is how I feel exactly. Even Warren Buffet never guarantees a return on his investing. I think he's done pretty well for himself. For one to say that it is easy to use dead equity to arbitrage other investment opportunities is either naive or has alternative motives. An investor should look at his risk tolerance and then determine what leverage position is appropriate for his/her own specific situation. There is no answer that will fit every scenario. It will differ vastly depending on the individual's financial position and investing philosophy among other factors. I tend to agree with the more seasoned investors with time tested experience who espouse that real wealth is built from free and clear properties. The ultimate goal should be to pay off LTRs. How you get there is dependent on your own personal situation and comfort level. I do not think a correction on the level of the GFC is looming, but I also don't want to be caught naked when the tied recedes.
- Member since 2018 · 1 post · 0 votes8y
Have had 10 one bedroom units for 4 years they are older and i owe almost nothing on them now. Off thread whats the best way to get remodeling or revolving credit loan to wow the property , its now a hot area No luck with my local bank ?
- Lender · Member since 2013 · 40 posts · 18 votes7y
I've spent the last 15 yrs paying off a rental (and a primary) +s & -s in doing so... could the money have been used elsewhere? I'm always under the impression, that no mortgage is a good mortgage. I don't have a payment, the income can be stored for improvements or rainy days etc.
Moving forward though, I'm looking to the next property. Thanks to appreciation, I have the ability to take out a decent equity that I hope to put to good use
Join the conversationCreate a free account to reply, vote on answers and follow this thread.