Paying off a rental aggressively. Pros & Cons?

Louisville, KY · Member since 2017 · 25 posts · 9 votes

I've got 5 units (Duplex & Triplex) that I've owned for 4-5 years now. currently cash flowing $1500 total.

Since I'm really busy with my job, I've been strongly considering paying off each one aggressively, which would increase cash flow by 2k which would be similar to owning another 5 units, but without the headache of 5 more tenants and the issues that inevitably arise with owning more properties.

Obviously I could use the money to buy more more more, but there's something attractive about owning the rentals outright, then saving the additional cash flow to get the next one and so on.

Anybody here regret paying off a rental or have any advice?

thanks,

Edward

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Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

I paid mine off. With 12 rentals I have a monthly cashflow of $20k/month. I could have gone bigger but I don’t need more. And during a busy time I work an hour a month.

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
I paid mine off. With 12 rentals I have a monthly cashflow of $20k/month. I could have gone bigger but I don’t need more. And during a busy time I work an hour a month.
23 Reply
Julie Gates
Real Estate Agent · Savannah, GA · Member since 2018 · 122 posts · 141 votes
3y
I prefer short term debt as well. I was a Dave Ramsey person for several years and I use his snowball strategy to pay on my lowest loan if I have the extra money. It works well, and it feels great to see a loan coming down.
6 Reply
Edward Heavrin
OP
Louisville, KY · Member since 2017 · 25 posts · 9 votes
3y
Quote from @Bill B.:

I paid mine off. With 12 rentals I have a monthly cashflow of $20k/month. I could have gone bigger but I don’t need more. And during a busy time I work an hour a month.
Bill, did you ever buy any with cash or did you finance them all?
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Edward Heavrin
OP
Louisville, KY · Member since 2017 · 25 posts · 9 votes
3y
Quote from @Julie Gates:

I prefer short term debt as well. I was a Dave Ramsey person for several years and I use his snowball strategy to pay on my lowest loan if I have the extra money. It works well, and it feels great to see a loan coming down.
Yes! I’ve been on a Ramsey kick recently and I’ve also been humbled by the stonk market… now I’m really seeing the value of my slow growth rentals.

thanks for your reply!
0 Reply
Jevon Shaw
Investor · DFW, TX · Member since 2022 · 198 posts · 161 votes
3y
Cashflowing with no payments would be so nice. @Bill B. is definitely sitting pretty! Seeing that other people are considering this makes me feel less crazy. Everyone talks about how it lowers your ROI but that's not a bad trade for thousands in cashflow per month for such little time to spend
6 Reply
Jason Hirko
Lender · San Antonio, TX · Member since 2016 · 1k+ posts · 1k+ votes
3y
Full disclosure: I'm a big fan of debt. However, I understand the appeal of paying down a loan to try to own it outright sooner. The one thing I always caution people is to hold enough in a savings that can see you through a tough time, if ever needed. Your mortgage company doesn't care how many months ahead you've paid down your Note if you don't have the money for next month's payment.
17 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
@Edward Heavrin
They wee all purchased with 20% down to avoid PMI. Every year I would buy one investment property and one new primary home. A year later I would move and repeat.
Since I didn’t need the cashflow to live on I sent all the rental income from all the properties towards the highest interest rate loan one at a time. Once you’ve paid off 1 or 2 you start paying off mortgages every couple years.
Yes, I could have bought more then, but you could say the same thing today. With $20k/mo income and zero debt on anything, what’s the limit on what I could buy? I’ve just reached my own personal “happiness because of income” threshold. Personally I wouldn’t trade my position for someone who makes a million a year working 80 hours a week and their income stops the day they stop working.
Ps. That’s being said by someone without kids. I assume people with kids would draw that line even lower.
12 Reply
Ash Hegde
Lender · Fort Lauderdale, FL (Lending in FL CT GA MI PA) · Member since 2022 · 470 posts · 349 votes
3y
If you are done acquiring properties there's nothing wrong with paying them down. The main argument against it is that you could use that money to continue investing and make a better return, but if you aren't going to use it for investing anyway and it helps you sleep at night go for it.
6 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Your cash flow would increase, but your wealth will take a halt. Use the cash to buy more property.
1 Reply
John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
3y
The real estate leverage issue has fans on both ends and many in the middle. I'm personally on the "no debt" end of the continuum and have been most of my life. High leverage enables rapid growth, no leverage is safe and enables peaceful sleep. You have to determine what your goals are and then attempt to achieve them. My goals in real estate were to create a large enough income stream to live on and ensure my wife has income if I die before she does. We've reached that point and thus don't plan to acquire any additional properties. Our lifestyle is "cheapskate" and thus we don't need that much to live on. We're happy with our status quo.
8 Reply
Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
3y
If the current interest rates are low, you are interested in buying more and your debt to income ration won't impede you buying more....I wouldn't pay them off aggressively. If you are planning on retiring and can use more cash flow or the interest rates are high, then pay them off.
1 Reply
Edward Heavrin
OP
Louisville, KY · Member since 2017 · 25 posts · 9 votes
3y
Quote from @Jevon Shaw:

Cashflowing with no payments would be so nice. @Bill B. is definitely sitting pretty! Seeing that other people are considering this makes me feel less crazy. Everyone talks about how it lowers your ROI but that's not a bad trade for thousands in cashflow per month for such little time to spend
Exactly. The ROI is lower but the headache and amount of hassle is less. 5 tenants keeps me pretty busy. I’ve hit the phase where if something can go wrong it will go wrong. Replacing multiple furnaces, water pipes breaking, noisy tenant I had to evict, etc etc. It has been pretty non-passive income with just 5 tenants. Can’t imagine what 10 would be like. 😳
3 Reply
Edward Heavrin
OP
Louisville, KY · Member since 2017 · 25 posts · 9 votes
3y
Quote from @Jason Hirko:

The one thing I always caution people is to hold enough in a savings that can see you through a tough time, if ever needed. Your mortgage company doesn't care how many months ahead you've paid down your Note if you don't have the money for next month's payment.
That’s a good point. I would probably keep it on the sideline until I can pay it in full in case something unforeseen happens. Thanks!
2 Reply
John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
I'm not a fan of Dave Ramsey as he preaches paying off debts, but debt is what made you successful. If you don't need the extra money what is your hurry to pay it off? Let the tenant continue to pay down the debt for you instead of you burying your cash into the real estate. The problem with burying your cash into your real estate is that if you ever need the money it's going to cost you money and time to take it back out. You still have a young loan so let the amortization run its course and set your regular income aside for the next opportunity/project that you want to explore. There are people on this forum that have over 50K in debt per month which I know sound daunting, but they don't care because their income from their properties is $100k per month. It's really just a mind set on how you view debt.
2 Reply
Jay ThomasPro Member
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
3y
I also find that investing in Real Estate is a great way to use short-term debt for long-term gain. Real estate investments can provide more capital growth than the stock market, and the rental income from them can help pay off the loan faster. It’s a win-win situation! Writing down my debts and seeing them become smaller over time still doesn’t compare to the feeling of being able to watch my real estate portfolio grow while I’m paying off my loans – it's an incredibly motivating process. To me, it's worth every penny.
[email protected]832-889-5607
3 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
3y
The only negative to that plan is that you will have so much more equity in the property. That means that you can be sued for more if an accident happens (legit or not). A lawyer can easily find out how much equity you have and with more equity you are a more attractive target.
But I like having free and clear properties, it sure is a nice feeling....
3 Reply
Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
3y
@Edward Heavrin I prefer to have my tenants aggressively pay off my debt. I guess it depends on your interest rate. I have a lot of properties locked in at 3% and 4%. Why would I want to get out of
That loan structure faster when tenants are paying off my mortgage and cash flow is paying me?
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2 Reply
John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
Not only is your debt cheap, but you get to write off all that interest on your loan which is a lot in the earlier years of your loan. You many never see rates in the the 3-4% rate again on an investment property so enjoy it.
2 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
3y
I get all the debt arguments, the "math", whatever logic is used, etc.

I still subscribe to no debt or limited debt. I wake up with peace of mind, I don't wake up caring if my ROI or CoC wasn't perfectly optimal.

With that said, I'm the only person I know of that does leverage some properties with cash against it. No one that I know that's as successful or more successful than me, actually sits in enormous amount of debt with cash idle against it. And I've rarely met anyone that survived 1 or 2 cycles with massive debt.

I care about making money with the least amount of stress (in regards to RE). For me, it's cash. I'll grow to scale then pay off. I won't buy a property, that I can't simply cut a check for.
7 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
3y
No pros! Keep buying and keep cash flowing. No reason to pay off if someone else is paying it off for you. Focus on scaling 1st.
1 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
3y
Also, CONGRATS!
1 Reply
Tommy Parker
Property Manager · Charlotte, NC · Member since 2022 · 269 posts · 135 votes
3y
Focus on scaling !
0 Reply
Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
3y
Quote from @Edward Heavrin:

I've got 5 units (Duplex & Triplex) that I've owned for 4-5 years now. currently cash flowing $1500 total.

Since I'm really busy with my job, I've been strongly considering paying off each one aggressively, which would increase cash flow by 2k which would be similar to owning another 5 units, but without the headache of 5 more tenants and the issues that inevitably arise with owning more properties.

Obviously I could use the money to buy more more more, but there's something attractive about owning the rentals outright, then saving the additional cash flow to get the next one and so on.

Anybody here regret paying off a rental or have any advice?

thanks,

Edward

I'm not paying mine off at this moment. BUT, if I bought a NEW property, with a 7% mortgage, then I'd be tempted to pay that off. A 7% guaranteed return on new debt is a lot different than a 3.5% guaranteed return on my existing debt. I can literally arbitrage the spread between my existing mortgages and my Ally bank savings account.
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6 Reply
Steve K.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
3y
If you're cash flowing positively, gaining natural appreciation, your interest rate is reasonable and your tenants are paying down your debt I don't see why you would want to make extra payments, personally, unless maybe you're ready to retire and need the extra monthly income to cover your living expenses, or you're worried about hitting a rough patch and not being able to make the payments. However especially considering the tenants are hitting that monthly nut for you, there are much better uses for that money. Personally I would put it into more property because that's what I've had the most success with. Since it sounds like you're not really looking to grow your RE portfolio due to management/ capex issues/ personal reasons, you might just look for other ways to put your capital to work and grow your wealth. You should be able to achieve a much higher cash on cash return simply by investing that money instead of paying down debt. There are also tax benefits you would lose such as being able to write off the interest portion of your mortgage loans. Ramsey's advice is really only helpful for people who have a lot of bad debt IMO, or who live beyond their means and need more financial discipline. He doesn't like debt or bankruptcy for personal reasons because he was an over-leveraged real estate speculator that couldn't liquidate his assets fast enough when the bank called his loans at the bottom of the market, leaving him with millions of dollars of debt which resulted in a rough bankruptcy for him. However his advice is illogical for most people because low interest rate mortgage debt is generally considered good debt. Why not borrow the money to make more money with it? Personally my stock portfolio (mostly very safe, set and forget/ "lazy portfolio", un-speculative "aristocrat stocks" and some basic high dividend yield ETF's like Vanguard's VYM which pays 3% dividends and has a 30 yr. average compound return of 10%) is doing much better than if I were to use those funds to pay down my very low interest, not at all over-leveraged real estate debt. You could even just buy I bonds that will do more to build your long term wealth than paying down a low interest mortgage faster. Or look into syndications. There are many ways to make a higher cash on cash return than paying down a mortgage faster (unless the mortgage is a really high interest rate of course). To me using low-interest leverage is the best thing about investing in real estate, as well as forcing appreciation but that is a more active strategy than most comparable investments. Anyway like many people I look at my investments from a cash on cash/ rate of return/IRR/ ROI basis and IMO having a bunch of dead equity in a property is a lost opportunity.
2 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3y
@Edward Heavrin
Owning the properties debt free isn’t something you start with. It’s something you earn. I think at least half the people saying lever up, borrow more, don’t pay anything off, are cute, to say the least.
There were a few years when I owned over $2 million (back when that was a lot, to me at least, say 10-15 years ago) on 10 mortgages. Let me tell you, when you’re “unemployed” and the rent coming in is the only way to make $15k/month in payments and pay your bills it’s “less fun”. (Today those numbers might seem “reasonable” but back then it was scary enough.)
I don’t know how long most people could go cashflow negative $15k/month but I would have been done in a few months. Before the pandemic and rent didn’t have to be paid there was safety in more and more properties, in case 1 or 2 or 3 people didn’t pay. When nobody has to pay, there’s no safety.
My final point would be. I assume everyone plans to stop buying and pay off their properties someday, so all we’re talking about is at what age or what number of properties to stop at. If you don’t lose it all getting thee, we all end up at the same place assuming we live long enough.
I was simply showing where I was and how I got there, not how someone else should do it, they might need more money. Good luck.
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