Paying off a rental aggressively. Pros & Cons?
Louisville, KY · Member since 2017 · 25 posts · 9 votes
Paying off a rental aggressively. Pros & Cons?
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Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
3yI 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.
84 Replies
- Realtor · Lubbock, TX · Member since 2016 · 165 posts · 155 votes3y
Being your investments, I encourage you to do what works best for you in your situation.
I can see the benefits to either option: having 5 properties cash flowing as much or more than 10+ levered properties is powerful and takes a lot of stress off of you. That being said, utilizing leverage brings a lot of pros as well (writing off interest payments, having the tenant pay off a low interest note on your behalf, & much more). I am biased in favor of taking on debt to grow a portfolio, but hear me out.
Depending on your investing goals and where you're at in your investment journey and life can determine when one may be a better option than the other. If you are younger and seeking to rapidly build a cash flowing portfolio, if you are wanting to continue 1031'ing into bigger assets, or if you do not have the cash to take down entire deals without financing, leverage makes a LOT of sense.
If you are retired (or rapidly approaching retirement with a level of uncertainty or concern about what your post-retirement income will look like), it could make sense to begin paying off properties so that you reach a point where your expected monthly cash flow will exceed what you need to live comfortably after retiring. Just some food for thought, no two people have the exact same situation when considering this decision so do what you are most comfortable with.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
this really depends to on what you do for a living .
if your in the real estate space with a lot of commercial loans.. your balance sheet is very important more so than your fico by a long shot.
so when figuring net worth those that are leveraged to the max basically have very little to no net worth other than their cash or other non real estate investments.
so its a fine line.. Commercial banks like to see low leverage and they love paid for assets :)
But if your W 2 and a mom and pop land lord getting your normal debt those are all computer driven formulas and there is not a big focus on balance sheet.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Edward Heavrin it all depends what interest rate you are paying and what is your ROI.
Realize that you can own RE while being a passive investor by leasing your property to a management company. That management company can allow you to lock in a 20% cash on cash return with leverage( example:triple net lease to a company a STVR). Even a 6% interest rate on your mortgage can get you 20%+ ROI. This while not having to deal with tenants.
- Member since 2019 · 7k+ posts · 4k+ votes3y
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.
wow super !
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Bill B.:
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.
This what Bill is saying is, in my opinion, the #1 most important and #1 most UNDERSTATED fact and detail of REI.
You gotta do things for YOURSELF. There is no 1-size-fit's-all, it's about your personal "zen". Where your happy-place is.
Some, they gotta go bigger, bigger, BIGGER. They want the G.Cardone life, they need to reach for the G6. So it's always about more more more. And kudos to them, if that's your-jam, hey do it!
But, it get's lost all the time, in all the Guru-messaging pressing people to go ballz-out. No, you need to define YOUR end goal and just go for that.
And EVERYONES end goal should have a landing point of debt-free, because your never truly financially free as long as your in financial servitude. DEBT is for GROWING, debt-free is cruise-control.
So the answer Ed, only you can give, what's your "zen"? F-everyone else's end-point, it's your life were all just living in it, right. If you need more, go for more. If your good, exterminate that $-master who holds a lien on your property. It's not truly yours until it is truly yours alone.
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Bill B.:
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.
It's all fun and games until there's a liquidity crisis. That's usually paired with a downturn in the market, so those houses to cash out go down in value.
if I was younger, had less cash, I'd leverage strategically to 8-10 units, sell 2. Pay off debt. Keep my W2, and roll with life. People that preach debt to scale ad nauseum are still believing they'll build generational wealth with this. I hope they do, but they need to realize they need to withstand likely 2-3 downturns while being this leveraged. It just doesn't happen.
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes3y
Paying off early pros - more cash flow, less risk
Cons - return on investment is lower, funds can be used for different things
There's not right or wrong answer here. It all depends on what you want and what you're trying to achieve.
Personally, I have never done an additional payment to any rental but I have focused heavily on paying down my primary residence. Financially, that might not make sense since I have a low rate but peace of mind has a value too....
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @V.G Jason:
Quote from @Bill B.:
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.
It's all fun and games until there's a liquidity crisis. That's usually paired with a downturn in the market, so those houses to cash out go down in value.
if I was younger, had less cash, I'd leverage strategically to 8-10 units, sell 2. Pay off debt. Keep my W2, and roll with life. People that preach debt to scale ad nauseum are still believing they'll build generational wealth with this. I hope they do, but they need to realize they need to withstand likely 2-3 downturns while being this leveraged. It just doesn't happen.
ya the ole refi till you die mantra :) - 3yOleksandr IvanovskiyPro MemberRental Property Investor · Member since 2019 · 124 posts · 38 votes
@Edward Heavrin
Well . It’s pros and cons.
Cons. You will have no cash flow if you paying significantly more every month than your mortgage.
Also not too much left for capital expenses (I. E big ticket items).
Pros you will pay it out faster. What are you willing to sacrifice for it.?
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes3y
What are the interest rates?
You can buy US Treasuries right now and some CDs and get 4.5+% return while maintaining the flexibility of keeping low cost debt on the properties. The debt on real estate right now is more valuable than the real estate.
- Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes3y
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
Edward,
While you certainly can acquire more properties and growth with leverage, you can also crash and burn if the real estate market turns against you.
There is a pretty well known Bigger Pockets commentator who suggests you don't even make money until your down payment has been returned through cashflow. I say nonsense.
I've been an all cash investor since about 2010, after my first two SFR's were mortgaged. Acquired the rest, admittingly quite reasonably during the great financial crisis, for cash. 12 years later my cash flow is over 6 figures per month.
Remember, no matter how much investors promote leverage, interest is still a huge expense. My recommendation: at least one paid for home for every two mortgaged. A built in safety net if you will.
Respectfully, Gary
- Real Estate Coach · Member since 2018 · 245 posts · 216 votes3y
Paying off a property early will have an opportunity cost associated with it. If you unload your cash, if a unforeseen great opportunity occurs hopefully you are ready.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Gary L Wallman:
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
Edward,
While you certainly can acquire more properties and growth with leverage, you can also crash and burn if the real estate market turns against you.
There is a pretty well known Bigger Pockets commentator who suggests you don't even make money until your down payment has been returned through cashflow. I say nonsense.
I've been an all cash investor since about 2010, after my first two SFR's were mortgaged. Acquired the rest, admittingly quite reasonably during the great financial crisis, for cash. 12 years later my cash flow is over 6 figures per month.
Remember, no matter how much investors promote leverage, interest is still a huge expense. My recommendation: at least one paid for home for every two mortgaged. A built in safety net if you will.
Respectfully, Gary
I recall back at the start of covid and eviction moratoriums and many BP members basically said they had no more than 2 to 6 months before they are in major trouble. So in my mind if your going to leverage you need strong reserves just in case. - Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes3y
@Edward Heavrin - keep in mind your ROI goes down down down the more money you put into the property. If you don't want to buy another investment property because you're too busy with work you should explore other investment opportunities that would give you potentially better ROI. You could invest passively by being a private lender (earning high interest), being a money partner (getting equity and a return for no work), investing in a syndication deal (similar to money partner but on bigger deals where you are one of many investors), buying another investment property and hiring a property management company, or investing in stocks. All of those options require little to none of your time and have more upside than just paying down your current 5 unit. But, that being said, there are the numbers on paper and then there's the psychological component.... the human behavior component. Sometimes you just need to do what YOU want to do even if it isn't "technically" the best option from a financial standpoint. It's YOUR life not mine :)
That's what I say as a real estate coach all the time!
- Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes3y
@John Teachout
This 100%! There is something to be said about "peaceful sleep!"
- Property Manager · Watertown, NY · Member since 2021 · 141 posts · 78 votes3y
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.
Self managing or hired out?
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
I don't regret paying off my many riskier or higher rate commercial, seller-financed or private loans.
I also don't regret not having to punch a clock in a really long time.
All those that say 'scale' on their way to, from or at work they'd rather not have to do or go to. LOL - Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
Manager for all but 2 properties. (My easiest, which I will pry transfer to PM if they ever move out. They are at 7 and 9 years so far.)
My PM pays for themselves in too many ways…
I don’t face any fair housing violations because I’m not keeping up on monthly changes local, state and federal
They take care of advertising, showing, rent collection, charging late fees. Move in and move out walkthroughs, Hoa violations, etc etc at no extra charge
They have connections with contractors that will show up within an hour any day of the week, charge a reasonable rate and have it fixed within a couple hours. Even with a dozen properties I might need a plumber twice a year, an electrician once, and a handyman a few times not often enough to be remembered or get priority service
They raise rents faster and higher than I ever would, this alone virtually pays their 8% management fee and $300 new tenant acquisition fee. I have no doubt they are collecting hundreds more per month, per property than I would have been.
I truly believe tenants act differently when they’re dealing with a PM with 1000+ properties than they do with a landlord. I used to manage them when I was learning, and I understand people who want to learn, but juice just isn’t worth the squeeze to me.
- Investor · Cary, NC · Member since 2012 · 214 posts · 194 votes3y
It would depend on interest rate you are paying. If you are paying a lower than current market interest rate then don't pay it down because your debt service is cheap. If rate is high then you might consider it.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes3y
What life phase are you in? Everyone goes through a personal investor cycle, some people go through several. But you basically have a growth phase, a consolidation phase and a drew phase.
Each one has different goals. When you grow, you have to reinvest and buy as much as you can. When you are ready to consolidate, you can be more differentiated. By the time you want to rest on your laurels, it would be good to have your loans not only paid off, but are also ahead of your future capex, meaning all major things already upgraded. Paid off, but junk and no reserves is not helpful, it will consume all your cash flow quickly for years.
- Member since 2019 · 7k+ posts · 4k+ votes3y
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
this is my own thing:
- i would pay off my residential first
- since cost of money was cheap before , I'd rather using loan
- but now since cost of money is more expensive, then I would add more into down or principal
- doing short term loan like 10/15YFRM can pay off the house faster too in comparison with cash. - Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Steve Vaughan:
I don't regret paying off my many riskier or higher rate commercial, seller-financed or private loans.
I also don't regret not having to punch a clock in a really long time.
All those that say 'scale' on their way to, from or at work they'd rather not have to do or go to. LOLyeah, if you see amortization table for pviate loan and higher rate commercial, 90% of the payment is going to lender anyway LOL
I would rather pay off that quickly as well.but for something like C/D class duplex somewhere in indianapolis with 2 percent rate, I can hold the loan for 30 years lol
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Edward Heavrin
I’m all for having less properties if the cash flow meets your financial goals. That was my original goal. To have 10 paid off properties by the time I retire to supplement my retirement that would net me 10k/month and live happily ever after. Lol. But people on here told me I needed to leverage to scale up to make more and more cashflow. So now I’m at 17 properties with loans and debt of about 2 million and I’m cash flowing 12k/month. Sometimes I wonder if I should have stuck with my plan of 10 paid off properties that netted me 10k/month with simplicity vs acquiring a bunch more properties with more headaches. How much do we need to make off RE to be happy/comfortable? 10k/month? 20k/month? 50k? I’m simple and would be fine with just 10k/month with fewer properties. But now I’ve got all these loans including 6 that have 2.75% interest rates. Well there’s no way I’ll ever pay those off. That’s basically free money the bank is practicality paying me to borrow their money. But I like this question of how much is enough. I think many of us get to a point where we don’t care about our return on equity or
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Your cost to buy a property, your TOTAL cost, is only the cash you put into it.
If you have positive cash flow, and you use your own cash to pay off the property, you are adding to your cost.
If you have negative cash flow, the negative comes out of your pocket and adds to your cost.
If you try to change negative CF to positive by adding to the down payment, thinking the lower mortgage payment will change the negative to positive CF, you are only paying the negative CF upfront,...and still adding to your cost of the property.
Profit starts AFTER you have recovered your cost (cash) in the form you paid for it (cash flow). The higher the cost, the more you have to recover and the longer it takes to recover it,...and start to profit.
The value of your DP is what it buys. The equity is what you are paying for the property. The DP is the initial equity, which you are paying for.
Equity gained from appreciation is free.
Equity gained from principal paydown is also free, if the source of the funds comes from the rent (tenant). If it comes from your cash, then it's an added cost. All you're doing is transfering cash from your bank account to the property. There is no increase in value, but if you want to use the cash in the bank, it's free...not so if you transferred it to your property. It will cost you to access/use it.
100% equity means you are paying full price for the property. 20% equity means you are buying a property worth 5 times what you are paying for it.
As your equity increases from appreciation, it increases 1 dollar for every 1 dollar of appreciation...which means the equity is losing value.
If you take all your cash and buy one property all cash, you get one property and one source of CF.
If you take the same cash, at 20% DP, you can buy 5 properties...meaning you have a total PV 5 times more than an all cash deal. This also means 5 sources of CF.
Appreciation is based on the PV, not the equity. The higher the PV, the greater the appreciation gains on both PV and equity.
- Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes3y
@Edward Heavrin not knowing anything about your financials I would suggest you first have cash or equivalents equal to your debt. At that point do whatever makes you sleep well at night. There are more important things than ROI.
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