Paying off a rental aggressively. Pros & Cons?
Louisville, KY · Member since 2017 · 25 posts · 9 votes
Paying off a rental aggressively. Pros & Cons?
Most Popular Reply
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
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3yThanks for the input, Bruce! From my understanding the lawyer will sue you for all of your assets, wether there in the form of property, stock, bank account, etc.
Quote from @Bruce Woodruff:
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.
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3y
Quote from @Jay Thomas:
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.
thanks for the insight!
- Accountant · Franklin, TN · Member since 2023 · 204 posts · 91 votes3y
What is your interest rate on the debt?
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3y
Quote from @Steve K.:
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.
Great reply, Steve! That is very helpful. Here's a bit more about my situation... I've had literally everything that could go wrong, go wrong with the rentals. Now I've finally hit a much more steady patch (knock on wood) now that they're all renovated and up to a certain standard (new roofs, hvac, etc). They are quite stressful even when nothing is going on and I can't imagine having double the units. Also, there just aren't many deals like there used to be, and it's hard to buy something when the local market has doubled in 5 years.
I'm a freelance videographer and business is the best its ever been. I don't know if I want more of the hassle of rentals because it's a distraction from my biggest form of income-- my job. However, I cannot be trusted with cash in the bank or in the stock market. I'm too impatient to set and forget, especially when you can buy and sell on the toilet. I lost a ton of money in 2022 from trying to trade. Stupid, I know. I figure if I put all my money into the properties, I am shielding myself from losing it by being reckless in the market. I actually don't know if I can trust myself. Is there a way to invest in VYM where I can put up a wall so that I don't have easy access to sell it? Maybe a financial planner that I have to call to put the trade in, so there's at least someone between myself and the money.
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3y
- Real Estate Broker · Bellevue, WA · Member since 2020 · 48 posts · 30 votes3y
I'll give my personal two cents on some pro's and con's. Take it with a grain of salt or a whole carton or morton's iodized, because at the root of it every investor is different and so is every unique investment situation.
Paying off aggressively will, like you stated, increase the cash flow to a point that it can be equal to or higher than X amount of additional units acquired at a higher net leverage position across the whole portfolio. As well as the additional pains of managing a portfolio yourself (which I am assuming you are). More cash flow with less brain damage. Until you scale enough units management makes most sense on the smaller scale being handled in that way, however aggressive paydowns can put you in a strong position to utilize free and clear properties for great funding options down the road on larger properties that allow you to scale your portfolio to where professional management makes sense. And on top of that, you how back end protection (assuming you buy these hypothetical future rentals right) in regards to have a strong and diversified total net equity position across your entire portfolio, as well as diversified amounts of monthly rental income that can help should there be any type of stabilization period that needs to take place if any value-add properties are in the mix. If portfolio growth is not the goal, then it definitely reduces some of the risk on your side including third party risk (the bank being a party with a vested interest in the property), but also yield adjustment risk. Also, improves your position in pricing should rent prices turn bearish unexpectedly during your vacancy time so you can be flexible in pricing in negative economic environments.
Con's are more on the side of the whole concept of using the long term locked-in period with the bank essentially utilize inflation to 'short the dollar', as well as the more rapid diminishment of the mortgage interest paid tax advantage.
All in all it is safer in a lot of respects to get to that property free and clear, but the major downside is missing out on the additional value that is derived from the power and monetary benefits that come from having a healthy expose to mortgage and other forms of financial leverage. I believe in having healthy equity across a portfolio, but also have expose via banking leverage.
Sounds like you are currently in a pretty good position and I wish you luck on your journey and decision. Always protect your downside, but if you buy right it could be a great opportunity
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3y
Quote from @Edward Heavrin:
Quote from @Steve K.:
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.
Great reply, Steve! That is very helpful. Here's a bit more about my situation... I've had literally everything that could go wrong, go wrong with the rentals. Now I've finally hit a much more steady patch (knock on wood) now that they're all renovated and up to a certain standard (new roofs, hvac, etc). They are quite stressful even when nothing is going on and I can't imagine having double the units. Also, there just aren't many deals like there used to be, and it's hard to buy something when the local market has doubled in 5 years.
I'm a freelance videographer and business is the best its ever been. I don't know if I want more of the hassle of rentals because it's a distraction from my biggest form of income-- my job. However, I cannot be trusted with cash in the bank or in the stock market. I'm too impatient to set and forget, especially when you can buy and sell on the toilet. I lost a ton of money in 2022 from trying to trade. Stupid, I know. I figure if I put all my money into the properties, I am shielding myself from losing it by being reckless in the market. I actually don't know if I can trust myself. Is there a way to invest in VYM where I can put up a wall so that I don't have easy access to sell it? Maybe a financial planner that I have to call to put the trade in, so there's at least someone between myself and the money.
Haha I appreciate your honesty on your personal situation. I also like how a lot of the comments you're getting here say to do what's best for you personally, there's no right or wrong here. I tend to get hung up on optimizing my return on equity and using low-interest leverage to build wealth as efficiently as possible, but there's also something to be said for the peace of mind factor as well, as others have stated, or in your case the opportunity cost of distracting you from your job. Some people sell and trade up if their ROE hits 35%, while others pay in cash and follow the principle NEVER SELL. Different strokes for different folks.
Trading stocks actively became untenable for me also. Not because I was losing money so much but because I got too OCD/ obsessed with it and lost too much sleep, couldn't turn it off. I ended up closing the account I was using to trade actively which made it too easy and opened a Schwab account that I just check/adjust occasionally and that works well for me. Depending on what your account balance is, it might make sense to hire an account manager to handle it for you, since you can't be trusted lol. They would take that off your hands but for a fee obviously. If I were you I would just delete that Robinhood app, go with something more traditional like a Schwab account and just buy some high dividend yield ETF's plus a few aristocrat dividend stocks you like and leave them alone/ manage them slightly occasionally. What is the interest rate on your properties?
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3yThanks for all the great insight, Sean! Can you elaborate on the "put you in a strong position to utilize free and clear properties for great funding options down the road on larger properties". Are you talking about the ability to get a Refi or Heloc?
Quote from @Sean Barnebey:
I'll give my personal two cents on some pro's and con's. Take it with a grain of salt or a whole carton or morton's iodized, because at the root of it every investor is different and so is every unique investment situation.
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3y
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3y
Quote from @Steve K.:
Quote from @Edward Heavrin:
Quote from @Steve K.:
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.
Great reply, Steve! That is very helpful. Here's a bit more about my situation... I've had literally everything that could go wrong, go wrong with the rentals. Now I've finally hit a much more steady patch (knock on wood) now that they're all renovated and up to a certain standard (new roofs, hvac, etc). They are quite stressful even when nothing is going on and I can't imagine having double the units. Also, there just aren't many deals like there used to be, and it's hard to buy something when the local market has doubled in 5 years.
I'm a freelance videographer and business is the best its ever been. I don't know if I want more of the hassle of rentals because it's a distraction from my biggest form of income-- my job. However, I cannot be trusted with cash in the bank or in the stock market. I'm too impatient to set and forget, especially when you can buy and sell on the toilet. I lost a ton of money in 2022 from trying to trade. Stupid, I know. I figure if I put all my money into the properties, I am shielding myself from losing it by being reckless in the market. I actually don't know if I can trust myself. Is there a way to invest in VYM where I can put up a wall so that I don't have easy access to sell it? Maybe a financial planner that I have to call to put the trade in, so there's at least someone between myself and the money.
Haha I appreciate your honesty on your personal situation. I also like how a lot of the comments you're getting here say to do what's best for you personally, there's no right or wrong here. I tend to get hung up on optimizing my return on equity and using low-interest leverage to build wealth as efficiently as possible, but there's also something to be said for the peace of mind factor as well, as others have stated, or in your case the opportunity cost of distracting you from your job. Some people sell and trade up if their ROE hits 35%, while others pay in cash and follow the principle NEVER SELL. Different strokes for different folks.
Trading stocks actively became untenable for me also. Not because I was losing money so much but because I got too OCD/ obsessed with it and lost too much sleep, couldn't turn it off. I ended up closing the account I was using to trade actively which made it too easy and opened a Schwab account that I just check/adjust occasionally and that works well for me. Depending on what your account balance is, it might make sense to hire an account manager to handle it for you, since you can't be trusted lol. They would take that off your hands but for a fee obviously. If I were you I would just delete that Robinhood app, go with something more traditional like a Schwab account and just buy some high dividend yield ETF's plus a few aristocrat dividend stocks you like and leave them alone/ manage them slightly occasionally. What is the interest rate on your properties?
Ah! I'm glad I'm not the only day trading maniac. I had turned 40k into 300k, and then lost it all plus another 100k chasing my losses. To make matters worse, I clocked an enormous profit the previous calendar year, so I owed a ton of taxes on money that I subsequently lost. It was quite exciting!!
I think I'll give the keys to my wife when it comes to investing in Vanguard and other ETF's, so that I have to get her permission to make a trade. You are right, it is all consuming and keeps you up at night. Glad you made it out unscathed.
Interest rates are at 4.25%
- Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes3y
That's crazy! Trading is super stressful for sure. Real estate is also but easier to control the outcome and also easier to compartmentalize/ turn off at night, for me anyway. 4.25% is less than inflation. Putting that money in bonds would even be better than paying down those notes (even without the loss of mortgage interest tax deduction savings factored in).
- 3yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Edward Heavrin:
Thanks for the input, Bruce! From my understanding the lawyer will sue you for all of your assets, wether there in the form of property, stock, bank account, etc.Quote from @Bruce Woodruff:
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.
Yes, but if your property is mortgaged up to 80%, there is less $$ to get and they may not bother. As opposed to a property that is 100% free and clear.
- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
I'm also a fan of investing in Real Estate, particularly short-term rentals. Real estate has proven to be a great way to make money while reducing your debt at the same time. I'm currently in the process of doing this myself, and it's been an incredible learning experience so far. It's amazing how much you can accomplish when you put your mind to it! I'm sure that with some hard work, applying Dave Ramsey's snowball strategy along with my Real Estate investments, I'll be able to pay off all my loans sooner rather than later. That will be such a relief!
- Louisville, KY · Member since 2017 · 25 posts · 9 votes3yTHIS is great advice. I think waiting to buy the next property until I have at least one paid for is a solid plan. Currently have 3 mortgages (2 rentals, 1 primary).
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.
Thanks for your input - Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
Don t confuse personal debt with business debt. Business debt involves cash flow and trying to get the best ROI, cash on cash return possible. There is no cash flow involved with a personal residence not being used for business purposes.
Avoiding leverage on RE involving cash flow negates the power of using OPM, other people s money. It removes all the advantage of using RE to increase wealth.
- Real Estate Broker · Bellevue, WA · Member since 2020 · 48 posts · 30 votes3y
@Edward Heavrin:
Both options, but at a high enough equity you kind find long term mortgage products that will allow cross collateralization, so you can use those high equity or free and clear assets in lieu of down payment. Not saying that any one strategy is right, but having the diversification of options has insane value in and of itself.
- Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes3y
@Bruce Woodruff why worry about the amount of equity in a property.Let the threat of lawsuit determine the amount of debt on a property is no way to run a RE property or business. By using the proper insurance and the right legal entity you can eliminate or minimize any threat by lawsuit to seize equity in a property.
- Realtor · Athens, GA · Member since 2023 · 201 posts · 104 votes3y
I see an opportunity to scale and turn the properties over to a property manager. If you are cash flowing and have equity why not add two or three more doors and pay someone else 5% to manage it all for you? Reduce your headache but continue to grow.
- Investor · Palm Beach County, FL · Member since 2015 · 27 posts · 28 votes3y
Hmmmmm............pay off my own RE debts!!!!! Now why in the world would I do my tenant(s)'s job? What's next pay their utilities for them.....?
SMH!!!!
- Rental Property Investor · Medford, MA · Member since 2016 · 37 posts · 7 votes1y
Assuming you have enough to pay the loan off in its entirety, the best thing to do in my opinion, is to jump in the amortization schedule to a point where it will take X years for the tenant to finish paying it off. That way you can have it paid off in X years without putting the FULL amount down to pay it off. That to me is much more lucrative. With your extra cash on hand, you can now buy another property, while having a couple being paid off in <X years. The tenants money is working hardest towards your loan at the end of the amortization schedule, not the beginning. Also, property management is key to make it truly passive. The moment you have a property paid off, use that money to pay for the property management, allowing you to focus on scalability. Consider the cashflow off that first property as a sustainment cost. For capital improvements, get a good handy man (i.e. not through property management). The sooner you pay off 5 units, the sooner you can use that cashflow for property management + paying the 6th unit off in cash in the very first year (and for every subsequent unit!!)
- 1yAlan AsriantsBusiness MemberReal Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes
I think a lot of people under appreciate having paid off assets. Leverage allows you to scale into build more of a portfolio, but also leverage comes with debt. You hit the nail on the head when you said that you can essentially make more money while managing the same amount of assets and that's a really critical point. Sure you can keep leveraging keep growing your portfolio, but that also comes with more work more expenses and more risk.
I think for the average person that is not going full-time into real estate, investing or property management, having a paid off asset is probably more favorable to them than continuing to own more properties especially if they find their current work to be rewarding, or they like what they area doing outside of Real Estate.
Real Estate is not a one size fits all investment. For most people. Having two solid paid off investments is more than enough, and I'd argue that it is even a better play for most people than continuing to scale and scale for the sake of scaling.
For someone like me I want to keep adding Properties to my portfolio because this is my full-time job. This is what I do day-to-day. For someone that enjoys their work, and just wants to have solid investments, having them paid off is incredibly valuable in my opinion.
Alan Asriants - New Century Real Estate 590 Reviews - Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes1y
Quote from @Edward Heavrin:
THIS is great advice. I think waiting to buy the next property until I have at least one paid for is a solid plan. Currently have 3 mortgages (2 rentals, 1 primary).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.
Thanks for your inputThe interest is NOT an expense, at least not yours, it's the tenants expense as there the ones paying for it......
- Pittsburgh, PA · Member since 2015 · 24 posts · 4 votes1y
What's the interest rate on your loans? Can you find better yields in the market? If you can invest at a higher return than your interest rate, I'd refrain from paying it off so you can continue to reap the tax benefits of deducting mortgage interest from taxable your rental income.
- 1yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
@Edward Heavrin only depends on YOUR goals!
If you understand all your options and the repercussions of them, you can make the best decision for yourself.
Logical Property Management4.9458 Reviews - Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes1y
@Alan Asriants there is no added time or added risk when buying properties that one triple net leases.
All the drawbacks you mentioned are eliminated with NNN leasing owned properties.
If the interest rate on the loan is low enough in relation to income received, there is no financial point in eliminating leverage, mortgage.
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