Paying off rentals
Member since 2019 · 30 posts · 16 votes
Who is an advocate for paying off their rentals and just enjoying the cash flow? I’m fully aware of the down sides of this, but thinking it could be a better fit for what I want out of life. I’ve also recently spoken with a very successful commercial investor who doesn’t carry any debt because of his experiences during the great financial crisis. Looking for feedback from people who have done it or are working toward it. I know this slows growth, eliminated leverage and all that, this is an alternative idea that is equally valuable to the investor looking for a more passive income.
For me it depends on where you are at. If you are growing your business it makes no sense to pay off debt. At my current state I have no interest in any more doors so I might as well get rid of any cash that is not going to be working.
I want enough cash for whatever comes along. New roof, kids needs, new car, boat whatever. Other than that I don't need any debt.
It depends on your goals and needs at the time.
I am, sort of. But it fits my longer term goals. I want to use real estate to achieve financial freedom, and then use that freedom to travel a ton and pursue other wealth generating ventures, which I’d probably use to buy more real estate lol.
A lot of people are big into efficient use of equity and portfolio optimization. But I just want to have cash flow forever to travel the world forever while I build some sort of travel business for people who love real estate (no idea what that really means, just want to hang with people who love travel and real estate).
Fun post here!
I am also largely of this mindset, although perhaps a little altered. At the moment I'm in acquisition mode, which means I'm actively trying to purchase more properties until I hit my "magic number," cash flow wise, pre-mortgage payoff. Once I hit that number, I'll back off and start putting funds toward paying off the mortgages rather than acquisition, because like @Christopher Mooney I'm also looking for financial freedom as my ultimate goal. Sure I can keep making thousands and thousands and thousands extra each month by taking on more debt and whatnot, but at some point all that extra money isn't necessary for my particular lifestyle... so it's kind of like working for work's sake. While I love RE, the whole point I'm so gung-ho on it is to not work, so I welcome the finish line when it arrives. Then I can focus solely on passion projects, like a low-income tiny house community I hope to build someday, or making video games. Or sleeping without a single ounce of stress lol. If the extra money is there to buy outright, though, I'll likely pick up an extra property or two every so often since I liken houses to trading cards lol.
For me it depends on where you are at. If you are growing your business it makes no sense to pay off debt. At my current state I have no interest in any more doors so I might as well get rid of any cash that is not going to be working.
I want enough cash for whatever comes along. New roof, kids needs, new car, boat whatever. Other than that I don't need any debt.
It depends on your goals and needs at the time.
Who is an advocate for paying off their rentals and just enjoying the cash flow?
spoken with a very successful commercial investor who doesn’t carry any debt because of his experiences during the great financial crisis.
I hear the commercial guy about commercial debt. It is much riskier with its 5/5/20 model that reviews your financial picture every year. I paid my 3 off in 2017.
As far as residential debt, we had a few dozen rentals before we began choosing the highest rate and risk one to pay off. We had seller-financed and private ones. Then it was pay off any fixed rate GSE above 6%
This was when savings rates were paying nothing so 'earning' 6%+ risk-free through debt pay-down was a no brainer. Now you get 4% almost for sitting in a money market acct.
I wouldn’t rush to pay off low fixed rate mortgages. Again, cash earns 4% to just sit there. It gets to be about risk and effort/reward and cost/benefit ratio analysis.
A smart investor had a 5 for 1 plan in the early 2000s when rates were closer to 7%. He'd buy 5, pay off 1. Not a dumb plan at all since savings rates were nothing.
This is completely a personal decision and there's no right or wrong awnser. That said, if you are risk averse, it's a win/win to pay them off and open up HELOCs on your properties. You won't have any closing costs or payments and if you change your mind or an opportunity drops in your lap, you have the means to make a move immediately.
Congrats on your success!
If you are done growing and don't care much about future properties, then sure, just pay them all off and sit back and collect checks. If you are still in the growing phase and trying to acquire more and more homes, then you definitely want to have some debt.
The end goal for most investors is owning a mix of leveraged and no debt properties. Having no debt eliminates a few pillars of REI. If you're retired and done growing you don't need all the pillars. If you're a new investor with a couple properties no debt is security but it's nothing else. I think it's just a speed limiter to scale.
I've made a personal goal to pay off my first rental as quickly as possible. It was my first deal and I want a safety net to fall on. Something to pass down to our kids. I also predict the cash-flow to 3x within a 5-6 years.
Is there any kind of calculation out there or rules-of-thumb around paying off a mortgage to a certain point using free cash flow in order to best maximize the amount of principal being paid down, vs. the opportunity cost of not using that cash flow fund new deals? Some kind of "breaking point" to maximize on both the equity in the property and the usefulness of using free cash flow elsewhere?
JUST starting my journey. I have one property but soon plan on aggressively (but prudently) acquiring more, and want to know how much the community REALLY worries about the amount of income being wasted on interest, especially with rates where they are now vs. a couple years ago.
@Randall Leach The only calculation that comes to mind is IRR but most investors (residential) just sell property and reinvest into the next deal or deals (1031 exchange). If the property has appreciated beyond the point of holding for cash-flow selling becomes a valid option. You could sell one property and buy 2. Said investor is leveraged again but still scaling and netting a greater return over time if managed properly and holding more reserves. More properties, more reserves, more safety.
I am, sort of. But it fits my longer term goals. I want to use real estate to achieve financial freedom, and then use that freedom to travel a ton and pursue other wealth generating ventures, which I’d probably use to buy more real estate lol.
A lot of people are big into efficient use of equity and portfolio optimization. But I just want to have cash flow forever to travel the world forever while I build some sort of travel business for people who love real estate (no idea what that really means, just want to hang with people who love travel and real estate).
Fun post here!
That sounds exactly like my plan. As much as I'd like to grow my real estate portfolio infinitely, in reality, I would be completely happy just growing the portfolio large enough so that the cash flow will allow me to meet my monthly bills and travel as often as I would like. I've been traveling within the US for the last 15 years and am finally going international starting this year. My favorite type of travel is adventure based travel that involves hiking in incredible scenery so I am hoping to achieve my goal before I'm 40 so I still have the youth and energy needed to go on extended hiking trips. One thing I have done to try to put me closer to that goal is starting a travel agency. In full disclosure, the travel agency is part of a multi-level marketing establishment so I am making some money in it but it's simply supplemental income that I use as play money as opposed to anything that I think will be replacing my W2 income anytime in the immediate future but it has let me connect with travelers and agents that I could use for my own travel. I am also using it as a tool to practice and improve my salesmanship. Good luck to both of us, hopefully we each attain our goals of traveling sooner rather than later. Feel free to connect, travel and real estate are absolutely two of my passions.
there's no answer to this, because it depend on what your goals are.
I agree with what others posted. If you are at the growing phase, use your money to buy another property. If you don't want any more properties, then let the tenants pay off the mortgage. With my current situation, I should only have one mortgage left when I retire.
Who is an advocate for paying off their rentals and just enjoying the cash flow? I’m fully aware of the down sides of this, but thinking it could be a better fit for what I want out of life. I’ve also recently spoken with a very successful commercial investor who doesn’t carry any debt because of his experiences during the great financial crisis. Looking for feedback from people who have done it or are working toward it. I know this slows growth, eliminated leverage and all that, this is an alternative idea that is equally valuable to the investor looking for a more passive income.
Thing is every debt is different in regard to one actual income/net worth.
One with Real Estate income only would view $100k fully paid investment with $500/mo cash-flow ; would be different than
a couple with W2 total household income of $400k and multiple stream of income, 75% LTV for 1.5mil investment and $50/mo cash flow, and still travel a lot LOL.
For me it depends on where you are at. If you are growing your business it makes no sense to pay off debt. At my current state I have no interest in any more doors so I might as well get rid of any cash that is not going to be working.
I want enough cash for whatever comes along. New roof, kids needs, new car, boat whatever. Other than that I don't need any debt.
It depends on your goals and needs at the time.
yes and every debt is different, If I do have six cars I have 0 car debts, 0 student loan.
But when I'm having 1 mil buying power, I would maximize it to 80% LTV into many asset class (Cash flow, apreciation,syndication,non-real estate, index arbitrage),etc that generates 5-15% cash-flows.
I don't mind increasing positive debt because all these assets are appreciable assets.
But one has to be strong in risk management by doing that.
All you're doing is paying for that added CF upfront. The only cost to the REI is the cash they have to pay, as long as you have positive CF. This is because the source of the funds used to pay the mortgage comes from the tenant's rent. When you use your own funds to paydown your debt, you are adding to your cost, not increasing your your profits. The added CF is an illusion. Profits in any business comes after all costs is recovered. By adding to the cost, you're just extending the amount of time to recover these added costs. Remember, your tenant WAS doing all of this for free for you.
Say you get $1000 per month in cash flow from a property. If you finance $24,000 out of your property, you have that guaranteed “cash-flow” for yourself for the year, and it’s not taxable as income. Plus you save the other $12k for expenses. Cash flow feels safe and stable, but it isn’t guaranteed. What if the tenant moves out? What if the sewer line needs to be replaced? If you finance, you know you can have that income no matter what. Your rates will be far lower than if you finance 80% of the property, and you’ll still have significant cash flow from the property. If you want security, borrow it and let your tenants pay it back.
Who is an advocate for paying off their rentals and just enjoying the cash flow? I’m fully aware of the down sides of this, but thinking it could be a better fit for what I want out of life. I’ve also recently spoken with a very successful commercial investor who doesn’t carry any debt because of his experiences during the great financial crisis. Looking for feedback from people who have done it or are working toward it. I know this slows growth, eliminated leverage and all that, this is an alternative idea that is equally valuable to the investor looking for a more passive income.
It definitely depends on your situation. For me, the main thing right now is leveraging the debt I have. Best of luck!
@James York I like the concept of keeping a balance. Some properties with mortgages and some properties paid off. That way you can have the best of both worlds and shift your strategy as the markets change. Right now maybe you pay cash because rates are high. In a few years when rates are down again, do a cash out refinance and use that money to buy more properties. Flexibility is the key.
Have you looked at your return on equity? I can show you a calculator to help you see if you have great return on equity.
I agree with a lot of people here! It truly depends on what your goals are and what you are comfortable with. The way I see it is there are 4 key steps to mastering real estate. The first step is the build phase. The build phase is all about buying a bunch of real estate until you reach your freedom number. Keep buying real estate until you get to the number where you will have reached financial freedom. You have to keep playing offense before you play any defense. Steps two and three have to do with stabilizing and optimizing your properties, and the final step is the debt hammer and paying off any debts you have in full. Some people you should pay it off and others say you should always have some sort of leverage on a property. But that's what personal finance is, it's personal. You have to do what is going to work for you and your loved ones, not what works for someone else.
Who is an advocate for paying off their rentals and just enjoying the cash flow? I’m fully aware of the down sides of this, but thinking it could be a better fit for what I want out of life. I’ve also recently spoken with a very successful commercial investor who doesn’t carry any debt because of his experiences during the great financial crisis. Looking for feedback from people who have done it or are working toward it. I know this slows growth, eliminated leverage and all that, this is an alternative idea that is equally valuable to the investor looking for a more passive income.
This question is a strategic financial question having to do with investment alternatives, and is specific to you... so actually isn't a question that anyone can answer meaningfully for you.
All else being equal, I woud'nt even consider it until if/when you've reached a point in your life where you do not plan do anymore deals. Until then, it's better to hold very low interest long term debt and not pay it off.
Who is an advocate for paying off their rentals and just enjoying the cash flow? I’m fully aware of the down sides of this, but thinking it could be a better fit for what I want out of life. I’ve also recently spoken with a very successful commercial investor who doesn’t carry any debt because of his experiences during the great financial crisis. Looking for feedback from people who have done it or are working toward it. I know this slows growth, eliminated leverage and all that, this is an alternative idea that is equally valuable to the investor looking for a more passive income.
We have taken the strategy to try and minimize the number of units we have to manage by selling off units with high equity to pay down other's to eliminate their financing. From a self-management perspective, this reduces the number of units we have to manage, reduces the number of roofs, etc we have to replace. Before the interest rates went up we did this several times, paying off multiple properties with 5% rates. The most interesting part about it was that we remained cash-flow neutral... The loss of income from selling off the properties was completely offset by paying off the higher rates on the units we were keeping. We sort of thought of this as 'compacting' our portfolio.
If your income tax rate is (say) 22%, you would be saving $2,200 on a $10,000 interest write off. By having that interest go away entirely (ie paying off the note) you have a net gain of $7,800 that went into your pocket, and not to the mortgage company after the 22% taxes.
The ultimate question is the opportunity costs of spending the money to pay down the note early. What else could you have done with it? More real estate would likely always win that argument over stocks and many other investments with its double digit returns. But if you are happy where you are at with the number of doors you have, steady-state increased long term cash flow isn't a bad thing... and given the state of the stock market currently, seems safer at the moment. The good thing is that you can always reverse course and mortgage back up properties that you want to down the line should the situation change. So it's really just a comfort zone question at the end of the day to me. If steady cash flow makes you comfortable, or increasing your investment activity.
Randy
Preference I guess but it's not my style. I see that as dumping in all my capital now and waiting to get it back later. I'd prefer to have my tenants pay down my principle as opposed to me. With all that extra money they dump into the pay off I scale for more property. I gain cash flow, multiple doors, equity built by others and appreciation. Wins from all angles.
Who is an advocate for paying off their rentals and just enjoying the cash flow? I’m fully aware of the down sides of this, but thinking it could be a better fit for what I want out of life. I’ve also recently spoken with a very successful commercial investor who doesn’t carry any debt because of his experiences during the great financial crisis. Looking for feedback from people who have done it or are working toward it. I know this slows growth, eliminated leverage and all that, this is an alternative idea that is equally valuable to the investor looking for a more passive income.
OK, I have done it, made my final mortgage payment on my last property last month. I have struggled with the fact that I have a poor return on equity, but have come to accept it. By always focusing on improving return on equity, it means you are focused on releveraging, expanding, and taking on more risk. I am at a point in my life where I don't want to do that anymore.
It is not so much that I don't want to acquire more properties. But I feel like I am in a position that I don't have to acquire more properties. I still look for deals but only willing to selectively buy on my terms which has not worked now for quite a while. Last property I purchased was in 2010.
One reason I would buy now if it was the right deal is the tax issues I have. Some of my older properties have been fully depreciated and I no longer have all the write offs I used to to help offset rental income. Another reason I would buy is to use long term fixed rate financing on income property as that is probably the best hedge against inflation you can have right now.