Portfolio Pay-Off Strategy

[Paul Novak]

This strategy won’t be for everyone, but I thought I would share it just in case it could help someone in a similar situation. For some background I am at a place where once I pay off my portfolio, I will be financially independent. I currently have a portfolio of 6 properties 8 doors. That doesn’t mean I will never buy another property again or will retire as soon as the properties are paid off but I will be able to. Knowing this I am aggressively working to pay off my portfolio. I still owe about $800K that I hope to pay off in the next 5 years. I know that’s aggressive but that’s my goal.

All my rental properties have interest rates somewhere between 4.25% and 6.875% as I have acquired them between 2021 and 2025. To supercharge my pay-off strategy I plan to pay my mortgages down as close as I can to $90K which is the value of a HELOC and then use the HELOC to pay them off. I will then shift from paying off the mortgage to paying off the HELOC. My HELOC interest rate is variable but right now it sits at 7%. Yes, the rate is higher but the velocity to which I am paying off the balance will make the difference in interest rate relatively insignificant. What this strategy does is unlock the cashflow of a paid off property quicker, allowing me to pay off the total balance quicker. Especially when I deploy this strategy repeatedly on multiple properties. Obviously, there are trade-offs with any strategy but if you are in a similar situation and have HELOC capital available to you this could be a potential option.

Would love to hear from others on if you like the strategy or have solid counter points against it.  Always open to listen and learn from others that have been through similar situations!

[JD Martin]

Joe and Dan and Mark have already mentioned your reduction in return so I'll skip that and just say risk is more than just debt on a property. Don't think of the bank as a back-alley usury agent; think of the bank as a silent partner that takes a minor cut of your profits and forfeits all of their rights to appreciation, management, and rent increases so long as you pay them their cut, and will help defend your asset against claims (frivolous or otherwise). Further, the US government will give you a tax reward for paying the bank their small fee, decreasing the effective rate you pay the bank. 

And think about risk in the manner of taking liquidity and locking it up into non-liquid assets. That's pretty risky. At the very moment you may need liquidity, you will be unlikely to be able to access it from the properties without great expense and great difficulty. At those kinds of interest rates you would be better off taking the money and sticking it in a CD at 3 or 4 percent, which would essentially maximize your liquidity while simultaneously reducing your effective interest rate to zero when coupled with your tax breaks. 

I get the "paid off" feeling - I own a number of paid-off properties - but in terms of return on investment and losing the opportunity costs of liquidity, it's a very poor trade off. I fully understand that my paid-off properties cost me money by not releasing the trapped equity, but I'm a lot closer to closing out than starting out. You really ought to think about this strategy.