Rochester, NY · Member since 2017 · 31 posts · 6 votes
I'm curious to hear from seasoned "buy and hold" investors....when thinking about growing your portfolio how do you best re-invest your cash flow proceeds from a property? Do you think it's a better idea to pay it toward paying off current mortgage principal OR put that money toward a down payment on your next rental property?
Denver, CO · Member since 2017 · 265 posts · 234 votes
9y
@Ned,
there is a continuum of strategies.....boiling down to how much debt/leverage you're comfortable with. On one end of the continuum, I know a widow who put her life savings into a $250k duplex in Denver and has zero leverage. She is a valid REI and is thrilled at her cash flow (no mortgage payment) on the one property. She is also happy that Denver's been appreciating at about 10%/year for several years. Her one property is cash flowing and appreciating.
Others, could have bought 4 similar properties, each with 25% down payment (75% LTV). If in an appreciating market, they'd arguably have 4x the appreciation as the widow. They'd be growing wealth more quickly with the leverage.
If you read about the BRRRR strategy (I'm a big fan), the same $250k could have bought 4 fixxer uppers, then cash out refi, then buy 4 more (per year?) and own the appreciation on 16 properties in 4 years (or faster)....with higher leverage, or even 100% leveraged in the ideal BRRRRR.
To prepay your mortgage with your rental cash flow, is to accept the slower path to wealth. If acquiring a new rental could be 10% or 20% ROE on your cash, consider doing that, instead of earning 4 or 5% yield on your money (by prepaying the 4% to 5% APR loan).
Only you can decide how much risk/reward you see in the leverage, and what's right for you.
Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
9y
I'm not a seasoned buy and hold investor but I would say take the cash flow and put it towards a down payment on your next rental. Although yes, it might be a great feeling or your end goal to have your mortgage paid off but many investors on here want to leverage themselves. Have your tenants buy your next rental, as well as, pay off your mortgage.
Real Estate Agent · Naperville, IL · Member since 2013 · 402 posts · 177 votes
9y
@Account Closed Cashflow... a house that is paid for (while nice) is a bank account with money just sitting there, not being used (equity). Until you hit your number, leverage to a point you are comfortable at, and keep growing! Cheers!
Rochester, NY · Member since 2017 · 31 posts · 6 votes
9y
@Josh Mitchell thanks so much for the answer. just to play devil's advocate here and play this out. when you do pay off the mortgage on property #1 in say 10 years instead of 30 though you likely have just tripled the cash flow you can produce from that property. so, still worth it to go after next property, with another mortgage?
Denver, CO · Member since 2017 · 265 posts · 234 votes
9y
@Ned,
there is a continuum of strategies.....boiling down to how much debt/leverage you're comfortable with. On one end of the continuum, I know a widow who put her life savings into a $250k duplex in Denver and has zero leverage. She is a valid REI and is thrilled at her cash flow (no mortgage payment) on the one property. She is also happy that Denver's been appreciating at about 10%/year for several years. Her one property is cash flowing and appreciating.
Others, could have bought 4 similar properties, each with 25% down payment (75% LTV). If in an appreciating market, they'd arguably have 4x the appreciation as the widow. They'd be growing wealth more quickly with the leverage.
If you read about the BRRRR strategy (I'm a big fan), the same $250k could have bought 4 fixxer uppers, then cash out refi, then buy 4 more (per year?) and own the appreciation on 16 properties in 4 years (or faster)....with higher leverage, or even 100% leveraged in the ideal BRRRRR.
To prepay your mortgage with your rental cash flow, is to accept the slower path to wealth. If acquiring a new rental could be 10% or 20% ROE on your cash, consider doing that, instead of earning 4 or 5% yield on your money (by prepaying the 4% to 5% APR loan).
Only you can decide how much risk/reward you see in the leverage, and what's right for you.
Real Estate Agent · Denver, CO · Member since 2017 · 98 posts · 33 votes
9y
I really like Steve's response above. I've been buying and holding for a while. Done a few flips, etc. A few of my properties i've purchased by leveraging the equity from other properties. I also broker for other investors and it all comes down to what works for you. I've seen guys be super aggressive because they have a high risk tolerance and make a lot of money. I'm pretty conservative and am the sole wage earner for my family so can't afford a lot of risk. I make my decision based on where I believe the real estate cycle is. A few years ago I was comfortable leveraging up and buying more because the prices were right and the returns were fantastic. Now the prices are high and the returns mediocre unless I come across something under priced and off market. So currently i'm picky on what I buy and i'm anticipating a bit of a downturn/leveling off. My experience with the previous cycle is that you don't want to be over leveraged in a down turn or you could lose your ***-ets. Currently i'm paying down some debt AND saving some cash so that I can be in a position to take advantage of the next cycle.