Anyone else paying down mortgages rather than buying now?

79 Replies

Seems I keep getting beat on properties going for full price and more. These deals often have low returns and function solely on best case scenarios in my opinion. Anything good is snapped up quickly. At this point with multiple properties I've debated on accelerating payments on everything until I find something good. Recently was outbid on a small condo which could rent for $1250, to a person who went all cash at 125k. Having 125k in cash sitting around, the COC on return would be 5 percent after expenses. At that point I'd rather go idle......being a landlord isn't as easy as ALOT of people make it out to be!

Anyone else in the same boat?  

@David K.

Same situation here. I'd suggest looking for properties that need a lot of work. Few want those.

I don't have enough rentals to start snowballing debt.

I purchase value ad and while prices have creeped, deals are out there if you sift through enough inventory. If you are having issues finding them though, I think it is absolutely a smart move to stack your chips so that you can act quickly when you do find one. Otherwise, great idea slashing debt. It will set you up nicely when you begin buying again. 

Let the suckers overpay for garbage. Keep stacking money and looking for deals. The best deals I find are from calling people or knowing through the grapevine. Not getting into a bidding war on an MLS listing just to watch someone overpay. Does it really matter if you don't buy for a few years and then finally find a good deal or package of deals, have a bazooka of capital and buy 5 great deals in one year?

Paying down mortgages is good. You could also put money into a low cost index fund.

I am hitting the principal. Why overpay in this market for measly returns. If I want to be satisfied with workimg hard for a 5% return then I'll buy property (no thanks).  Stack your chips and wait for the market to turn. Think about it, if you pay mortgage down now you will have more $ to play with later. Continue to look for deals like I do but I have yet to find one that isn't owner occupent. I'll keep looking though.

Paying down a mortgage on a income property is a terrible idea as a investor. If you have cash or equity it should be moved to a different investment vehicle not simply allowed to wallow in a property where it is essentially being sent to die. That is hoarding not investing and a embarrassing use of money. 

Every 100K in a property will suck $866/month directly off the top of your income based on a conservative opportunity value of 10%.

Take the money and invest in a income fund or REIT if you want to hold, do not burry it in a property where it will essentially kill your cash flow and turn the investment into a liability.

Simply because you are on hold does not mean your money should stop earning it's keep.

There's no situation in which I'd put additional money towards my mortgage.

That's a 4% ROI, I'd sooner put it in stocks if I couldn't find a deal (which is usually what I do in their interim via Betterment).

Keep looking and as others have said find a property that needs work. Got outbid on a property that was priced @ 285, offered 300, winning bid was 330k with no contingencies. No chance it appraises over $305k.

Glad it fell through as I ended up finding a 5bd/2ba in an appreciating area of Denver for the same price. Great shape structurally, half the normal going rate on PSF, will end up being a far better investment after I update it. $300k price, ARV 400+ after 50k in rehab costs.

As a newer investor I’m really curious why those of you who are seasoned say don’t pay down mortgages? I have a 5 year note (3 years now) and I was considering doing the same...but if it’s a bad investment, I definitely don’t want to go down that road.

@Scott Titus paying down a mortgage has
1) positive effect on a balance sheet (the asset now has less debt attached to it)
2) marginal positive effect on an income statement (there is less interest expense to pay each month)
3) negative effect on return-on-equity (equity is increasing without a corresponding increase in income).

Every investor has different needs and will favor some outcomes over others at any particular time.

Just because they paid cash at acquisition, does not mean they did not leverage it post-acquisition.  Being a landlord is easy.  Having the persistence over long periods to generate profitable deal flow (networking, marketing, analysis) or to create competitive advantages like being able to make all cash offers is the hard part.  Just like any endeavor in life, there is a cost and time commitment to achieving success (generating outpaced investment returns) especially when getting started.  Some investors enjoy the hunt and persisting is fun for them...others do not and they move on to something else.  We all have different interests and there is no right or wrong answer.

@Scott Titus If you pay off your house, you are a HUGE TARGET for a LAW SUIT. If you have debt on your property, attorneys don't want to go after a house with not much left over after paying realtors and the mortgage off. If it's free and clear, look out, you are the #1 guy they LOVE to sue. If they win, $$$$ loss is huge.

Investors buy for Cashflow. Appreciation is speculation and is gambling. It's like the stock market, see crash of 2008. If you were Cashflowing through the crash, it didn't really matter if it was worth less. If you still had it, it would be worth more now today.

If you build up equity in your properties, do a cash out refinance. You get your equity out TAX FREE. You don't pay taxes on Debt.

In your case, having a 5 year loan, I would need more info on the type of property and cost. Is this a modular with short term financing?

@Scott Titus   I see several reasons why paying down the mortgage is a bad idea.

1) Your ROI is equal to the interest rate of the mortgage on a rental property. In this low interest rate environment this represents a pretty abysmal rate of return. If your interest rate is 3%, then prepaying the mortgage gives you an ROI of 3% on a rental property. (On a personal residence your net, after-tax return would be even worse since you would be writing off the interest, thus lowering your actual interest rate).

2)  Liquidity.  Using extra funds to pay down principal traps money in the property.  I would rather have easy access to the money so that when an investment opportunity arises, or if I need to access that money, then I can easily access it.  Your rate of return on equity trapped in a property is 0% before taking opportunity cost under consideration and is negative after factoring in opportunity cost.  The value of your property will increase or decrease based on the market (along with how well you maintain the property, whether you make improvements, and whether you are able to raise the rent over time), not based on how much equity you have.

3)  Equity trapped in a property is a reason for you to be sued.  Landlords have giant targets painted on their backs.  The more equity you have in a property, the bigger that target becomes and the more likely you will be sued.  Keep your money working for you by extracting equity when possible and reinvesting those dollars elsewhere.  

I think after reading comments people are at different stages in the game.  I've got enough properties, that if I paid them all off, I could live off the income for the rest of my life.  I've been investing in index funds for many years too.  Thank you for all your responses, its always good to look at things in a different way.

Originally posted by @David K. :

I think after reading comments people are at different stages in the game.  I've got enough properties, that if I paid them all off, I could live off the income for the rest of my life.  I've been investing in index funds for many years too.  Thank you for all your responses, its always good to look at things in a different way.

 That's awesome, David.  Congrats!

I'm in the same boat as you.  I've paid off 19 doors this year, but they weren't the typical residential fixed mortgage in the 4s.  They were above 6% (from 2003-7), one was 7.99%, 2 were seller-financed with old dudes and 2 big ones were commercial with shorter terms and rate adjusts that were callable and bothering me.

Not all debt is the same.  I leave my fixed resi's below 5% alone, but punch all others in the face until they go away.

I think that's not a bad strategy given the current market cycle. Unless you see something great pop up don't feel like you have to over bid.

Originally posted by @Steve Vaughan :
Originally posted by @David K.:

I think after reading comments people are at different stages in the game.  I've got enough properties, that if I paid them all off, I could live off the income for the rest of my life.  I've been investing in index funds for many years too.  Thank you for all your responses, its always good to look at things in a different way.

 That's awesome, David.  Congrats!

I'm in the same boat as you.  I've paid off 19 doors this year, but they weren't the typical residential fixed mortgage in the 4s.  They were above 6% (from 2003-7), one was 7.99%, 2 were seller-financed with old dudes and 2 big ones were commercial with shorter terms and rate adjusts that were callable and bothering me.

Not all debt is the same.  I leave my fixed resi's below 5% alone, but punch all others in the face until they go away.

I tried getting into apartment buildings 10+ units.  On that end here the prices are high.  One particular deal I the appraisal came in 100k under purchase price, and the seller, wouldn't go lower.......that's why my line of thinking is the way it is at this point.  Pay downs, becoming a hard money lender, and still actively looking is where I'm headed, although it is kinda boring lol

Does anyone have any actually stories of being sued and losing a great portion of a heavy equity position in a property?  I understand why it is a target and I hear this as a reason why people like the cash out refinance but I haven’t heard the horror stories of a landlord being sued and losing. Maybe I’m not looking hard enough. 

@David K. I haven’t done it *yet* but I may. Here’s the caveat, it would be on a commercial mortgage that will go through the balloon payment/refinance cycle. So paying it down de-risks the potential impact of interest rates rising. And I get a small return in the meantime. By return I mean “pay slightly less in interest”. I wouldn’t do it on a residential mortgage because I’ve got a low rate locked for 30 years. So while it’s not the “best” use of investment capital it will have a return and allow greater cash-flow down the road. Still, I’m hoping to find a solid deal so I haven’t done it...yet.

In my opinion, the best argument for paying down debt is to get your debt to income ratio in check so you can leverage even further. But as the others have said, the return is only the interest rate on your loan. I can't wait for the day when I can take out a mortgage on my first property that I paid cash for so I can put it to buying another property. It will still cash flow with a mortgage on it and I can be making 10-25% if I can pull those funds out and put it elsewhere. 

2 schools of thought.

Some investors during an up cycle when not much pencils as a deal will say let me pay down extra on properties.

The other investors are thinking of while lending LTV ratios are high to leverage and take out as much debt as possible. This way less is put down and you stockpile cash for the next downturn.

The thinking is that when economic down cycle happens more deals might be available but lenders and banks will also tighten up LTV's and want more down to do a deal. So the person paying down more on properties will not be able to access that equity versus the investor who locked in long term debt and high ltv can take all the saved up cash and still buy at lower ltv's from lenders.

It's a preference thing. 

Originally posted by @David K. :

Seems I keep getting beat on properties going for full price and more. These deals often have low returns and function solely on best case scenarios in my opinion. Anything good is snapped up quickly. At this point with multiple properties I've debated on accelerating payments on everything until I find something good. Recently was outbid on a small condo which could rent for $1250, to a person who went all cash at 125k. Having 125k in cash sitting around, the COC on return would be 5 percent after expenses. At that point I'd rather go idle......being a landlord isn't as easy as ALOT of people make it out to be!

Anyone else in the same boat?  

 Money is cheap & easy to get right now. Let's not forget that mortgages are the best debt one can have. Money won't always be both cheap & easy to obtain forever. 

@David K. I am in the same boat, not finding any good deals so debating to pay down existing debt. I see new condos being built everywhere but when you do the math, the rent barely covers the mortgage and high condo fee plus other expenses makes cash flow go negative.

Maybe you'll find something before December if you take Brandon's 90 day challenge. More deals to be found during winter months I believe.

Let me know which areas you are looking if I can help.

Keep looking and good luck!

As someone who’s already said it depends on where you are. I 65 I like 8 paid for properties Plus my 40 years of savings to provide a comfortable retirement.

Why focus on only cash on cash return? If you add in mortgage paydown and small depreciation savings you'll well exceed anything you'd gain paying down a 4-5% mortgage.

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