Anyone else paying down mortgages rather than buying now?

Investor · Attleboro, MA · Member since 2016 · 137 posts · 51 votes

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?

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Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

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.

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Joseph ODonovanPro Member
Property Manager · Ridley, PA · Member since 2017 · 427 posts · 449 votes
8y
Someone please enlighten me here regarding the comments about being a big target for lawsuits if you have alot of equity in your property. Doesn't insurance cover you for negligence? What about umbrella policies? I am in the litigation support industry and I have never seen a defendant who has insurance in a premises liability case lose any equity in their property. I have seen cases settle for max limits but never ever go beyond that.
8 Reply
Dan Schwartz
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
8y
Interesting experience/perspective, @Joseph ODonovan . Thanks for sharing.
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Will GastonPro Member
Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
8y
@David K. Do you have a HELOC? If so, you could pay that down instead of a mortgage? That way you could see some of the benefit and keep the availability of liquidity if the need came available.
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Pablo Mendez
Abita Springs , LA · Member since 2017 · 80 posts · 43 votes
8y
I also have thought about aggressively paying down mortgage on primary home. Main issue might be if there is a real estate / banking down turn in a few years... might be tough to refinance that money out of the home if banks tighten up.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
8y
In the last downturn HELOC's also were drying up along with lower lending LTV's.
Banks go into (meltdown mode) where they want to keep loans performing at all reasonable costs and shrink ratios to borrowers in what they see as a very risky current lending environment.
If you have ever heard the saying a banker has an umbrella for you on a sunny day but when it starts raining they run like hell! lol
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y
Originally posted by @Joel Owens:

In the last downturn HELOC's also were drying up along with lower lending LTV's.
Banks go into (meltdown mode) where they want to keep loans performing at all reasonable costs and shrink ratios to borrowers in what they see as a very risky current lending environment.
If you have ever heard the saying a banker has an umbrella for you on a sunny day but when it starts raining they run like hell! lol
Helocs got froze and called during the last down turn.. read the fine print.. these are not fixed 30 year loans. they are an extension of credit at the unilateral discretion of the lender.. basing your investment future on HELOC"S is quite risky.. when they call them you usually don't know until 60 to 90 days later when you get a letter in the mail or go to access it and it wont let you.
we have a whole crop of new investors who never lived or invested during those times and simply don't know what they don't know and neglected to read the fine print in their loan docs ( which is common I never do either).. but as a HML in those days I bailed out many a folks who had projects half way through and their helocs got froze .. so I learned this in real time in real situations.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
8y
That's why in a down turn cash is king.
Clients love commercial NNN assets in down turn because the leases are fixed with increases. Not as sexy but you know what you are getting. With multifamily,stock market, REIT's, etc. you can have wild swings in income and vlaue. Multifamily operating costs of the property can go up, rents can flat line, and vacancy can increase.
Everything has a positive and negative with no perfect investment vehicle. It's kind of what flavor of risk and return is an investor comfortable with.
Strong corporate tenants save up reserves while times are good to run specials in a down turn and maintain market share.
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Chris Armstrong
Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes
8y
Its 100% perspective and risk tolerance that answers the question of what to do. I dont see the problem with paying down the mortgage because I look at things differently. Yes technically you could put cash flow into another option yielding more than 3-4%, but once paid off all the cash flow is yours. Yes i am sure people will say that your CoC return is low...I dont care. I collect all rent money now and forever and then I can use that cash flow to buy more. PErsonally I dont like to be spread thin either. BUt again this is all up to you and your perspective.
There are people who say you become a target once you have a paid off property, but how would someone know unless you told them it was paid off....i dont buy it.
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Chris Armstrong
Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes
8y
@Pablo Mendez dont refinance your money out, think about the amount of money you now do not have to pay to the bank once your home is paid off. Invest that money.
I say this time and time again, ONCE YOUR PRIMARY HOME IS PAID FOR COMPLETELY, YOU HAVE WON THE GAME.
that is a huge expense you no longer have to fork out. Ex, imagine a $1500/month mortgage payment. If you didnt have to pay that then you could bank probably 1300 of that 1500 ( cause you still have taxes and insurance) but you can stack a ton of cash that way. Then take that theory and apply it to the rest of your life like cars and credit cards etc.... now your building momentum
.
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Victor Gutierrez
Rental Property Investor · Pawtucket, RI · Member since 2017 · 47 posts · 37 votes
8y
I’m just sitting on cash the prices around my area doesn’t make sense for me. I’m not in a rush I only buy when I can see returns not just base on my feeling about the property!!
0 Reply
Katherine S.
Investor · Grosse Pointe Shores, MI · Member since 2017 · 160 posts · 74 votes
8y
I don't know why I'd put my cash where I couldn't readily reach it if needed.
2 Reply
Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
8y
Originally posted by @Chris Armstrong:

@Pablo Mendez dont refinance your money out, think about the amount of money you now do not have to pay to the bank once your home is paid off. Invest that money.
I say this time and time again, ONCE YOUR PRIMARY HOME IS PAID FOR COMPLETELY, YOU HAVE WON THE GAME.
that is a huge expense you no longer have to fork out. Ex, imagine a $1500/month mortgage payment. If you didnt have to pay that then you could bank probably 1300 of that 1500 ( cause you still have taxes and insurance) but you can stack a ton of cash that way. Then take that theory and apply it to the rest of your life like cars and credit cards etc.... now your building momentum
.
Won the game? How?
You have essentially trapped yourself in a location. I like to think about my Grandmother before she passed away. She lived in the same house for over 40 years. She could not pursue career fields with more opportunity in other locations because she was stuck in that location. Not only that, but her neighborhood went from being a nice blue collar area to being in the middle of the hood in Kansas City within her lifetime. Her house was paid for, but after retirement with a fixed income and as she aged, she could no longer maintain the house, which quickly deteriorated.
A few years before she passed away, she moved to a 55+ apartment community. She was reluctant at first, but she really liked that she was no longer responsible for maintenance or repairs and that she was able to minimize.
I think a lot about homeownership and I have to say that I agree with Grant Cardone on this one. Rent where you live and own what you can rent out. I bought my first 4 plex while living in an apartment.
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Jennifer Slaughter
Real Estate Agent · Fort Collins, CO · Member since 2016 · 246 posts · 142 votes
8y
@David K., where are you purchasing? When we were first getting started we were purchasing out of state in two different markets. Market #1 we got under contract right away, closed and started cash flowing. Market #2 took us 6 months after analyzing over 100 properties, making 10 offers and being under contract 3 times. That property cash flows now but it was 3x as much as our property in Market #1 and barely cash flows more than the first one.
All that to say, you can have a totally difference experience depending on the market. Is your goal to be debt free or to build a bigger portfolio with more income producing properties? There are a lot of strong markets, if you build a team you can lock down more units that cash flow.
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Mary White
Rental Property Investor · Klamath Falls, OR · Member since 2016 · 146 posts · 213 votes
8y
@Anthony Gayden
That's all about perspective. Not everyone is set on mobility in their old age and many in fact prefer stability and lack of expenses. There are many that are very attached to their home and wouldn't ever want to leave it or move away despite possible opportunities. I'm sorry for your Grandmother's situation, but imagine that she'd had good savings and additional outside income and her paid off house. Then she could have made the choice to move. How many years was she able to live inexpensively because her home had no mortgage? Did it provide her comfort to live in the home where her children were raised
My long term plan is to have no debts at all in my golden years and use charitable giving to offset as much tax as possible.
Right now we're stockpiling cash and waiting. We have 10 units and will jump if a good value add small multi comes available or keep building up our cash until we can buy an apartment complex. There's nothing wrong with paying down or stockpiling cash.
1 Reply
Chase Gochnauer
Investor · Des Moines, IA · Member since 2015 · 380 posts · 201 votes
8y
I disagree that paying off a primary residence is winning the game. My mortgage is 3.675% interest and is tax deductible, making it about 3%(or less) that I'm actually paying. Paying off my mortgage basically saves me 3% on my money. Perhaps if you were to the point in your life that you're hands off your investments and want to no longer work, then it makes sense. But if you're hands on with your rental properties, and actively trying to grow your rental portfolio, it makes no sense to pay off your primary residence.
I think I'd rather stockpile cash than pay down a mortgage over a 1-2 year period, at least then it's liquid and you can access it quickly when an opportunity presents itself.
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David K.
OP
Investor · Attleboro, MA · Member since 2016 · 137 posts · 51 votes
8y
I probably should have asked for input for people who own MULTIPLE properties. Right now I can buy plenty of units, but the cash flow is LOW, and the COC return doesn't make sense for me. Deals are getting extremely tight, which is why I questioned paying down a note for a guaranteed return.
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Ralph R.
Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
8y
Chris Armstrong I'm not seeing how having a paid for primary signifies a win. Health insurance in my area is 1550 a month. My house payment at 4.5% is 890 a month PITI. To me I'm better off to keep my 890 a month primary payment and continue to look for investments that will offset my insurance and other living expenses. I don't see paying your primary off as anything but stashing money in a mattress. Better off to invest in something that will offset your liabilities. It's pretty tough to increase your portfolio if your money is locked up as equity in rentals as well. To me it's more important to have long term mortgages with a longer call on them. ( as opposed to shorter term portfolio or commercial loans as Steve mentions.). You gotta learn to look for the deals. They are tougher now but they are not nonexistent. I own 9 properties and have only bought 1 off the MLS. I'm closing on number 10 in November. 37 storage units that also were never on any listing service. The deals are there but you gotta be diligent in looking for them. If your money is tied up in equity someplace it doesn't matter if you find a deal or not. You won't have the cash to play if you do. RR
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
8y
Originally posted by @David K.:

I probably should have asked for input for people who own MULTIPLE properties. Right now I can buy plenty of units, but the cash flow is LOW, and the COC return doesn't make sense for me. Deals are getting extremely tight, which is why I questioned paying down a note for a guaranteed return.
I own multiple properties, most of which are free & clear. I would not pay down the properties that are leveraged because cash is king and the leverage is cheap. And I am a fairly conservative individual. As for lawsuits, I don't worry 5 cents about that. I have a ton of insurance.
Equity sitting in a house is kind of like having workers sitting around doing nothing. But I'm OK with that to some extent because A) I have a good job, that I like, that pays very well, and B) The money needs to be parked somewhere. If you constantly leverage everything you have, you need to do something with that money - either stick it in a checking/savings/cd (dumb from a financial point of view), an index fund or stocks (good but a different type of risk), or continue investing in real estate (also good but also risk and work). Bottom line is sometimes you just need/want to park money somewhere and have it earn some nominal return. If you have no plans on growing any further, there's nothing wrong with trading return for simplicity and security. If you do plan on continuing to grow your portfolio, paying off the mortgages is not ideal.
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Amy A.
Portland, ME · Member since 2012 · 616 posts · 550 votes
8y
I'm in the same situation you are. Cash earning 0.05% in a savings account waiting to find the next deal. Not finding deals because people are willing to pay more than I am for a much lower return. Also, my existing cash flow is enough to live on, so I don't want to buy properties in bad neighborhoods that will add stress to my life. I'll probably end up paying down my commercial loans on my 5+ unit properties when the rates reset next year. My 30 year, 4.5% fixed loans I'll keep paying for 30 years, or until exchanging to nicer properties someday. (My state's difficult foreclosure laws make our rates about half % higher than most.)
I know somebody will tell me to invest in stocks, and I have some in IRAs and 401(k)s. I fund these on years when the tax break will give a big initial return. However, I've never lost money in real estate but I have had mutual funds that went to zero. Actually, the only time I lost money in real estate was in Fannie Mae stocks. Therefore, I'm going to follow the advice to invest in what I understand. I really don't understand the stock market and people who spend years in college studying it have lost money too. I guess I'll take the 5% return from paying down my mortgages and hope I can cash-out refinance if another downturn brings buying opportunities.
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Chris Armstrong
Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes
8y
@Anthony Gayden
Again its all perspective. If you essentially have no bill you are financially free...am I wrong? Hence winning the game.
Notice I didnt say anything about buying a Ferrari or a mansion I said financially free.
How are you trapped upon paying a house off? You can just rent it out.... If you are trapped its because you choose to be.
Im not saying you're wrong and you cannot say I am wrong because we hold different perspectives and choose to put our money in investments in different fashions.
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Chris Armstrong
Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes
8y
@Ralph R.
Ralph, Again its perspective. What happens when you deploy all your equity and then markets shift. Unless you have a air tight deal then you're royally screwed and because you're leveraged you can multiply that screwed factor by how many deals you have that are not good. I own 4 properties. 1 free and clear and it cash flows $3K per month 90% mine (taxes and insurance etc). Soon I will have the other 3 paid off (within 4 years) and I will cash flow over $12K per month and my job which is pretty damn good. So at that point I become dangerous and can trade up the properties into much much larger options (large multi family). Im trying to create generational wealth so I am looking at it another way. I really dont care how many people say my strategy is "stupid" or whatever but lets see who is in a better position in 5 years.....
Also, how are the storage units working out for you? I see them everywhere...is it turning out to be a good investment? I dont know much about them but I assume you would treat it like many small apartments.
1 Reply
Chris Armstrong
Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes
8y
Last thing
Generally speaking YOU CANT GO BROKE IF YOU DON'T OWE ANYBODY MONEY..... think about it.
1 Reply
Paul B.
Rental Property Investor · Dallas, TX · Member since 2015 · 501 posts · 504 votes
8y
Originally posted by @Chris Armstrong:

There are people who say you become a target once you have a paid off property, but how would someone know unless you told them it was paid off....i dont buy it.
Actually, I believe it is possible to look up what liens (e.g. mortgages) are on a property. The ease of doing so and the information available probably varies by state.
Having said that, I wonder myself whether you are more of a lawsuit target if you own a property free and clear? Does anyone have first-hand knowledge? Are there lawsuit trolls who look for free and clear property, then find an excuse to sue? Maybe professional tenants who seek out landlords that have a lot of equity? Any horror stories?
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Jack B.
Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
8y
Originally posted by @Joel Owens:

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.
This.
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Luke F.
Littleton, CO · Member since 2015 · 59 posts · 14 votes
8y
Originally posted by @Chris Armstrong:

Last thing
Generally speaking YOU CANT GO BROKE IF YOU DON'T OWE ANYBODY MONEY..... think about it.
I agree with the theory. It is the Dave Ramsey way of thinking about things, which my wife and I have done. There are others who prefer the debt free theory but most here are more worried about cash on cash returns. I understand that 100%. It boils down to what you want as your level of risk.
For those that are waiting it out right now and not putting their money into mortgage paydown or buying new properties, where are you keeping your cash? If the housing market corrects, doesn't that mean the stock martket would follow a similar trajectory?
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