How do you like having paid off rentals?

153 Replies

I know people have different opinions on paying off rentals but for those who have how do you like it? Did it allow you to buy more properties faster,did you pay for the next property with cash or did you end up taking loans out on them later down the road? If you had to do it over again would you pay them off?

Looking forward to the reply’s.


@Tj M. , I don't think there is a right or wrong answer to this question but I do think there is value in identifying and understanding the factors to help each person make the best decision for themselves.

I think there are a some scenarios where having paid off rentals is superior. For someone investing for cash-flow they need to live on but at a point in life where they aren't trying to grow their portfolio just self-manage it and live off the income. So, this might be someone of retirement age who enjoys self managing a little and wants stress free income. They will need to manage fewer properties for the same cash-flow since they are paid off.

Another type of investor who might like paid off rentals would be someone who is very risk averse. We can't help to an extent how we feel about these sorts of things and for someone who is very risk averse having paid off rentals is better than not having any. So, even though their approach is slow and steady, that may well serve them best.

For investors who are confident in what they are doing and want to grow, I think using leverage is the way to go. Leaving equity sitting in a property only grows through appreciation. Appreciation is generally slow (on average), inconsistent, hard to quantify in the short term, and impossible to control (except through property improvements).

Leveraging the equity in your properties puts the money in your hands and as an investor we should all believe we can do highly productive things with that opportunity.

I planned on having paid off rentals in my retirement, and now that I am, it makes for a comfortable retirement.

The nice thing is when there paid off, and in high rent areas like NYC, you don't need that many. Earlier on, when I had a number of duplexes and triplexes, and a high pressure job, the hassle of running around handling small repairs, and vacancies is something that I no longer have to endure. But back then, it's OK for a younger man.

While I have sizable 401K's and with our social security, when I meet with my financial planners to review things, the nice thing is that I have income from rentals that will keep going up in future years, complimented by safe investment vehicles and steady income stream.

I agree with the others that it is a matter of what personal preference.  The other variable is the price of the house.  I hear of people buying houses that are $30K, where I am you'd need at least 3 times that to buy a small apartment.  I have one of mine paid off and the others will be paid off in the next 5-10 years.

Absolutely personal preference. A paid off property allows greater cash flow, opportunities for higher HELOCs and allows you to finance more properties in your personal name. 

Financed homes allow for more leveraged initial investment (potentially higher ROI), and allows you to use any additional earned capital to invest in other assets.

No wrong answer. I would say start with the end in mind. What do you want to achieve through your portfolio and when do you want to achieve it by. That should lead you in the right direction

A couple of points not mentioned here:

1 - If you are talking about paying off your rental faster, you're not ahead...especially if the money used to pay off the rental puts you at a negative cash flow.

2 - Any and all money that cones out of pocket, must be recovered before you can make a profit.

3 - The tenant is already paying the mortgage for you (positive CF)

4 - 100% equity (paid off rental) is dead money sitting in your rental...doing nothing, when it should/could be out adding another positive cash flow property (or more).

5 - If you have negative CF, because you are paying off your mortgage faster, then you are both losing money every month and, paying your tenant to live in your house.

If you let the tenant(s) do their job, and pay off the mortgage for you, then let them...don't help them.

Paid off rentals are great it gives you holding power.  Regardless of economic conditions, you will be able to survive it.  I am taking one variable out of the risk of investing by having it paid in cash. 

I understand both sides of leveraging and owning houses outright.  In the beginning, an investor needs equity and leveraging is the best way to attain it.  Towards the middle (10yrs) of the investment career that need may not be as great and they want more cash flow.  That is when an investor wants their units paid off and netting them more money per deal. 

At some point, you have to evaluate your portfolio for risk and time. Do I want to own 30 houses netting me $200 a unit or do I want to own 7 houses cash that pays me the same?  What has more risk 30 houses with loans or 7 houses paid off?   How much time will I have saved owning 7 vs 30?

Having your money sit in your house is NOT DEAD EQUITY.  I understand why someone would say that but if my house pays me every month it is not dead.  It is being utilized as the exact tool that I planned.   It's like saying someone who invests in treasury bonds is dead equity.   But no one ever says that. 

In the end, it depends on the investor and how they run their business and what's most important

Yes, I like my paid off rentals because I punched them in the face on purpose.

Crappy commercial loans with calls, rate adjusts,  bothering you every year for your financials?  Gone.

Resi rates above 6%? Gone.  

Now I have options.  My lender is watching rates for me and we will explore resi refi's at 5%. Until then, paid off ratty loans work well with my nap schedule.  I would have had to take on 19 more tenants and toilets to net the same net cashflow. My dry powder is still locked and loaded for an opportunity, with cash.

Do I want to own 30 houses netting me $200 a unit or do I want to own 7 houses cash that pays me the same? What has more risk 30 houses with loans or 7 houses paid off? How much time will I have saved owning 7 vs 30?

I am thinking 7 is better, and that's all I need. But I am thinking about retiring.

If I was young I might go more with the 30 and buy more plan.

Our houses are all ours, not the bank's, and we like it that way. As @Steve Vaughan said, we avoid all of the unpleasantness associated with loans. This fits our investment strategy, at this stage of our lives. We consider our rental houses as the bank, and the cash flow is the interest we earn. The return is certainly greater than any bank would pay!

If we wanted to buy more houses than we have cash, we could and would get financing, but right now there is no point. We have no need to grow, or at least not to grow at breakneck speed. Our money invested in houses is not dead, it pays us quite well. 

Don't fall for the ridiculous statement that your tenant pays your mortgage. Your tenant pays you, and you pay the lender. If the mortgage isn't paid they come after you, not the tenant. And if you don't have a mortgage, the money stays in your pocket, where it belongs. Leveraging allows you to acquire real estate that you couldn't otherwise afford, but you are still paying for it, whether the money comes from tenants or a job.

You-all know that I like to point out that the lever in the word "leverage" pries in both directions - for you or against you.  I doubt many people come here to post about losing money or going broke.  It is not "dead money," especially on appreciating properties.  

My paid for rentals produce the income that I use to buy my next rental cash . Rinse and repeat . 

whats not to like.. paid for real assets are great.. 

@Steve Vaughan   I am in Charleston SC this week with one of my partners from Hawaii.. And like you he has over the year punched his debt in the face..  and now there cash flow on all those free and clear apartments and shopping centers brings them in a massive amount of cash flow.. With no risk to anyone.. Now they are at the point of donating there 4 plexs in Vegas to their charitable foundation..  

@Tj M. there are definitely benefits to having rentals paid off in full.  I have 6 mortgage free rentals and it's great to rely on those on a monthly basis.

Everyone has a different strategy, however, if you're just starting out in REI it may not be the best strategy to have them completely paid off. It's okay to keep the cycle going and then once you get to a certain point you can pay off one and then refinance another and just keep doing it.

I still have 3 properties that we have mortgages on and we use those as live in flips and for refinancing purposes. 

@Tj M. --I would rather have 10 free and clear rentals than 15-20 rentals financed. Every single investor is different in what they want to accomplish. Mine personally was to put 80% of my rentals on 15 year terms. The reason was to pay them off faster, build equity quicker, and have options down the road. Also think back in 2008-2009 range when a lot of investors were "Leveraged" to the max. I know a few guys personally that lost their ***. Just me 2 cents.

I hate it. Just today, I was counting my Benjamins and thinking I should just give some to the bank.

@Tj M. I think the answer is relative to the situation. If you are just starting out and you have many years left in your real estate career, leverage as much as you can (safely) to acquire as much as you can. If you are closer to retirement or the end of your real estate journey, focus on paying off the properties to cash flow as much as you can.

I’m doing brrr strategy right now and I’m coming out with around 20-30% equity on each deal. After 5 years of this I am going to auction most my properties and keep/ pay off the best ones,

So.. use leverage to grow, then consolidate to retire. I’m 28 now , hope to retire by 35!

@Tj M.

Honestly, I would much rather acquire say 5 properties that are leveraged then 2 properties payed off. But also mental health is something too take into consideration because I think by leveraging can cause stress and havoc. On the other hand by leveraging you gain more experience and generally a more successful and expanded portfolio from what I’ve seen. At the end of the day there is no right or wrong answer and it all depends on you.

When I see the total interest saved over life of the loan I get excited about paying them off but when I see how much cash flow per month that money brings I get discouraged. I feel like if I paid them off tomorrow that I would be able to save a lot money and start buying the next ones with cash. I am spoiled and bought all mine at the bottom of the market and feel like the market is to high. I could pay them off now. Wait for a correction or deal and then mortgage them again if the cash is needed.

What age are you now?

What age do you want to retire?

What age did your parents and/or grandparents die?

These should help determine the answer.

@Aaron Hunt

1.41 now

2. 55 max. Can’t use my pension or 401k till then.

3. Grandparents where in the their 90’s

So what do you think?

@Tj M. Looks like you want to invest for about 14 years. Try to acquire as much as you can with 15 yr mortgages. You would be about done by quitting time. By then you'll have a good idea of which ones are performing and which ones are not. Then you sell the problem ones and chill with what's left.

@Tj M. Don't worry too much about interest saved. Remember the tenant is paying it. Not you.

@Adeva Edobor  I prefer that money in my pocket rather than a banks .  The tenant pays you , you pay the interest .

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