Real Estate Investor · Reno, NV · Member since 2016 · 71 posts · 67 votes
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?
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y
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
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?
If you have a pension cooking you’re actually in better shape than most.
Don’t have to stress as much as others between that, 401k and SSN. (I have a pension as well but after I hit 20 years the curve peaks and it’s just not worth as much beyond that.)
Still would aim to have most properties paid off by 55. If you choose to work for 4-7 more years after (just cause), to get closer to the 59-62 range, so be it. Wouldn’t take on unnecessary new debt after 55.
If grandparents were in 90s, you won the gene pool and might have a very, very long retirement.
Rental Property Investor · NC · Member since 2018 · 776 posts · 776 votes
7y
I believe in two modes: growth and cruise control.
The more rentals I have that cash flow the quicker it can pay off loans. While interest rates are low, I will continue to grow. Debt is a friend to growth. Eventually, the cash flow from enough properties will pay down a loan for a property at a time. Cruise Control is when you don't want to stress about the mortgages anymore and have paid off properties with steady income.
I guess I am a greedy investor. Instead of paying down my rentals and earn the prevailing mortgage interest rate on that money, as @Jeff C. points out. I do exactly as he suggests and make far more money than the measly return it would buy in a rental.
Instead of paid off properties I have the same value of cash invested elsewhere earning double the income and the properties still appreciate.
Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
7y
I invest in and pay for rentals in cash. I save the rental income to buy more if I want more, or take money from other investments such as stocks and bonds and cds and use the rent for a trip to Portugal, or where ever.
I did not drink the guru kool aid and say this is my w-2 money, its mine, this is my rental money its my passive money and the 2 do not mix. Or that the rental income pays for the mortgage, etc.
I look at it from a net worth landscape. If it is income it is mine, all mine. I claim it, pay taxes on it, and use it. The source of the income is not relevant. If it is a bill, whatever bill, it is mine, all mine. I am responsible for it. I do not try to keep a rental portfolio that is managed for its overall detriment (paying interest, paying refi fees, paying closing costs), then a personal income portfolio that is managed at its advantage. I do not have my rental properties 'pay back' my money earned from a w-2 job. I am me, my money is mine, I do not have a split personality. The income sources are not legally separated so there is not a legal reason to manage them separately. I try to keep a balanced overall life balance sheet of everything. That lets me look as how all the assets can be managed together as one common package and thus bring back the overall best return for me and my family. That is, I make financial decisions based on MY net worth. (And this will NOT work if you have a dozen LLCs as then the assets must be managed separately.)
So, if it is interest, I want that to be income, not outgoing, for any source.
Thus I prefer to save and not borrow.
If there is a discount for doing something fast, I do it fast.
If there is a discount for cash, I pay cash.
My rentals and homes are bought at a discount, paid for in cash, rented for long term use, rather than the highest income and frequent vacancies. I have found that lower rent is better overall income than highest demand rent and turnover/vacancy costs. I would not do it any other way. More rentals can be bought with the rental income, or by selling stocks/bonds that are not preforming well or that preformed very well but now need to be balanced.
Banker · Huntington Beach, CA · Member since 2018 · 99 posts · 100 votes
7y
@Matthew Paul Not if you think of the bank as your partner who's bringing more money to the table and the mortgage as your attempt to buy out the partner. Having this wealthy partner gives you access to control more assets within a short period than you can by yourself.
Real Estate Investor · Reno, NV · Member since 2016 · 71 posts · 67 votes
7y
@Lynnette E.
Do you mine sharing how many properties you own and how long you have been buying them. I have 2 properties that have a total of 7 units. They both have a mortgage now but could pay them off tomorrow. I kinda want to pay off my personal residence also then use all my w2 money and rental money to pay cash for everything in the future. If something really good came up and I didn’t have the cash I could just get a mortgage again if needed.
Mortgage Loan Originator · Providence, RI · Member since 2016 · 35 posts · 22 votes
7y
I'm a bit confused on this topic and am happy to see so many people all for paying them off and enjoying the rewards of fewer rentals. On the podcast and many places people are always saying leverage leverage leverage. But where I am duplexes in C neighborhoods start at 200k. So over 30 years you might pay $200k+ in interest. If you have 5 houses leveraged, that's $1,000,000. If I pay them off in half the time and save $500,000 in interest isn't that the same as making $500,000 on another property or two? Plus if they are paid off they are cash flowing $2400-3000/month as opposed to a couple hundred a door. I understand that having more houses long term will earn you more equity, but there must be a specific number of houses you have to reach in order for it to pay off, relative to the housing prices in your market, compared with the interest savings and increased cash flow. Am I looking at this wrong?
@Matthew Paul Not if you think of the bank as your partner who's bringing more money to the table and the mortgage as your attempt to buy out the partner. Having this wealthy partner gives you access to control more assets within a short period than you can by yourself.
I dont do partners , its the most likely business set up that fails .
Rental Property Investor · Chicago, IL · Member since 2017 · 293 posts · 383 votes
7y
@Tj M. All depends on what you are pursuing. If you’re looking for security or financial freedom, you will love it! If you’re looking to scale as fast as possible, not as much. I have one paid off and I don’t ever plan on putting debt on it. Actually planning on paying off the others as quick as possible too. A line of credit still gives me access to the equity.
Real Estate Agent · Renton, WA · Member since 2017 · 204 posts · 151 votes
7y
@Tj M. Great question, they’re really is no right or wrong answers like most posted here, it all depends where your at on your path. Leveraging is good to get you going, however if you over leverage it can hurt you. I was one if those who over leverage and got smashed, lesson learned and is getting back in the game again. The key is to get in and start. Happy Investing!!
Banker · Huntington Beach, CA · Member since 2018 · 99 posts · 100 votes
7y
@Matthew Paul @Tj M. @christian The bank is the best partner you can have. A partner that after giving you money never talks to you again, never tries to tell you how to run your business and never gives unsolicited advice.
Think about this scenario. $30k property 25%down finance $22,500 @ 5%. In 15 years, you will have paid $9,528 in interest payments.
If you put the $22,500 (because you had the cash to begin with) into the s&p500 for 15 years assuming a super conservative rate of 5% (since most experts say it's about 9% or 10% before inflation) you will make an extra $25,058
Would you rather make $25,058 or save $9,528
Or better yet, stay with real estate and invest the $22,500 into 3 other properties and let the bank carry the rest of the cost. In 15 years, you will have 4 paid off properties with the extra 3 only costing you $12,704 each.
Real Estate Broker · Louisville, KY · Member since 2014 · 362 posts · 232 votes
7y
The best advice I ever got was to do my first one all cash. That way any mistakes you made only financially affect your past. When you leverage it affects your future. That can be for good or bad, so why risk future money when the you that is in the present doesnt know what they are doing. Right now I am using leverage to acquire more deals, but somewhere around 15 units I'll be switching back to all cash purchases. The thought there is that within 2 years I expect a little down turn in the market so I will be living off the cash flow of the 15 and using all my work related income to buy cash assets.
Realtor · Charleston, SC · Member since 2018 · 84 posts · 51 votes
7y
We started off investing in a piece of land, we proceeded to get a loan for 12 trailers and enough cash to put in city water, electric, licenses etc. 20 years later, that was by far the best investment we ever made. As we were able to pay it off, we bought another trailer park, paid it off, and by then the money was rolling in, as the trailer parks started to age, we switched to single family homes and only purchased them for cash in high rent areas. The original trailer park was still bringing in full capacity last year when we sold the property to a commercial investor for 1.5 million (2.5 acres+11 trailers and 2 cinder block homes). Looking back, tackling the investments one at a time until they were paid for in the beginning slowed the investment cycle down for us, but it allowed up to make good decisions (and cash offers) on future home investments, which is really a wonderful freedom to have when making buying choices.
Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
7y
@Tj M.
I have a property that I paid cash for and cash for the rehab ($ came from profit from sale of personal residence). Live the cash flow from this cash cow, and I'm able to take out a HELOC to buy another and will still have a little bit of cash flow.
Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes
7y
I'm not sure there's a right or wrong answer. I personally have 85 + SFR's and 25 or so multi doors. Maybe 6 mortgages, mostly inherited. The cash flow is awesome and I can acquire 8- 10 more SFR's a year out of that cash flow if I so desire. I'm at the point now however (in my 60's) where it might be time to accumulate more liquid assets.
A lot of folks tout leverage but ignore the fact that borrowing is expensive. Interest, points, application fees, surveys, etc. Costs I don't pay for cash deals.
IMHO if I were starting over and with 20/20 hindsight, i would do both. I would leverage my butt off on good cash flowing properties BUT I would have a minimum ratio of all cash deals to help weather any downturns or vacancies.
What would that ratio be? Again, in my opinion, 1 paid for door for every 4 mortgaged.
Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
7y
@Adeva Edobor I get what you are saying . But each persons goals are different . I love depositing money , I hate writing checks . Plus going in cash , no points , loan origination , appraisals and no waiting . I am cash flowing rather well from the starting line . I can then take that same cash and use it to invest .
I'm retired but just refi'd one of my rentals. My reasons were simple: (1) Even after the higher payment from the refi I still have adequate income. (2) It never hurt to add to cash reserves for emergencies or sudden investment opportunities. (3) Money remains historically cheap so borrow all you can as long as you don't exceed your desired debt-to-equity ratio/leverage. (4) I can use the money for living expenses, basically, tax free.
Rental Property Investor · San Anselmo · Member since 2015 · 659 posts · 600 votes
7y
@Christian Scully Your not wrong, just extremely conservative.
You came up with 1M in interest over 30 years, with multiple properties. That is cheap. With 80/20 leverage, you could theatrically purchase 5x the amount of homes, while earning appreciation, and principle pay down on all of them.
Leverage is like a knife. It's a tool that can help wonders, or harm you.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
7y
When I was younger leverage was necessary and a good thing. Now that I am retired my properties are paid off. If there is a next investment it will be paid off too. What is the point of leveraging if you have a surplus of cash and the market is as expensive as we are experiencing today?