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
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
My goal is to head towards having everything paid off. But I'm good with using some leverage until the ball is really rolling. I have 15 more years until I plan to retire but may work a little longer if I'm enjoying it. I want to have around 20 doors (mix of SFH and multi) by then and working to have at least half or a little more paid off by retirement. My house is about a year from being paid off as well so that should help speed up the process.
I have modest leverage on my properties. Real estate is expensive, and few of us have the funds to purchase multiple properties with cash. So leverage is normal in our industry.
I'm probably not the only one - but paying off your properties takes a very long time.
One idea to accelerate your payoff - you can use all of your cash flow (minus reserves) to pay down your balance, beyond your monthly mortgage payments.
When the lending interest rates were at record lows, it absolutely made sense for many investors to lock in that cheap money.
@Tj M. Great question. I’m 43 and my rentals are not paid off. I plan to get them paid off in the next 5-7 years. But I did purchase rentals for my parents that they own outright and use the rent as retirement payments in addition to social security. Without the rentals, they could not have retired since the stock market and a terrible “financial advisor” destroyed their retirement accounts. Thanks for throwing out the question since the responses I am seeing are encouraging.
@Frank Chin. Frank, what are some of the pitfalls and advantages of investing in NY? I’m a military transplant up here in Orange County and have been turned off the rental market from the massive property/school taxes assessed. Where did you start and what is your rate of return?
@Tj M.When I first started, I owned a couple houses free and clear....however, I then ran out of money and couldn't do anymore deals unless I took on a partner, found investors, or talked owners into handing me over properties without any $.
So then I started leveraging, and my portfolio and net worth has exploded. I will continue to leverage until we feel we've had enough, and then focus on stock piling cash for alternative investments.
With paid off properties, can you still write off enough expenses to have tax free income?
No leverage so no interest to write off. I'm thinking you start to have paying taxes with no leverage, right?
If you own the properties longer than 27.5 years you also run out of depreciation to write off.
What other tax implications are involved with paid off properties?
@Steve Vaughan
Imagine if you locked in a 3.5% Interest over 30 years just a few years ago. You would be thanking yourself for liquidating some of that equity in your paid off properties for another investment. You may have to wait another 10 yrs to get those terms on conventional financing.
@Steve Vaughan
Imagine if you locked in a 3.5% Interest over 30 years just a few years ago. You would be thanking yourself for liquidating some of that equity in your paid off properties for another investment. You may have to wait another 10 yrs to get those terms on conventional financing.
Says the person that may not even have their car paid off...
I did do a ton of residential refinancing in 2012 in the 3s, then another 2 in the fall of '17 at 4.25%. Those I kept.
Most of my stuff is commercial apt bldgs.
House only and new people think all debt is 30 yr fixed residential house debt. It's not.
My first property started @ 80% leveraged, now @40%. It has "rehabbed" itself (replacing outdated appliances, fixing some pre-existing damage). It has always carried itself, and should pay itself off in another 10 years. All the income goes into a separate bank account that gets used for repairs (or more property purchases).
I’m new to bigger pockets and buying properties. I currently own a home with a 15 years mortgage and bought a condo with a 15 year mortagage. I plan to invest more. My question is...is it smarter to go this route even if you break even or pay a little into mortgage since you get to own the property sooner (like 15 years sooner! ). Are there any tax benefit from doing this? I also work full time, so am making 6 figures. So trying to figure out how I can grow my assets without having to pay an arm and a leg in taxes...
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.
Gott ask:
Are your SFRs Class A/B/C? Were they 30 yr or 15 yr? Did you start with SFR and move to multi?
Did you use high W2 income to get started and fund your deals?
Any regrets in buying/owning too much and not “lliving it up” at times?
The reason equity is "dead" is it is as if it is locked in jail. Equity, if paid for using the REI's cash, is equal to the cash that was used to buy it. The value hasn't changed...just the location. The difference is when this money is located in the bank, instead of the equity, it has the ability to grow exponentially through reinvestment...and movement. As equity, it doesn't NOT grow...and cannot grow. Now before anyone mentions appreciation, remember that appreciation is based on the value of the property...not how much equity there is in that property. The value of the property is exactly the same, regardless of how much equity you have.
I think this question depends on where you are in your investing career.When I started I had a negative net worth as you grow your portfolio start thinking about who is making more money you or the bank?I listen to investors talk about the great rates they have.How have banks made more money with historical low rates than ever before? I ask them what volume of your payment is going to your equity? I have started creating mortgages on my portfolio and if has changed the way I think about real estate.Own your own Debt its all about how you think!
COMMERCIAL Loans can wipe out decades of growth when they call them DUE!! be ready they will
Has happened to me twice in my life.
Invest in Debt: The "how To" Book on "buying Paper" for Cash Flow Book by Jimmy Napier
become your own banker book by Nelson Nash
I want to add to the previous post, what the value of cash in the bank reinvested is vs. having that same money sitting in equity by comparing future value through use of of both over the next 30 years (at the 30 year mark, both examples would be paid off and have equal equity as well as cash flow).
Assumptions:
Value = $100,000; DP = $20,000; Loan = $80,000, CF w/loan = $4800/yr; PM = $5200/yr
Options :
A - Use CF to payoff mortgage faster = Payoff happens at 19 yrs, 8 months
B - Stockpile CF for 10 years and flip = $48,000 in cash. Flip "cash" at 10% return twice a year, reinvest including profits. $48,000 > = $52,800 > = $58,080 at end of yr 1, and repeat for 10 yrs
Compare Yrs CF Equity Accum Profit Total Return
Payoff 10 0 $68,000 0 $48,000 (- DP)
Reinvest 10 $48,000 $42,000 0 $70,000 (-DP)
Payoff 20 0 $100,000 0 $80,000
Reinvest 20 $48,000 $65,000 $343,000 $436,000
Payoff 30 $100,000 $100,000 0 $180,000
Reinvest 30 $96,000 $100,000 $2,588,658 $2,764,658
This is a great problem to have.
Generally, my response here is to seek balance. Be somewhere in the middle. Don't be too highly leveraged, especially going into a downturn, but also don't be at zero debt either.
When you house is paid off, you have all that equity which you can access -- but when you decide you need it, you will need to then convince some banker to lend it to you.
If paying it off saves you say 5% in apr, that is great. How do you take that money and earn 7-8%, or 10%? Or more? And what are the risks involved with doing that?
Again, a fun exercise.
We all love getting to help spend other peoples hard earned wealth -- thanks for this cool thread!
I would think that 7 paid for houses would be better than 30 doors @ $200 per doors which are 80/20 leverage. Although it would appear to be the same ‘net’, I don’t see how it could ever be that way. With 30 doors you will always have something. Anything from an eviction to a/c replacement, those pesky roof replacements, to just trying to ‘bulletproof’ a property.
What happens in a downturn where you may have to cut rents? I think we saw this once.
I presently own 6 properties. All leveraged at about 30-40% on 30 yr loans. 30 yr loans give me the lowest payment (in case of an issue), but I can still pay down the mortgages if I want.
My main reason for leverage is different from most. I want to avoid paying tax on my positive cash flow. So i’ve figured out that if positive cash flow = interest + taxes + insurance + depreciation + expenses, than my tax liability is Net zero. ;-). But I still have a good chunk of cash in my pocket.
I will have to buy more (selectively) to keep this going as loans pay down or pay off. For the last 10 yrs of the loan you pay way more principal than interest.
I've actually debated in paying off the brrr property I bought rather than paying so much in fiancing costs, relative to the amount of the loan that is. Doesn't make sense to me to pay (all together) 5-8k just to get 75-80k in loans. That's including hml and permanent financing.
But that would take a huge chunk of my cash reserves and i think it would make it more difficult in aquiring more properties.
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.
Gott ask:
Are your SFRs Class A/B/C? Were they 30 yr or 15 yr? Did you start with SFR and move to multi?
Did you use high W2 income to get started and fund your deals?
Any regrets in buying/owning too much and not “lliving it up” at times?
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.
Gott ask:
Are your SFRs Class A/B/C? Were they 30 yr or 15 yr? Did you start with SFR and move to multi?
Did you use high W2 income to get started and fund your deals?
Any regrets in buying/owning too much and not “lliving it up” at times?
Sorry, wasn't able to see anything posted. Feel free to directly message me if you'd prefer to take it off-thread.
Aaron,
20% A's, 70% B's, 10% C,s. 1st 2 purchases were 15 year mortgages paid off in about 8 years. The rest were paid for cash and renovated with cash with the exception of a couple of the C class properties which I inherited through a bulk purchase agreement.
I'm fortunate enough to live in an area that has very reasonably priced housing. That combined with the 2008 crash made a lot of bargains possible. Owning another business plus saving every penny of rent allowed me to accumulate them debt free.
In terms of questioning whether I should have spent more money living it up, the answer is no way. I loved what I was doing. I felt like I never worked a day in my life.
With paid off properties, can you still write off enough expenses to have tax free income?
No leverage so no interest to write off. I'm thinking you start to have paying taxes with no leverage, right?
If you own the properties longer than 27.5 years you also run out of depreciation to write off.
What other tax implications are involved with paid off properties?
The interest costs more than the taxes. Let's say you are in the 25% tax bracket. For every $100 you pay in interest, it would only cost you $25 to keep it. Would you rather make $7500 or pay $10,000? Intentionally incurring interest (or any expense) for the sole purpose of avoiding taxes is not logical.
Of course, maximize deductions on expenses that better your business. Leverage is a great tool to grow a rental portfolio faster, but at some point paying off the debt makes more sense. I will take profit (and taxes) over debt (and losses) any day.
@Steve Vaughan
Imagine if you locked in a 3.5% Interest over 30 years just a few years ago. You would be thanking yourself for liquidating some of that equity in your paid off properties for another investment. You may have to wait another 10 yrs to get those terms on conventional financing.
Says the person that may not even have their car paid off...
I did do a ton of residential refinancing in 2012 in the 3s, then another 2 in the fall of '17 at 4.25%. Those I kept.
Most of my stuff is commercial apt bldgs.
House only and new people think all debt is 30 yr fixed residential house debt. It's not.
@Sylvia B. Well said I agree with what you said.
@Joe Villeneuve The term in my mind isn’t dead money, but rather inactive money. It’s a good way to store capital in the event of a market correction so you can buy as well. I plan to pay off my first five units quickly and then leverage them when foreclosures start wrecking the market again in 5-10 years. It’s not dead money because it sill has value and potential, but that’s my own definitions/take on the situation.