How do you like having paid off rentals?
Most Popular Reply
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7yPaid 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
153 Replies
- Flipper/Rehabber · Long Beach, CA · Member since 2017 · 155 posts · 118 votes7y
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
@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.
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. Cars are so cheap to finance nowadays. 0% interest with very low down is pretty common. So paying off a car with cash makes no sense to me but maybe you have nicer cars than I do. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
You are correct, I assumed we were talking residential rentals. Kudos to you for realizing the opportunity in 2012. Now everyone is looking back to that period wishing they took advantage. Sounds like you capitalized so I am issuing you a certified “Atta Boy” for that.
- Omaha, NE · Member since 2017 · 50 posts · 29 votes7y
You're numbers make sense, but flipping at 10% two times a year seems quite aggressive and a lot of work. Maybe you are doing this, which is great!
Originally posted by @Joe Villeneuve:
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 yrsCompare 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 $436,000Payoff 30 $100,000 $100,000 0 $180,000
Reinvest 30 $96,000 $100,000 $2,588,658 $2,764,658 - Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes7y
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
- Flipper/Rehabber · Long Beach, CA · Member since 2017 · 155 posts · 118 votes7y
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
- Rental Property Investor · Ballwin, MO · Member since 2017 · 6 posts · 4 votes7y
This is really a good discussion. One big factor being discussed so far is the age of the landlords. An older landlord might want more security and cash flow. A younger landlord likes leverage so he/she can build their portfolio. Both arguments have great merit but our current lending environment should be discussed too. Being able to borrow around 5% is a huge advantage to using leverage. When you can get cash on cash north of 30% that is like getting a 30% to 35% dividend in the stock market! I'm in the Midwest where properties are cheaper and rental rates are strong so location might be a factor too. If current rates were say 8%, I would be a lot more likely to pay off my properties for security and cash flow.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes7y
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
This isn't the 'If you lease a car, tell me why' show.
This is a 'How do you like your paid off rentals?' show.
For some reason, you singled me out like I asked for your opinion, then you gave it to me. I found myself answering to you, then you gave me an attah boy. LOL
Patrick, how do you like having paid off rentals? Answer the title question.
- All Over, USA · Member since 2017 · 689 posts · 756 votes7y
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
Oh man. Not this again. You haven’t met Steve before, I presume?
He has a track record to get easily offended, as if someone slapped his ancestors with a backhand, anytime someone has any car debt of any kind and mentions it or acknowledges it. If you’re not driving a paid off hooptie then you’re as good as dead.
You’re actually a worse human being in his mind for it and he will let you know - as he has clearly done in this thread with you.
Must have been sippin something cause this time no one mentioned a car loan and yet Steve still managed bring it up and poo-poo this thread with it! (Now we’re discussing Honda Civic lease payments...)
Dodge the poo by telling Steve you will sell one of your kidneys and pay off your car tomorrow.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Joe Lambert:
You're numbers make sense, but flipping at 10% two times a year seems quite aggressive and a lot of work. Maybe you are doing this, which is great!
Originally posted by @Joe Villeneuve: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 yrsCompare 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 $436,000Payoff 30 $100,000 $100,000 0 $180,000
Reinvest 30 $96,000 $100,000 $2,588,658 $2,764,658When I way "flip", I'm flipping the cash. There are many ways to flip cash...and 10% isn't that aggressive.
- Rental Property Investor · Watervliet, MI · Member since 2018 · 49 posts · 29 votes7y
That's why I love REI. 100% preference, no right way.
For me, I like to push my money off the couch and not let it back on until it brings back it's friends. So I like Joe V's point:
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).
If you want to grow (like I do) then send your money out to find it's friends and bring them back. If not, you have dead money.
Again, it's entirely up to you! CF is king and obviously a paid for rental is a cash cow if proper maintenance has been put in over the years.
Best wishes!
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Kyler Cook:
@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.
It's dead. Here's why.
That "inactivity" isn't accessible, unless you sell the property or refi. If you refi, it now costs you to use your own money...again.
Also, the "value and potential" you speak of is exactly the same in the bank...but liquid. If invested, along with the returns on that investment, it compounds its value for as many times as you "use it"...and, there's no cost to use it.
- Flipper/Rehabber · Long Beach, CA · Member since 2017 · 155 posts · 118 votes7y
Originally posted by @Aaron Hunt:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
Oh man. Not this again. You haven’t met Steve before, I presume?
He has a track record to get easily offended, as if someone slapped his ancestors with a backhand, anytime someone has any car debt of any kind and mentions it or acknowledges it. If you’re not driving a paid off hooptie then you’re as good as dead.
You’re actually a worse human being in his mind for it and he will let you know - as he has clearly done in this thread with you.
Must have been sippin something cause this time no one mentioned a car loan and yet Steve still managed bring it up and poo-poo this thread with it! (Now we’re discussing Honda Civic lease payments...)
Dodge the poo by telling Steve you will sell one of your kidneys and pay off your car tomorrow.
This makes soooo much more sense now. I was wondering why he brought up the car lol!
- Rental Property Investor · Kalamazoo, MI · Member since 2018 · 117 posts · 235 votes7y
If you're money is in a bank liquid it's not performing ROI, and the money you spend to refi your equity would be similar as spending money to obtain two separate mortgages, yes?
- Flipper/Rehabber · Long Beach, CA · Member since 2017 · 155 posts · 118 votes7y
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
This isn't the 'If you lease a car, tell me why' show.
This is a 'How do you like your paid off rentals?' show.
For some reason, you singled me out like I asked for your opinion, then you gave it to me. I found myself answering to you, then you gave me an attah boy. LOL
Patrick, how do you like having paid off rentals? Answer the title question.
I have a cash buyer for my kindney. I will be using that cash to pay off the $3600 I owe on my car. Thank you for telling me like it is. Most people would’ve let me continue down this destructive path of commenting on threads without having my car paid off. It wasn’t what I wanted to hear but it’s what I NEEDED to hear.
- Rental Property Investor · MO · Member since 2018 · 3 posts · 2 votes7y
paid all 25+ houses in cash. Less stress.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes7y
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
This isn't the 'If you lease a car, tell me why' show.
This is a 'How do you like your paid off rentals?' show.
For some reason, you singled me out like I asked for your opinion, then you gave it to me. I found myself answering to you, then you gave me an attah boy. LOL
Patrick, how do you like having paid off rentals? Answer the title question.
I have a cash buyer for my kindney. I will be using that cash to pay off the $3600 I owe on my car. Thank you for telling me like it is. Most people would’ve let me continue down this destructive path of commenting on threads without having my car paid off. It wasn’t what I wanted to hear but it’s what I NEEDED to hear.
You guys are great. Who'd a thunk Aaron would take such time crafting such a creative post about lil ol me.
Make sure your cash buyer isn't just a wholesaler on that kidney. Hate to not have POF. Could delay your 'closing'.
Then again, if you had some paid for rentals, you wouldn't need to sell the kidney or rent the car in the first place. Good luck to you. It's been fun.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes7y
Originally posted by @Aaron Hunt:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
Oh man. Not this again. You haven’t met Steve before, I presume?
He has a track record to get easily offended, as if someone slapped his ancestors with a backhand, anytime someone has any car debt of any kind and mentions it or acknowledges it. If you’re not driving a paid off hooptie then you’re as good as dead.
You’re actually a worse human being in his mind for it and he will let you know - as he has clearly done in this thread with you.
Must have been sippin something cause this time no one mentioned a car loan and yet Steve still managed bring it up and poo-poo this thread with it! (Now we’re discussing Honda Civic lease payments...)
Dodge the poo by telling Steve you will sell one of your kidneys and pay off your car tomorrow.
OK, let's lay off the personal attacks, especially if you're a third party. We don't need this thread to disintegrate; it's a good discussion thus far.
Back to the original question: IMO there's no right or wrong answer. Someone said it earlier but I would repeat that a big part of it depends on where you are in life and how hard you want to work.
If I was 20 again, no question I would leverage to the hilt (smartly) and try to grow as fast & hard as I could. There's no getting around the power of time to compound your earnings, and you need something to compound in order for that to work.
Being the age I am, I'm a lot more conservative at this point. Not only do I like the stress-free living of having paid-for properties, I also don't want to work that hard continually chasing returns and managing debt. Having paid-for properties is just about as close to mailbox money as you can get (what us musicians call our royalty checks) in the investing world. Short of the house burning to the ground or evil tenants pouring concrete into all the drains, the thing just makes money and you collect it. Finding other houses to invest in, apartments or commercial properties, etc. is work. It's one reason I have no interest in being a flipper - that's just another full-time job, and I already have one of those.
My own personal portfolio is mixed. I own most of my stuff free & clear. I have some low-rate mortgages on a few properties, mostly when I wanted access to that cash to do another deal. I will probably do a few more deals here and there, bankroll most cash and start paying down the properties that are left, then at some opportune point put everything into a trust for living out my last days and having something to generate monthly paychecks for kids, grandkids and siblings. My strategy is pretty much the same as @Steve Vaughan.
Skyline Properties - Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes7y
Originally posted by @Joe Splitrock:
Originally posted by @Roy Gamiz:
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.
Excellent response, Joe! Only one thing I would add.
Roy, if it pains you too much to pay income tax, find some creative ways to raise your expenses. Let's say you no longer have $1000 in interest expenses, and don't want to pay Uncle Sam $250 in tax on that income. Find a way to spend that money on an improvement to your rental. That way you get the benefit of an expense that reduces your taxable income (saving you that $250) as well as improving your asset. Paying interest doesn't improve your asset.
.
.
.
Or you could just put the $750 in your pocket . . .
:-) - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
Originally posted by @Patrick Fraire:
Originally posted by @Steve Vaughan:
1. If you think paying off a car is the minimum pre requisite for understanding real estate investments we have bigger issues. I leased a 2018 Honda Civic base model last year for 150/month with 0 down.
This is a thread about having paid-off rentals.
Not even having a paid-for car speaks to the level of legitimacy your theory and opinion warrant on the matter.
That will be all.
My theory is cash on cash return is the true barometer for a successful investment and if there’s is an opportunity to buy low, someone with a paid off property should use that equity to capitalize on the down market. Thus increasing their cash on cash return.
I don’t see why I need to pay off a car to say that. I leased a car. What am I to do. I only owe 150/month x 24 months. I think that’s okay. I don’t think that’s so bad Steve. Why have cash sitting in a depreciating asset?
This isn't the 'If you lease a car, tell me why' show.
This is a 'How do you like your paid off rentals?' show.
For some reason, you singled me out like I asked for your opinion, then you gave it to me. I found myself answering to you, then you gave me an attah boy. LOL
Patrick, how do you like having paid off rentals? Answer the title question.
I have a cash buyer for my kindney. I will be using that cash to pay off the $3600 I owe on my car. Thank you for telling me like it is. Most people would’ve let me continue down this destructive path of commenting on threads without having my car paid off. It wasn’t what I wanted to hear but it’s what I NEEDED to hear.
Patrick, in all seriousness, Steve could really help you and instead you think it is funny to crack jokes at his expense? Steve is a full time investor with a good size portfolio that he built it up from nothing. He is actually really laid back.
Patrick (by your own statements) you are a college student, you are a renter, own no property and have a low credit score, so low you can't get bank financing. And you lease cars.
Why don't you just listen and learn, instead of attacking people who are way more successful than you?
- Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes7y
@JD Martin, what was ‘leveraging smartly’ in 2005-08? ;-) Hindsight is 20/20.
Leverage is good. Too much is a noose. Any hiccup and you’re done. Look at the ppl that lost it ALL during the downturn.
- Property Manager · Philadelphia, PA · Member since 2015 · 515 posts · 196 votes7y
Great comments! Slightly related along the peace of mind, mindset/lowering your risk, is to keep some equity in your properties at all times. Many lenders keep you at 70% of being able to take out that equity, I tend to not take advantage of any lender that offers to do more. I like knowing I still have 30% equity in a property, should things go south. I mostly leverage debt; but I do like to put 25% down and keep some equity in.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
I am not going to read all the comments but I am betting the general consensus is:
A: those who have paid off properties love it, good cash flow, and less care in a market downturn. These are the people who are not concerned about "unit count" and are more concerned about counting cashflow. No need to concour the world, they simply want investment income and to sleep sound every night even if it takes a bit longer to create wealth.
B: those who don't like paid off properties see it as a "waste of resources" as they can be spent elsewhere. These people tend to boast about how many units they have thinking that quantity of units seems to matter more than quality of units. These people will borrow as much as they can to increase their unit count and create more cash flow. These people are susceptible to more risk in a market downturn.
I have a few places paid off and like it. I also have paid off properties with LOCs on them so I have access to money if needed. One example is a SF house I am all in for ~$55k, it is worth $140k or so. Type B people would run to the bank for a cash out refi and tell all of their friends they have an infinite return (albiet at probably $75-$100 a month). Then they will pay principle and interest on the money sitting in their bank account while they wait for the next deal.
Type A person would say it is nice to have this property paid off, I am getting the cash flow of a 4 plex without the debt.
What did I do? I put a $100k LOC on it so it is "paid off" but I have access to money when I need it.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
Originally posted by @Joe Villeneuve:
Originally posted by @Kyler Cook:
@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.
It's dead. Here's why.
That "inactivity" isn't accessible, unless you sell the property or refi. If you refi, it now costs you to use your own money...again.
Also, the "value and potential" you speak of is exactly the same in the bank...but liquid. If invested, along with the returns on that investment, it compounds its value for as many times as you "use it"...and, there's no cost to use it.
It is not totally dead from the standpoint, that you are avoiding interest. Let's say I took out a loan for $100,000 and was paying 5.5% interest. If I pay off that loan, I am now avoiding 5.5% interest, which is similar to making 5.5% interest. Arguably 5.5% interest isn't great, so you could put that money to work to make higher return.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
You're not paying any interest. The only thing you paid was the down payment. If you have positive cash flow, your tenant is making the payments for you.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @John Woodrich:
I am not going to read all the comments but I am betting the general consensus is:
A: those who have paid off properties love it, good cash flow, and less care in a market downturn. These are the people who are not concerned about "unit count" and are more concerned about counting cashflow. No need to concour the world, they simply want investment income and to sleep sound every night even if it takes a bit longer to create wealth.
B: those who don't like paid off properties see it as a "waste of resources" as they can be spent elsewhere. These people tend to boast about how many units they have thinking that quantity of units seems to matter more than quality of units. These people will borrow as much as they can to increase their unit count and create more cash flow. These people are susceptible to more risk in a market downturn.
I have a few places paid off and like it. I also have paid off properties with LOCs on them so I have access to money if needed. One example is a SF house I am all in for ~$55k, it is worth $140k or so. Type B people would run to the bank for a cash out refi and tell all of their friends they have an infinite return (albiet at probably $75-$100 a month). Then they will pay principle and interest on the money sitting in their bank account while they wait for the next deal.
Type A person would say it is nice to have this property paid off, I am getting the cash flow of a 4 plex without the debt.
What did I do? I put a $100k LOC on it so it is "paid off" but I have access to money when I need it.
Maybe you should have read all the posts.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
Originally posted by @Joe Villeneuve:
Maybe you should have read all the posts.Can already tell you are a type B person in my example by looking at the post below mine and "dead equity".
This is a common question here and the same people always dig their heals in. One side of the table may get caught with their pants down if we get another recession, the other side is making sure they don't get caught. I was fortunate to start investing in 2007 so picked up property on the back end. I have also worked with many individuals who weren't as fortunate, many realtors sold on the game of monopoly.
There is no correct approach to this, it depends on the individual's needs and goals. So that makes you wrong :)
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