With so much debt involved - when do rentals finally pay off?

25 Replies

Hello BP Community,

I've been listening to podcasts, and reading all about rentals for the last 6 months. Now I had a quick question from all of my readings. What tells you a deal is worth your time? Looks like most of the community is after MFH. But what makes a deal worthwhile in your eyes? What scares me is how large a mortgage or money borrowed is as compared to the rent you charge for a property. For example, lets say I found a SFH that costs 200k after all renos, and I can rent it out for 1k/month. If I put 20% down and get a 160k loan, it would take me (160k/1k) 160 months or 13 years to pay off this loan. Now even with appreciation and increased rent inflow - it would still take above 10 years to pay off the loan/interest expenses. This does not seem ideal. Do you refinance all of your properties to increase cash flow? If you do not refinance, do you take on massive amount of debt and just collect the small difference between your investment property expenses and income until you fully pay off the loan? Do you have a certain criteria you looks for in regards to rent vs cost of home? Why wait 10 years for 1k per month as opposed to flipping a home and possibly making 20x?

 I appreciate your help!!!

Firstly, its all about the numbers. You cant just pick any property to buy and rent. I has to make sense both in terms of cash flow and CoC.

Secondly, unless you find an absolute steal most rentals are not cash flowing like crazy. (Sticking with the idea of a traditional mortgage of course. Full cash buys are different.) On BP the trending minimum is $100/door. Obviously even if you scale up in doors its not getting you much fast. So most MF buyers are in it for the long haul. They are comfortable with the extra bit of side cash so that by the time they retire they will have it paid off and then truly have a good steady income. All the while working a normal W2. This is the method that is most promoted here on BP, but definitely not the only one out there. 

Thirdly, to put it simply, TAXES. Flipping a house counts a short term capital gains so if you make $20k profit on that flip you really are only bringing home $10-12k. Not that that is bad, just that you pay a LOT more in taxes. Flipping is also a full time job...or a second full time job. 

Fourthly, there are lots of ways to structure debt to your advantage. Its not just get a loan and wait to pay it off after 30 years. There are a dozen ways to work debt to your advantage and to make sure that its "safe" debt. Some people like to use debt to limit their liability while other like to eliminate debt as quickly as possible to insure as little money as possible gets paid out in interest. There are pros and cons to both sides and it really comes down to personal preference IMO. 

I hope this helps clear things up a bit. Just remember theres no one way to do REI.

@Mo Farraj MF is very popular and my preference too. Mo, you make a good point it seems lots of people buy properties like that- 200k that rents for 1k and it just won't work-no way to make it cash flow. IMO anyway. I don't buy anything that does not provide a return from day 1. Makes it very hard to find properties in this market. As a quick check I use the 1% rule to determine is a deal is worth looking at. Flipping is a great alternative and very popular; but I am not handy. Stick with it not as complicated as it sometimes sounds-lots of ways to make a buck-and many more ways to lose one.

I buy tax liens and get rental properties that pay off in 1 to 3 years. I am building my portfolio with these. I have a substantial monthly positive cashflow for many of these properties. I can tolerate buying a property that only generates a couple hundred positive cash flow because I am spoiled with my all cash houses that pay me back in a flash.

Its very simple the numbers need to stack up. Rentals must be cash flow from day 1. Covers all expenses

Here is a iink that may interest you, one of my recent cash cows. 

https://www.biggerpockets.com/forums/311/topics/624369-my-little-cash-cow-in-detroit

@Mo Farraj As bjorn mentioned . You can’t buy a 200k house and rent it out for a grand ! doesnt work that way . You’ll be in bankruptcy court doing that . The numbers have to work plus provide cashflow . There are formulas that are to be used to achieve good results that are sustainable and profitable

@Mo Farraj There are many ways to structure the debt on a rental property. The most popular way to structure a Buy-and-Hold portfolio is to purchase your properties with as little cash out of pocket and let your tenants pay-down the mortgages. When an investor purchases the property the only money they will/should spend out of pocket is the initial down payment and closing cost.

An example is your $200k property cost you $40k down payment and $3,000 closing cost = $43,000 out of pocket investment  

If you property Nets you $1,000 per month cash flow you actually start making money on month 44 because this is the first month after you've hit the break even point provided you don't come out of pocket for anything else.

On this example if you collected your reserves at the right amount and don't get hit with large vacancies, you're making from year 4 going forward not including any appreciation.  

There are some business models that choose to flip because they want the cash today and don't want to be landlords and aren't concerned with appreciation. You also lose your long-term appreciation and the ability to transfer property non-taxed via 1031 when flipping a property

Mo, the question you're asking here is pretty basic: How's you make da-big-bucks-hubba-hubba as a landlord?

The answer is also simple: most of us don't.

Investing in rental income properties is a long slow path to wealth accumulation. Tenants pay for everything along the away and you put a little in your own pocket every month to compensate you for your headaches (and you will have plenty). You leverage to the max starting out with minimum down and 30 year mortgages. You don't concern your self with paying them off since that is your tenants responsibility not yours.

 Once you reach 30+ doors you have a solid income making it all worth while. You cash out to retire, like everyone else in the working world, and enjoy your serious years. You could also keep them and work till the day you die. 

Did anyone tell you that investing in rentals was a job, it definatly is and you should be prepared to work very hard to earn that fortune you will end up with. No job provides you with a pension your first day.

@Nik Moushon I really appreciate your reply, very thorough and thoughtful - thank you for this. In regards to your last piece of advice, do you mind explaining how one can use debt to their advantage?
Originally posted by @John Underwood :

I buy tax liens and get rental properties that pay off in 1 to 3 years. I am building my portfolio with these. I have a substantial monthly positive cashflow for many of these properties. I can tolerate buying a property that only generates a couple hundred positive cash flow because I am spoiled with my all cash houses that pay me back in a flash.

Wow.  Teach me this trick. My tax lien sales around me go for almost mls listing prices.  

Originally posted by @Mo Farraj :

Hello BP Community,

I've been listening to podcasts, and reading all about rentals for the last 6 months. Now I had a quick question from all of my readings. What tells you a deal is worth your time? Looks like most of the community is after MFH. But what makes a deal worthwhile in your eyes? What scares me is how large a mortgage or money borrowed is as compared to the rent you charge for a property. For example, lets say I found a SFH that costs 200k after all renos, and I can rent it out for 1k/month. If I put 20% down and get a 160k loan, it would take me (160k/1k) 160 months or 13 years to pay off this loan. Now even with appreciation and increased rent inflow - it would still take above 10 years to pay off the loan/interest expenses. This does not seem ideal. Do you refinance all of your properties to increase cash flow? If you do not refinance, do you take on massive amount of debt and just collect the small difference between your investment property expenses and income until you fully pay off the loan? Do you have a certain criteria you looks for in regards to rent vs cost of home? Why wait 10 years for 1k per month as opposed to flipping a home and possibly making 20x?

 I appreciate your help!!!

It’s all about the long haul. Yes people have had amazing deals and cash flow a few hundred or even a thousand bucks a door.  I just make sure the numbers work and sit back and relax and wait well my tenants pay off my mortgage and then my cash monthly will go thru the roof.  

But I’d probably refinance and pull out cash to buy more.  Smart leverage is the best kind of leverage. 

Originally posted by @Mo Farraj :
@Nik Moushon I really appreciate your reply, very thorough and thoughtful - thank you for this. In regards to your last piece of advice, do you mind explaining how one can use debt to their advantage?

Basically its how you structure the financing or different ways of doing it. Seller financing, lease options, partnerships, BRRRR method thats popular here, ect. You dont always have to take on 100% of the debt yourself and there are ways so that you dont have to put up any cash or at least very little instead of the typical 20-25% down payment. As long as the numbers work out in the end and you have planned for contingencies and such you should be fine.

I just wanted to clear up that I am not against flipping. There are plenty of people that do a couple flips, eat the taxes, so that they can build up their saving for a larger down payment later. That is defiantly one way of doing it. Its just flipping is a full time job all the time right from the start. Where as MF rentals are more easily structured to be "hands off" investments if thats what you want. Though that comes at a cost as well so most people dont do that. I will also mention that there are people the flip MF so you can do it that way too. Dozens of different ways to do things. Just have to pick one that seems the most fun to you.

Anyways, I would advise doing a lot more reading. Cash Flow Quadrant is a good book at explaining these concepts in more detail without getting too heavy into the numbers. 

Ok, here is a simple explanation. You use some of your money as a down payment and take out a loan. However you calculate that what you will get from your rental income will be enough to pay for all expenses including paying off the loan. In other words other people pay for what you make yourself responsible for. When the property is finally paid off its entire market value at that time in yours so it is as if you were setting up a bunch of savings accounts that will each have an equity balance that will belong to you , long term of course and the rest is just simply ways of managing the debt, cash flow, and appreciation to your advantage. It is not something anyone expects to be able to do over night.

If done rigth over time you should realize earning a lot more money than if you simply put your money and saved it in a bank or otherwise. This is a buy and hold strategy

Flipping is simply forcing appreciation. You buy a fixer upper for so much, put so much into fix it up nice and sell it for a profit that is all. Its really not that complicated to understand. People use credit to get into a property , that is have a creditor pay for them initially , then they will pay from what they earn back to the lenders but still end up with a profit. 

You do this throughout your life time and you can turn your $60K into $1,000,000.00 , this is the premise of real estate investing. 

It is all based on the premise that people will always need a place to live, a house, a condo, an apartment, whatever. Now as a real estate investor you inject yourself into this housing system of supply and demand as being  provider of housing for a price of course. 

Some people seek independence from needing a 9-5 job so their objective it to earn enough from owning, controling or managing real estate assets  to both pay all of their bills and even beyond that earn enough spendable dollars that they can use an in income on top of everything all the while building up assets which in the end they will own outright and have all the money that can come for the value of their assets in the long haul. 

It is both earning money and saving at the same time but having other peope contribute to you own financial succress. 

You buy something that cost you $1,000.00 per month but that earns $1,200.00 per month so that you get to keep $200.00 after you pay what you owe. It is really that simple and the rest is using intelligent strategies applicable to tax optimization and reducinug your taxable income through deductions that you get as a real estate business owner. 

This is all a kind of business, that you must manage well in order to be protiable, nothing really more than that.

Originally posted by @Nik Moushon :
Originally posted by @Mo Farraj:
@Nik Moushon I really appreciate your reply, very thorough and thoughtful - thank you for this. In regards to your last piece of advice, do you mind explaining how one can use debt to their advantage?

Basically its how you structure the financing or different ways of doing it. Seller financing, lease options, partnerships, BRRRR method thats popular here, ect. You dont always have to take on 100% of the debt yourself and there are ways so that you dont have to put up any cash or at least very little instead of the typical 20-25% down payment. As long as the numbers work out in the end and you have planned for contingencies and such you should be fine.

I just wanted to clear up that I am not against flipping. There are plenty of people that do a couple flips, eat the taxes, so that they can build up their saving for a larger down payment later. That is defiantly one way of doing it. Its just flipping is a full time job all the time right from the start. Where as MF rentals are more easily structured to be "hands off" investments if thats what you want. Though that comes at a cost as well so most people dont do that. I will also mention that there are people the flip MF so you can do it that way too. Dozens of different ways to do things. Just have to pick one that seems the most fun to you.

Anyways, I would advise doing a lot more reading. Cash Flow Quadrant is a good book at explaining these concepts in more detail without getting too heavy into the numbers. 

 Thank you again really appreciate the advice, I will check out that book!

Originally posted by @Nik Moushon :

Firstly, its all about the numbers. You cant just pick any property to buy and rent. I has to make sense both in terms of cash flow and CoC.

Secondly, unless you find an absolute steal most rentals are not cash flowing like crazy. (Sticking with the idea of a traditional mortgage of course. Full cash buys are different.) On BP the trending minimum is $100/door. Obviously even if you scale up in doors its not getting you much fast. So most MF buyers are in it for the long haul. They are comfortable with the extra bit of side cash so that by the time they retire they will have it paid off and then truly have a good steady income. All the while working a normal W2. This is the method that is most promoted here on BP, but definitely not the only one out there. 

Thirdly, to put it simply, TAXES. Flipping a house counts a short term capital gains so if you make $20k profit on that flip you really are only bringing home $10-12k. Not that that is bad, just that you pay a LOT more in taxes. Flipping is also a full time job...or a second full time job. 

Fourthly, there are lots of ways to structure debt to your advantage. Its not just get a loan and wait to pay it off after 30 years. There are a dozen ways to work debt to your advantage and to make sure that its "safe" debt. Some people like to use debt to limit their liability while other like to eliminate debt as quickly as possible to insure as little money as possible gets paid out in interest. There are pros and cons to both sides and it really comes down to personal preference IMO. 

I hope this helps clear things up a bit. Just remember theres no one way to do REI.

Couldn't have said it better myself, Nik.  Excellent post!

When do rentals finally pay off is the question?  Year 13 for me.  Paid off a bunch but it took work and discipline.

I'll now pass the mic back to my young knowledgeable friend, Nik!

Originally posted by @Marisa R. :

Its very simple the numbers need to stack up. Rentals must be cash flow from day 1. 

 Simply not true. Here's my standard speech. If you buy a property with 25% down on a 15 year note, and it simply covers ALL it's expenses but does not cashflow, at the end of 15 years the tenants have paid the mortgage and you own it outright, which calculates out to making 9.7% on your cash input. That is normally considered a great long term return. Now, that is assuming the property did not appreciate, nor rents increase, which are unlikely over 15 years. 

The obsession with cashflow is short term thinking.

I suspect, from what I am reading, that we are in a tough investing market. It seems like 2006 again- many investors are willing to hold onto properties that just barely cash flow or don’t at all with the expectation of continued high appreciation.

It doesn’t mean the deals aren’t out there- it just means you may have to change your criteria. 

I think one of the most difficult things I had to deal with was my own mindset. It took me a while to shift out of the “hurry up and payoff debt” mentality. That is a very liberating feeling- and it frees you up to handle business properly.

Personally, $100 a door would not keep me going in this game. Don’t get me wrong- it is a blast, but I need to get paid much more than that.

@Johann Jells

I guess its different strokes for different folks.

I want cash flow from day one as I want the income. 

I understand you are using the power of leverage and in 15 years paid for, but it wont put money in your pocket today.... 

Generally I look at around 12-15% net on my money. 

@Johann Jells

I agree. However, in saying this its all about timing, not time in the market... that's my personal experience, but we all have different strategies that can work.

Atlanta started in 2011 and still hold properties here, buying at rock bottom in bread and butter areas, not war zones. These property purchases were at around $35,000 renting at $1000 in 2011, today fast forward..... average price $170,000 (SFH) and renting for around $1400 per month

Today, finding another market to provide opportunity... Detroit... yes ... many will poo poo this, they did so when I jumped into Atlanta. What is crucial is location, product and property management.

Detroit is actually a rising market, with big money coming in. Smart money is now jumping in. Anyways not here to convince investors what to do. But keep an open mind, its not black or white.

I would not be surprised if "$35,000 renting at $1000" is a once in a lifetime event. I agree timing is important, but knowing is the problem.  I bought a short sale in 2012 from a guy who inherited a 4 family the previous decade, and leveraged it to the max to buy a portfolio of properties that all went underwater and he lost it all. I paid $300k and now have rents up to $60k after some reno, and Zillow keeps telling me it's worth >$800k.  I got lucky with timing, but I would have been OK with status quo of zero cashflow rather than in a jam. If an investor's plan requires an exit strategy, there may be a problem with the plan.

@Mo Farraj

Great questions. The reasons you wait are: 

  • you get amazing tax breaks (deductions and depreciation) while you own
  • the tenant pays the mortgage for you
  • when it is free and clear, you have passive income coming in for life

If you flip it, you get $20,000. Uncle Sam takes 1/3 and you have to go out and do it all over again.

The goal, while you hold rentals, is that you receive enough rent to cover the cost of owning and maintaining until paid off. If you purchase right, this should not be a problem.

The glory is when they're paid off. And there are ways to accelerate pay down so you can have them paid off in 10 years and, at that point, never have to worry about working to pay your bills again.

1 free-and-clear rental property is good - 10 is incredible for a retirement that most Americans can only dream of.

Good luck to you!