Should I pay off my property
Williamsport, PA · Member since 2017 · 42 posts · 20 votes
Should I pay off my property
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesIf you are cash flowing positive before you pay of the property, then there are answers. Both are the same...just spelled differently:
1 - NO!!
2 - You are already paying it off. Well, actually, your tenant is for you. That means you are not using your money to pay it off. If you pay it off with your own money, then you have to recover all that money before you can show any profit. Why would you do that? There is no advantage to you paying off your property. In fact, you are losing the advantage given to you by your tenant.
60 Replies
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
If you are cash flowing positive before you pay of the property, then there are answers. Both are the same...just spelled differently:
1 - NO!!
2 - You are already paying it off. Well, actually, your tenant is for you. That means you are not using your money to pay it off. If you pay it off with your own money, then you have to recover all that money before you can show any profit. Why would you do that? There is no advantage to you paying off your property. In fact, you are losing the advantage given to you by your tenant.
- Rental Property Investor · Miami FL · Member since 2017 · 65 posts · 37 votes7y
One thing to consider is the direction interest rates are heading. If they continue to move up you maybe very happy to have a locked in 5% and cash on the sidelines as properties will fall in price and cap rates should also go up. Having some dry powder is not a bad thing.
Disclaimer: I’m not a financial advisor, you should consult with a financial advisor.
- Rental Property Investor · Member since 2018 · 483 posts · 956 votes7y
@Alexander Churchill
It depends on your long term strategy. My first portfolio of 34 doors I paid off as I built it. When I sold in 2007 all were paid off but 2. I stuck all that money in low cost index funds and retired at 42.
After a 3 year battle with cancer I decided to get back into real estate. My strategy changed to using leverage to build quickly.
Now at 15 SFR we are paying some off, currently 4 paid off. The long term plan is to continue to pay off the rest of them in 5 years. This will increase our cash flow significantly and reduce our output.
I should note that we have never lived on any of our rental income. All money has always went back into the business. In 5 years my wife will retire from the military and we will then be using some money to supplement her decrease in income.
- Rental Property Investor · Fort Collins, CO · Member since 2015 · 273 posts · 127 votes7y
@Alexander Churchill ROI. - can you get a better return placing your money elsewhere? If so, that is where I would put it. Above, goals were stated. If your goal is little risk and cash flow flow, I would suggest this could be a good strategy. That being said, you're 25 years old and probably should be a little more risky at this point in your career. Either way, sounds like you're kicking butt! Good work.
- Investor · Longmont, CO · Member since 2016 · 185 posts · 156 votes7y
@Clifford Paul Just wanted to say congrats on beating cancer man!
@Alexander ChurchillUse the additional capital to buy properties without leverage. Still allows for growth without messing with good loan rates. My plan is to grow with leverage until I have achieved my freedom number, then use all of the annual income to buy properties outright until that number has doubled. After that's done I'll be able to start buying large MF.
Everyone is stocking up on cash.. We're due for a correction and MANY are over leveraged, meaning properties on the cheap (not 08 cheap for most markets) but definitely for a discount.
Just my two cents.Good luck!
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
It doesn't matter what the interest rates are since you are not the one currently paying the interest on the loan.
- Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes7y
@Alexander Churchill, congrats on your progress to date. Sounds like you have excellent income too? Are you super-eager to have even more cashflow/income from debt-free properties, so that your net taxable income is even higher (having less expenses to claim)? Just askin'.
[Before you answer, you should pass your question onto your (or a good) Tax Accountant!] Cheers...
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes7y
I think the interest rates are absolutely important because your situation may change in the future. I plan on acquiring while the rates are low. When rates go up and fewer people can afford to buy, that will help strengthen my renter base and I'll focus on paying everything off so I can live a debt-free, easy life!
The DIY Landlord Book4.7248 Reviews - 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Interest rates would matter if you were the one paying the interest...which on a positive CF property, you are not paying...your tenant is. Any money you pay instead of your tenant, for the same thing, helps nobody but the bank.
Also, your money dies when it transfers from your bank account (liquid) to under the floorboards of the property (stationary). It's the same money...just dressed in different clothes.
When your money is liquid, it has a chance to compound itself in future properties. Buried in the floorboards, it gains nothing...yes, nothing. Before someone says "appreciation", remember that the appreciation is based on the value of the property...not the equity. The value of the property is the same, regardless how much equity you have in that property.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes7y
It really depends on what your goals are and what your risk tolerance is. For me, I would keep the loans in place and use your capital to acquire more properties. But if you want to go with a low-debt, low-risk strategy, then it would probably be wiser to pay them off.
- Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 201 votes7y
@Alexander Churchill Disclaimer: I'm not a lawyer! A mortgage can provide asset protection too, making your property a lesser target of a lawsuit. As others suggested, you might want to look for alternative use of your money.
- 7yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Alexander Churchill
You’re young and the interest rate at 5% isn’t bad. I would not pay it off and stock pile cash for more opportunities when things slow down. You’ll be happy you had a big cash reserve for emergencies or future purchases vs putting all that cash into paying them off and having equity in them.
- 7yAmy KendallBusiness MemberReal Estate Broker · Lehi, UT · Member since 2016 · 397 posts · 318 votes
@Alexander Churchill I have had the same thoughts of paying off properties, but have decided to instead keep purchasing properties and getting the benefits of leverage. I plan on doing this until I have my allowed ten properties and then I will start paying off a few. I definitely see the appeal to owning a property outright though
- Investor · Nashville, TN · Member since 2014 · 104 posts · 15 votes7y
@Alexander Churchill
Dear Alexander,
Great work getting started and getting started so successfully. I agree with the responders who mentioned consulting a tax advisor. I support you in adding a good tax advisor as part of your “team” and to help you with a long term strategy.
Potential Tax benefits aside , I like your ability to be in a position to even have the option of making a choice to pay off your mortgages versus holding them. That is awesome. If the economy goes into a prolonged recession I could imagine you might have opportunities to buy from investors who are “cash flow “poor or “cash poor”, or both.
Questions I plan to ask my CPA soon are : what is the strategy around depreciation ? As I understand it , ever so slightly ,depreciation helps one tax shelter your real estate income (from a passive real estate investors standpoint) for a while . At the time of sale your cost basis on the property is theoretically lower than what you actually paid because of the depreciation on the property and your “taxable” gain is thus higher. In my case my income taxes are higher than my capital gains taxes so right now I like the sheltered income.
There are lots of variables. Good luck.
Anne
- Investor · PO, WA · Member since 2015 · 197 posts · 95 votes7y
i am on-board with paying off property. no debt provides piece of mind and financial flexibility. Both of which are important during difficult economic conditions. One approach we have taken is to pay off one property with our $. use the extra cash flow due to no mortgage on property X to pay off another property and repeat until all paid off. The benefit is you use your $ only once (payoff first property) and then renters $ to pay off the remainder. use a spreadsheet to model this out and you will be amazed at how fast you can pay off several properties.
- Investor · Spokane Valley, WA · Member since 2014 · 175 posts · 94 votes7y
Originally posted by @Joe Villeneuve:
Interest rates would matter if you were the one paying the interest...which on a positive CF property, you are not paying...your tenant is. Any money you pay instead of your tenant, for the same thing, helps nobody but the bank.
Also, your money dies when it transfers from your bank account (liquid) to under the floorboards of the property (stationary). It's the same money...just dressed in different clothes.
When your money is liquid, it has a chance to compound itself in future properties. Buried in the floorboards, it gains nothing...yes, nothing. Before someone says "appreciation", remember that the appreciation is based on the value of the property...not the equity. The value of the property is the same, regardless how much equity you have in that property.
I'd have to disagree with you a bit on this Joe. If that's the case, then you could make the same argument about any debt... "it's not me paying the interest on my auto loan, my job is" or a business could make the same argument "it isn't my business paying our credit card interest, our customers are".
Tenants do not pay off our mortgages, we do. Once my tenants pay rent, that is my (my business's) money and then I will be using my (my business's) money to pay that interest.
Not that i'm advocating one should pay off their low interest mortgage, i'm saying that interest rates DO matter and are very important regardless of whether cashflow is positive or not.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes7y
A 5% fixed resi loan that doesn't have calls or bother you for your financials every year (like commercial loans do) would not be on my gotta puch that one in the face radar.
I grew to 3 dozen or so before I started paying off my higher rate, higher risk and higher hassle mortgages.
My threshold for accelerating resi loans is 6% or above. I will pay off another one of those this year, especially if deal flow remains pretty dry.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Shane H.:
Originally posted by @Joe Villeneuve:
Interest rates would matter if you were the one paying the interest...which on a positive CF property, you are not paying...your tenant is. Any money you pay instead of your tenant, for the same thing, helps nobody but the bank.
Also, your money dies when it transfers from your bank account (liquid) to under the floorboards of the property (stationary). It's the same money...just dressed in different clothes.
When your money is liquid, it has a chance to compound itself in future properties. Buried in the floorboards, it gains nothing...yes, nothing. Before someone says "appreciation", remember that the appreciation is based on the value of the property...not the equity. The value of the property is the same, regardless how much equity you have in that property.
I'd have to disagree with you a bit on this Joe. If that's the case, then you could make the same argument about any debt... "it's not me paying the interest on my auto loan, my job is" or a business could make the same argument "it isn't my business paying our credit card interest, our customers are".
Tenants do not pay off our mortgages, we do. Once my tenants pay rent, that is my (my business's) money and then I will be using my (my business's) money to pay that interest.
Not that i'm advocating one should pay off their low interest mortgage, i'm saying that interest rates DO matter and are very important regardless of whether cashflow is positive or not.
No, Job income and rental income are not in the same ballpark. Job income is Active Income meaning you have to work for it. Rental income is Passive income, meaning your money works for it. They are not the same at all.
If you want to compare Job Income to anything, compare it to the Job Income of the Tenant. That's the same thing. The Tenant then pays Rent to you, generating Positive CF, and in the process pays all the expenses, including the loans, and then lets you have the unused portion of the rent...the positive CF.
- Investor · Spokane Valley, WA · Member since 2014 · 175 posts · 94 votes7y
Originally posted by @Joe Villeneuve:
Originally posted by @Shane H.:
Originally posted by @Joe Villeneuve:
Interest rates would matter if you were the one paying the interest...which on a positive CF property, you are not paying...your tenant is. Any money you pay instead of your tenant, for the same thing, helps nobody but the bank.
Also, your money dies when it transfers from your bank account (liquid) to under the floorboards of the property (stationary). It's the same money...just dressed in different clothes.
When your money is liquid, it has a chance to compound itself in future properties. Buried in the floorboards, it gains nothing...yes, nothing. Before someone says "appreciation", remember that the appreciation is based on the value of the property...not the equity. The value of the property is the same, regardless how much equity you have in that property.
I'd have to disagree with you a bit on this Joe. If that's the case, then you could make the same argument about any debt... "it's not me paying the interest on my auto loan, my job is" or a business could make the same argument "it isn't my business paying our credit card interest, our customers are".
Tenants do not pay off our mortgages, we do. Once my tenants pay rent, that is my (my business's) money and then I will be using my (my business's) money to pay that interest.
Not that i'm advocating one should pay off their low interest mortgage, i'm saying that interest rates DO matter and are very important regardless of whether cashflow is positive or not.
No, Job income and rental income are not in the same ballpark. Job income is Active Income meaning you have to work for it. Rental income is Passive income, meaning your money works for it. They are not the same at all.
If you want to compare Job Income to anything, compare it to the Job Income of the Tenant. That's the same thing. The Tenant then pays Rent to you, generating Positive CF, and in the process pays all the expenses, including the loans, and then lets you have the unused portion of the rent...the positive CF.
My point of difference is not comparing the two types of income, it's the fact that it's ALL income. And more importantly, I get to keep/use whatever income is left after expenses. Interest is an expense, regardless of how you allocate it or who you allocate it to. The tenants payment to me is not variable based on what interest I pay on any of my loans. So if i am paying a 20% interest on something, it doesn't mean i want to keep that loan just because my passive income is enough to cover it. It would be beneficial for me to pay off a 20% interest loan so that I do not have that expense and can therefore keep more income.
I understand your point, that if someone has a 5% fixed rate 30 year mortgage, then yes carry that full term and use your money elsewhere. But your argument behind that point is where I disagree as it becomes less and less true the higher the interest rate is on whatever loan you apply that argument to.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
No it's not. When you have passive income from a rental, your income is what comes to you after all expenses are paid by the tenant's rent. The rent isn't your income. When you let your tenant pay for the expenses, you are using their money...not your's.
- Investor · Spokane Valley, WA · Member since 2014 · 175 posts · 94 votes7y
@Joe Villeneuve I couldn't agree more, which is why i want to reduce my expenses as much as possible. However, if I have a loan at 5% but am making 10% on those borrowed dollars then i wouldn't want to pay that down. But if that same loan is at 20% and I'm still only making 10% on it then I want to pay that down. Even if my "tenant is paying that expense for me" because at the end of the day, i would increase my income by decreasing my expenses.
- 7yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Shane H.:
@Joe Villeneuve I couldn't agree more, which is why i want to reduce my expenses as much as possible. However, if I have a loan at 5% but am making 10% on those borrowed dollars then i wouldn't want to pay that down. But if that same loan is at 20% and I'm still only making 10% on it then I want to pay that down. Even if my "tenant is paying that expense for me" because at the end of the day, i would increase my income by decreasing my expenses.
It's not your expenses if your tenant is making the payments.
Owning a rental is the same thing as a business you might own. All bills (rental expenses) of the business are paid from the sales (Rent) within the business. Your income from the business is the profit (cash flow from the property). This means your sales in the business is paying all the business Expenses. When you add your own cash to pay the rental expenses, it's the same thing as using your own money to pay for the business expenses...even though you don't need to since the sales are enough to make all the payments.
In both cases, adding your own money to the mix accomplishes nothing positive. In the business, all you're doing is taking profit out, and giving it right back. In the rental, all you're doing is taking CF out, and giving it right back. In a rental, even if you double the principle per month, the monthly payments don't change. What changes is the number of payments. This means you don't even see the results of extra payments until maybe 15 years later?
- Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes7y
Depends on your goals and risk tolerance. For me I buy and pay off houses. I do not like loans, but then again I can afford to not have them and still have money for the next deal.
Personally I would rather have ONE paid off house with rent at $1000 that is profit than 10 houses that cash flow at $100 a door. That way I have less bills to pay (time) and less toilets to fix, less roofs to replace, etc. I enjoy my life more, for me that is part of the quality of life.
Most here on BP would go out and buy a bunch of houses or multis and 'let the rent pay for the house' Well, I paid for my houses and the renters now pay for my life! In the end its net income, however you look at it!
If I were to pay off one of yours, it would be the 30 year loan as when you make a payment on that one more of the money is going to interest, not the principal since you are at year one of a 30 year loan The other loan is shorter and year 2.
- Rental Property Investor · NH (new hampshire) · Member since 2017 · 53 posts · 22 votes7y
@Lynnette E.
Forgive my ignorance. I have read of interest being tax deductable. Can anybody apply this to this conversation?
- Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes7y
Originally posted by @Jason Parker:
@Lynnette E.
Forgive my ignorance. I have read of interest being tax deductable. Can anybody apply this to this conversation?
Any expenses for a rental property is deductible on your taxes. That includes interest you pay. It includes repair costs. It includes depreciation. These deductions can offset your rental income so they are a big deal.
BUT just because there expenses are tax deductions, do you want to maximize them? If so, be the first to put in a gold toilet and tub in your rental! I still want to minimize the amount of money I spend on a rental.
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