Should I pay off my property
Williamsport, PA · Member since 2017 · 42 posts · 20 votes
What’s up BP,
I’m 24 (25 next month) just closed on my second buy and hold multiunit rental last month.
Around this time next year I’ll almost certainly be in a position to pay either property off while still
maintaining a solid security savings for repairs and life. Just wondering if anyone had any thoughts or advice on paying off a mortgage outright with cash.
Property 1 ( Loan term 20y- in year 2 of that term)
Property 2 ( Loan term 30y- just started year 1)
Both fixed rate around 5%
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.
So interest rate isn't a huge factor.
So interest rate isn't a huge factor.
When you are determining the yield or true cost of an asset the tax deduction of the interest and the interest rate makes a difference. In simple terms, say you are paying 5% interest on your loan, your actual cost may really be more like 4% because some of that interest is used to offset your profit as a tax deduction.
That would come into consideration if you were retiring debt and maybe a unsecured, not tax deductible loan was at 4.5% so without thinking about the tax deductions one might want to pay off the 5% interest deductible loan first because it is costing you more in interest, but really is it not because the interest is tax deductible.
And the interest rate is a big deal, the higher it is the more you pay to the lender, making the lender richer and you poorer. These HMLs for 12% are a major profit for those lender. I would personally wait and save money and never pay anyone 12% interest. But, then again, I can save money and get in the game, some can not. So not putting down others who have to use this method.
Run the numbers!
If your properties are giving you cash flow, you can use that towards the principal and save a lot on the long term. Also, I would consider looking for better interest rates at your 20-yr mortgage. That is a lot of interest paid up-front.
Run the numbers! Here is a link so you have an idea how much you will save if you pay some extra $ on your principal.
That said, will you have enough to keep saving and keep investing with cash flow? Or do you need to free some debt to do so?
@Clifford Paulwhich method did you use to finance the SFH. I'm working through that dilemma right now
@Amy Kendall
Hey Amy
You sail allowed 10? Is that the cap your bank gave you. I already have some loans invested in property just trying to see the best course of action in securing more funding to purchase more
@Joe Villeneuve
Do you ever have concerns about having many mortgages out? I have been assessing my own risk tolerance the last week or so. I'm fairly torn.
Risk is a very misunderstood concept as it pertains to REI. There are three parts to risk:
1 - What is at Risk
2 - Who is at Risk
3 - Who is THE Risk
Ask any Bank/Lender to apply those three parts to any loan, and see what they would answer.
Here would be their answers:
1 - The Cash
2 - The Lender
3 - The Borrower
What is at risk, in all REI, is the cash. Who is at Risk, in all REI, are the ones that put the cash in. Who is the Risk, is the Property (OK...not a who in the normal sense, but still the correct answer).
The more of your cash you have in the property (i.e...down payment, added payments that you make), the more you have at risk. This means as soon as your income (cash flow) is equal to or greater than the amount of cash you put in (this is where you start realizing your profits), your risk disappears...since you no longer have any cash in the property.
@Lynnette E.
What was your strategy for paying off your properties? I've been kinda debating on what my strategy will be. On one hand I like the idea of limiting debt but on the other hand I don't wanna spend the next 15 year's working 60 hour weeks to get them paid off. Thanks for your thoughts!
@Clifford Paulwhich method did you use to finance the SFH. I'm working through that dilemma right now
@Erica Raby
I assume you are asking how I finance more than 10 loans. If that's what you are asking I use a small local bank that keeps loans in house. I have used the same bank for 30 years now. I have closed a total of 44 loans in 30 years with them. I see so many people in real estate chasing loans when I think the simple answer is to build a relationship with their local bank or credit Union.
@Alexander Churchill great problem to have. I was in a similar position a few years ago with a single family rental (they rule in my area).
Well it depends... it depends on whether or not by paying them off the remaining cash-flow, which would be your rent + the principal & interest you're paying now is 'life changing'. I mean if you pay them off is the increased cash-flow they will kick out then going to change your life so that you're closer to financial freedom or any other goal you have? In my case a few years ago, my cash-flow would increase dramatically if I paid off my one single-family rental but, that was not life changing meaning that I would still have to go to work and still do all the other things holding me down, I would have had more cash monthly sure but, no financial freedom. For me, I decided to cash-out refinance and that has produced 4 other single-family rentals, a 12 unit apartment building and now I'm looking for a 20-30 unit.... for me now, is where I'm on the doorstep of financial freedom and yes all of them are leveraged but safely.
I don't know.... if it's life changing and you get financial freedom to pursue other interests or even continue to pursue real estate full time probably but, if it's not, will you be able to continue to purchase investment properties by keeping the money in the ones you have? and if so, at what rate... every year, every 5 years, every 10? So it depends for me if it was life-changing and allowed me to be financially free but still allow me to continue to grow my real estate portfolio I would do it but, if not... I would not and would instead continue to grow faster but responsibly. My formula is simple if I decide I need 20 units to be financially free well I'll keep going until I hit 25 or 30 then stop and turn around and sell off my extra 5 or 10 to pay for the 20 I initially planned on but, who knows.... plans change, life happens, and your needs and wants change as you go along so you have to factor that in ( the long-term goal).
Sometimes numbers and ROI are minimal if what you're about to do is 'life-changing' for instance maybe along the way I'm stretching my investment dollars for the highest returns maybe targeting 20% or 30% ROI with as little of my money on down-payments as possible and that IS supper important HOWEVER, if I'm at doorstep of a 'life-changing' action or a purchase which will change the game you better believe that ROI and other numbers are minimal at that point if my analyzes shows me that by putting down 30%, 40% or even 50% will decrease my ROI to 5%-8% but, will increase the cash-flow of the investment to boost me past the financial freedom line, of course I would do it but, it all depends on your goals. A lot has to do with your age as well and your current lifestyle, for instance if you're single but one day want to get married and have kids, your need for income will grow as your family grows and so although 2 may do for now they may not in the future. But most things can be course corrected along the way or before you get there, so it all has to do with your future goals and current needs.
I hope this helps.
Alex
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.
I would like some input from other investors on Lynnette's comment above. I have struggled with this question; is it better to have one or two rentals paid off or nearly paid off, or to have several rentals that have minimal cash flow because they are highly leveraged? Comments from BP community appreciated!
@Erica Raby I meant that you can only have 10 conventional loans in your name. There are ways around this as listed in the above comments, like if you use a bank that keeps the loan in house. Or you can always search for seller financing deals as well.
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.
I would like some input from other investors on Lynnette's comment above. I have struggled with this question; is it better to have one or two rentals paid off or nearly paid off, or to have several rentals that have minimal cash flow because they are highly leveraged? Comments from BP community appreciated!
My answer is it depends on your goals. I agree with @Lynnette E in that I'd rather pay off the house and be free and clear having close to 100% of revenue from the rental as net income. If my goal was to try to get as many properties as possible in my portfolio, I would not pay off my properties and leverage them so as to gain as much buying power as possible from the cash I had.
Gary you're in Bremerton? we have prop in Bremerton. under rated area in my opinion.
As far as your question regarding @Lynnette E. comment, i have to say i agree with her. Fewer properties lead to fewer calls/maintenance issues, etc. paid off properties can yield the same net cash flow and fewer headaches. I do not understand why some will say "but if you pay it off you lose the interest deduction". so what. you do not get to write off the entire interest payment, only the amount equal to your marginal tax rate--you still wrote a check for the reminder. less debt is always better. yes, most investors need some leverage to get started, but that doesn't mean you have to keep the debt for the entire loan period.
@Joe Villeneuve
Everything he said x2.
Next investment property get a 30 year mortgage not a 20.
If you want to pay extra like if it was a 20 then you have the option to do so but in the front of the amortization giving you more bang for your buck.
Dont pay your properties off. You’re not there yet.
You are paying down the mortgage, but cash flow isn't enough to pay properties off that quickly. Tell us more!
@Alexander Churchill
Unless you would be happy with the cashflow from them paid off and be done then no. If you are buying more use the money to buy more and if you buy more you are not likely going to get that 5 percent so you'd be using more
expensive debt to buy in future. Not to mention cash offers get better deals so you lose that discount too.
@Account Closed When I bought my first home, many decades ago, I printed out an amortization sheet when I got the loan. I saw that maybe $60 went towards the principle and a few hundred dollars went toward the interest on the loan. It was clear who was making the money on the loan.
Each month as I made my payment, I marked off that line on the amortization sheet. After a few months I decided that I would add on the principle for the next month and cross off 2 lines, and 'save' paying that next line of interest. The following month I looked at my savings and knew I could easily pay off an additional year of principle and 'save that year's worth of interest. During that first year I added on extra principle payments whenever and as much as I could, still keeping a 6 month emergency fund. Awards from work, etc. all went towards that payment. By the end of the year I was on year 15 of the 30 year mortgage.
For me seeing that amortization sheet get crossed off, page after page was addicting. It was harder to do a lot of payments as the schedule shifted and most of the payment went towards the principle and less went towards the interest, but I kept it up and that house was paid off in less than 4 years.
That has been my practice for most of my working career. Now, I am retired and save the money upfront --save first-, then buy the houses. But it is really fast to save because I get almost all of the rent payments to put towards the next house. I do put aside some for taxes, insurance, capex and maintenance, but the rest goes into the savings for another house if that is what I want, or a trip or whatever.
I can not imagine collecting rent, addressing late/no rent issues, fixing things, doing inspections, finding new tenants, cleaning and fixing between tenants all for $100 a month! I would loose all motivation as it would not even seem to be minimum wage. So, for me, I have to have a less cash flow out to a loan and more to me for me to be motivated.
@Alexander Churchill
I take a different view than most. If you have a solid income (apart from the properties which it sounds like you do), I would pay off one of the properties.
Why? Well if you have a 20y loan on a 300k property, you will pay over double that amount for the place when it is all said and done. Fast forward 21 years, sitting around and telling your friend how much that property actually cost... well I bought it for 300k but I actually paid over the term of the loan a total of 600k.
So you did not pay 300k. You paid 600k.
If you are dependent on cash flow, then hold the note for 20-30 years and pay double or triple for the property over time. That is the cost of using others' money. And it is smart if you need it.
Pay it off. If you need the money in the future, refinance it (might only get 70% value at a slightly higher interst rate). But that is likely enough to purchase more property, pay for a family emergency etc etc.
If the property value goes up, you paid 300k for a house worth 400k (just using arbitrary numbers for example sake). If it goes down, you paid 300k for a property worth 220k. But you wont be paying 600k for it.
I wish you success in your journey!
Depends. If you are trying to scale you should hold off on paying them and just acquire more properties. Once you have 5, 10, or whatever you want then you can focus on using that cash flow to tackle the debt one at a time until paid off. In the mean time your income can be used to keep buying more so you can have a mix of paid off homes and leveraged homes
@Lynnette E.
I admire your patience and diligence.
@Alexander Churchill
I take a different view than most. If you have a solid income (apart from the properties which it sounds like you do), I would pay off one of the properties.
Why? Well if you have a 20y loan on a 300k property, you will pay over double that amount for the place when it is all said and done. Fast forward 21 years, sitting around and telling your friend how much that property actually cost... well I bought it for 300k but I actually paid over the term of the loan a total of 600k.
"So you did not pay 300k. You paid 600k"? Nope. You actually only paid say 25% deposit = $75k!
If you are dependent on cash flow, then hold the note for 20-30 years and pay double or triple for the property over time. That is the cost of using others' money. And it is smart if you need it.
Pay it off. If you need the money in the future, refinance it (might only get 70% value at a slightly higher interst rate). But that is likely enough to purchase more property, pay for a family emergency etc etc.
If the property value goes up, you paid 300k for a house worth 400k (just using arbitrary numbers for example sake). If it goes down, you paid 300k for a property worth 220k. But you wont be paying 600k for it.
I wish you success in your journey!
"So you did not pay 300k. You paid 600k"? Nope. You actually only paid say 25% deposit, = $75k!
The rest was paid off with Other People's Money (ie. tenants)! And if you bought wisely in the first place, you could probably have refinanced it after one year (or so) to cash out $75k of your borrowable equity, meaning you had zero of your own money left in the deal! (ie. The "BRRRR strategy"). Cheers...
@Alexander Churchill
I have had similar thoughts about mine but consider this-
1. Asset protection. You get sued for something totally unrelated to the property. Attorneys see you have 100% equity in a property so they go after it. If you only have 25% in the deal, all they can go after is 25%
2. Paying off your property could throw you into a higher tax bracket because you lose the ability to write off mortgage interest. (Depends on your own situation)
3. Debt is an accelerator. If you use the money to buy more properties, not only can you scale quicker, but you see the compounding effects of appreciation and rent increases.
4. Be careful putting all your eggs in one basket. Having one or two houses paid off is like having a small herd of cows on a farm. If you have 4 cows and one gets sick, your farm is in trouble. But if you have 30 and one gets sick, it’s not going to tank your farm.
Just some thoughts that changed my mind about paying off properties. Hope that helps! Sounds like you’re doing well so far!
@Joe Villeneuve
I think everyone’s point is that the something positive gained is less risk. It’s not a tangible positive gain...unless tides turn and you get caught too leveraged.
@Joe Villeneuve
I think everyone’s point is that the something positive gained is less risk. It’s not a tangible positive gain...unless tides turn and you get caught too leveraged.
Sorry, you lost me at, "I think...".