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.
@Joe Villeneuve
You said in a previous comment that there’s no positive aspect to spending “your” money on paying off a property. Multiple comments in this thread are making a case for the positive benefits of not leveraging, which aren’t necessarily tangible unless the market corrects and a person is over leveraged.
@Joe Villeneuve
You said in a previous comment that there’s no positive aspect to spending “your” money on paying off a property. Multiple comments in this thread are making a case for the positive benefits of not leveraging, which aren’t necessarily tangible unless the market corrects and a person is over leveraged.
Many cases have been made...none convincing...for the same basic reason. None of those "cases" take all the math into consideration. Math is a big problem for many REI. Unfortunately, it's critical.
If @Alexander Churchill owns the property than the liability of the interest is his. Not his tenant's. See how quickly the bank would show up and take his rental if he opted not to cover that particular expense. There's a potential huge savings in total interest by paying off early. If you don't need the cash flow right now (and I assume you don't since you're so young and are probably working) than pay that thing off! I put all my rentals in 30 year loans and then double my payments each month. They get paid off in about 10 years and on my average loan I'll save about 40k over the life of the loan. 40k could be a down payment on another house! If I ever need the cash flow spigot turned back on I just stop making the additional principle payment. By paying down quicker you're still using your tenants money to cover all the costs. I prefer that approach to paying off all in one go. That way you're not dipping into your personal funds.
@Joe Villeneuve
...
Many cases have been made...none convincing...for the same basic reason. None of those "cases" take all the math into consideration. Math is a big problem for many REI. Unfortunately, it's critical.
Have to disagree here. You only look at the math you want to look at. You are not looking at the full picture. What about all the interest you pay when your property is not paid off? You are not looking at the interest/financial benefit you can gain when you get to keep most of the rent and reinvest it. You earn interest on the rent money instead of paying it or you buy another investment. All the charts showing what happened when paying off the property vs. not paying off the property assumes that the earned rent just gets put in a shoe box and sits there. That never happens with a smart investor. That rent payment is earning money.
You are not looking at the cost of your time dealing with $100 a door a month houses, and that your hourly wage is pretty sad, even it there are no repairs and rent is paid on time, and despicable if there are issues.
The mindset that one can use someone else's money to 'buy the house', is just words, mindset. The renters pay rent. It is just money. What one does with the rent--pay the mortgage or use it for whatever really is up to the owner. Money is money-that is math-it does not matter if the mortgage is paid from savings, gift, salary, the rent, or whatever. If your house is paid for you can pool that rent money and use it to buy another house.
Guess what? Cash buyers make out well in pricing and being selected to buy the house. They even can find realters who tell them about houses before they are listed. I just bought one that was not listed. I got the key to see it myself when it was being cleaned to list. Entered into a contract the next day.
Oh, and over all the -math- is much better for cash buyers as we do not have to pay that interest and other charges at all so our overall costs for the house is less in that area too. THAT is math, understanding that the cost is lower to start, there are no loan fees, appraisals, etc, no points, no refinancing costs, no interest paid! You can not pay more for an asset and say you came out better-that is math too! Those charts also do not capture all those extra costs non-cash buyers pay!
BTW, I actually have a B.A. in Mathematics, so know it quite well, spent a career with math and physical science paying the bills.
The non-math issues one has to consider are actually the bigger players in this discussion, in my opinion.
The stress of having bills that are dependent on rental income that may or may not be paid on time or not at all is not desirable for many. Living on the financial edge is fine for some, but not for others. Some can handle that stress and risk, others can not.
The concern that one is going to be sued for all their assets (and thus must never pay off a house) is not a big concern to some, huge to others. For me a million or five million dollar liability insurance policy is about $200 a year or $300 a year. Money well spent, and the insurance company will fight hard to not spend that first million, so I also get attorney benefits (re. the attorney that the insurance company will use) on top of that million. When working in my regular career at times I worked on more risky things and upped the insurance to five million, cost was maybe a hundred dollars a year more. Not a big deal. I drop that on dinner for my family.
And probably the biggest non-math issue is 'image'. Some people like saying I have XX doors. Really they OWN no doors and are making very little money per door, but they like the image they project.
@Joe Villeneuve
...
Many cases have been made...none convincing...for the same basic reason. None of those "cases" take all the math into consideration. Math is a big problem for many REI. Unfortunately, it's critical.
Have to disagree here. You only look at the math you want to look at. You are not looking at the full picture. What about all the interest you pay when your property is not paid off? You are not looking at the interest/financial benefit you can gain when you get to keep most of the rent and reinvest it. You earn interest on the rent money instead of paying it or you buy another investment. All the charts showing what happened when paying off the property vs. not paying off the property assumes that the earned rent just gets put in a shoe box and sits there. That never happens with a smart investor. That rent payment is earning money.
You are not looking at the cost of your time dealing with $100 a door a month houses, and that your hourly wage is pretty sad, even it there are no repairs and rent is paid on time, and despicable if there are issues.
The mindset that one can use someone else's money to 'buy the house', is just words, mindset. The renters pay rent. It is just money. What one does with the rent--pay the mortgage or use it for whatever really is up to the owner. Money is money-that is math-it does not matter if the mortgage is paid from savings, gift, salary, the rent, or whatever. If your house is paid for you can pool that rent money and use it to buy another house.
Guess what? Cash buyers make out well in pricing and being selected to buy the house. They even can find realters who tell them about houses before they are listed. I just bought one that was not listed. I got the key to see it myself when it was being cleaned to list. Entered into a contract the next day.
Oh, and over all the -math- is much better for cash buyers as we do not have to pay that interest and other charges at all so our overall costs for the house is less in that area too. THAT is math, understanding that the cost is lower to start, there are no loan fees, appraisals, etc, no points, no refinancing costs, no interest paid! You can not pay more for an asset and say you came out better-that is math too! Those charts also do not capture all those extra costs non-cash buyers pay!
BTW, I actually have a B.A. in Mathematics, so know it quite well, spent a career with math and physical science paying the bills.
The non-math issues one has to consider are actually the bigger players in this discussion, in my opinion.
The stress of having bills that are dependent on rental income that may or may not be paid on time or not at all is not desirable for many. Living on the financial edge is fine for some, but not for others. Some can handle that stress and risk, others can not.
The concern that one is going to be sued for all their assets (and thus must never pay off a house) is not a big concern to some, huge to others. For me a million or five million dollar liability insurance policy is about $200 a year or $300 a year. Money well spent, and the insurance company will fight hard to not spend that first million, so I also get attorney benefits (re. the attorney that the insurance company will use) on top of that million. When working in my regular career at times I worked on more risky things and upped the insurance to five million, cost was maybe a hundred dollars a year more. Not a big deal. I drop that on dinner for my family.
And probably the biggest non-math issue is 'image'. Some people like saying I have XX doors. Really they OWN no doors and are making very little money per door, but they like the image they project.
Talk about "only looking at the math you want to look at".
1 - You're not the one paying the interest. Your tenant is. This is a business, and like a business, all the expenses are business expenses, paid by the income from the business. In this case, that income is the rent, thus, the rent is paying the expenses...not you.
2 - "You are not looking at the interest/financial benefit you can gain when you get to keep most of the rent and reinvest it." When you add payments every month, your cash flow goes down, meaning you are losing money every month.
That "advantage" of saving the added interest doesn't happen until the loan is paid off. Your monthly payment doesn't change each month, just the amount of money you are spending per month (goes up).
3 - This just makes my point. By not making that extra payment, you have more cash flow each month to reinvest.
4 - "$100/door"? If you are only getting $100/door, you bought the wrong property.
5 - "The mindset that one can use someone else's money to 'buy the house', is just words, mindset. The renters pay rent. It is just money. What one does with the rent--pay the mortgage or use it for whatever really is up to the owner. Money is money-that is math-it does not matter if the mortgage is paid from savings, gift, salary, the rent, or whatever. If your house is paid for you can pool that rent money and use it to buy another house. "
It most certainly does matter where the money is coming from, and not all money is the same. On one hand you describe the need to take the value of your time into consideration, then you say that the money is the same from the rent (none of your time spent) and your job income (all of your time spent) is the same? Understanding how Math Works in relationship to money is more than the ability to add and subtract. This statement you made proves that even with your B.A. in Math, you don't understand it. Sorry.
5 - You don't need to pay all cash to get an advantage in pricing, or favorable offers from REA. If that's what it takes, you need a new REA.
6 - The fact that you don't have to pay interest when you buy all cash is missing the most important numbers in the most basic of all equations. You don't start to make a profit until all the money you spend is recaptured. The more of your cash (the money you spend) you spend, the longer it takes to start to make a profit. When you spend extra each month, the less cash flow you get each month, and this adds to the length of time you are making less profit.
7 - I'd give you the "stress of higher monthly bills" argument if the net result each month, by making extra payments, was higher cash flow...but it isn't. None of the bills/expenses go down each month when you are making that extra payment...but your cash flow does. So, how is it better (less stress) to have less money each month to pay for those bills? This is what you get when you are making extra payments?
8 - Which person is more likely to be sued. A) the person that has a lien on the property, and little equity, or B) the person that has all equity and not lien? Why would anyone sue someone to get a property where if they win, they only win the money represented by the equity?
9 - What's at "risk" is your cash (equity). Just ask any lender.
10 - "And probably the biggest non-math issue is 'image'. Some people like saying I have XX doors. Really they OWN no doors and are making very little money per door, but they like the image they project". This is an emotional statement, and has no place in REI. Besides, when you buy a house with a mortgage on it, you own it. Just because there's a lien on it, doesn't mean the lender owns it. The lender owns the lien, and you own the house. When you add payments every month, you are reducing how much money you are making per door.
If @Alexander Churchill owns the property than the liability of the interest is his. Not his tenant's. See how quickly the bank would show up and take his rental if he opted not to cover that particular expense. There's a potential huge savings in total interest by paying off early. If you don't need the cash flow right now (and I assume you don't since you're so young and are probably working) than pay that thing off! I put all my rentals in 30 year loans and then double my payments each month. They get paid off in about 10 years and on my average loan I'll save about 40k over the life of the loan. 40k could be a down payment on another house! If I ever need the cash flow spigot turned back on I just stop making the additional principle payment. By paying down quicker you're still using your tenants money to cover all the costs. I prefer that approach to paying off all in one go. That way you're not dipping into your personal funds.
But, by "making the additional principal payment" each month, you are "dipping into your personal funds", right?...
First off Alexander, Congrats on getting yourself to this position in the first place, what an achievement! This comes down to the classic discussion of leverage vs debt free scenarios. and ultimately what it boils down to is HOW YOU SLEEP AT NIGHT.
Breaking it down a little more... Leverage is a proven method that works. Buy a property rent it out, have someone else pay the mortgage and cover all your costs and if you did your numbers right... Property will cash flow as well to help you earn passive income and continue towards a life of happiness. In the case of an economic downturn, the only one who loses is the one who sells. So if you hold onto your property and continue renting it you should be fine. Depending on how many properties you have in your portfolio, there could come a time (IT IS POSSIBLE) the institution that holds your notes could "call you notes" letting you know that you have X amount of time to pay off the remaining balance of all your mortgages, forcing you to sell as many properties as necessary to have all your debts paid. If that scenario never happens you could continue to live a happy life having someone else pay off all your debts and you earn income in the meantime. Build up equity leverage your 1 rental property to put a down payment on a second property rent that property out have someone else pay off your expenses and provide you with a cash flow to eventually refinance pull out equity, rinse and repeat. Also heard as the BRRRR strategy. Continue to add more properties to your portfolio and increasing mortgages that are paid by tenants.
Debt free scenario: Buy a property have someone live in it pay the expenses and you still earn a cashflow. You can again leverage your property to purchase a second property and continue your cashflow. One day you may realize that you have a few mortgages that are fundamentally being paid off by tenants and earning you a passive income. You think about what it may be like to earn more on the same properties you have if the mortgage was no longer there? You calculate how much you have saved up and how quickly if you put your savings or income built up and paid off the remaining balance of one or more of the mortgages how much more you would earn per property. You can determine the ROI from what you have paid off and in X amount of time with new Y passive income you can purchase your next investment property with a down payment or cash depending on how long you save up.
HOWEVER in any case scenario with an economic down turn, say your tenant moves out because times are hard. Your property has a mortgage you can calculate your loss month over month and stress about losing your passive income every day you don't have a tenant. Miss your mortgage payment because someone is no longer paying it for you, get your notes called because you are now delinquent and potentially foreclose, or even go bankrupt...Not very likely but most certainly possible and anyone who denies that well, look at the facts and history.
SAME SCENARIO but Debt Free rental properties... well tenants move cause times are tough, experience vacancy for x amount of months, calculate loss of passive income. There is now no mortgage company to "call your note" for missed payments because you own the property. no foreclosure, very unlikely for bankrupt because no one is telling you what to do. And... well... simply put, you most likely will sleep better at night.
AGAIN both systems work leverage and debt free both have proven effective strategies CLEARLY. I must say that anyone who says its NOT WORTH IT having rental properties and being debt free, well most likely that person has never been debt free with rental properties. And if thats the case and they don't like having a mortgage on their rental property, they can jump right back in to the leverage game, use their paid off rental as collateral and get themselves another mortgage and even better passive income rental property. They essentially just built up their equity reserve!!
Happy investing!
@Brent Coombs Sure. It's all his money.
@Brent Coombs Sure. It's all his money.
Not the same money.
Job earned is active, REI cash flow is passive.
The difference, and why the passive/cash flow is more valuable is this: If you quit your job, your job income stops...but your passive income keeps coming.
@Brent Coombs Sure. It's all his money.
No, I was talking to you. You wrote: "I put all my rentals in 30 year loans and then double my payments each month", but then wrote "by paying down quicker you're still using your tenants money to cover all the costs...you're not dipping into your personal funds".
Does that meant that just your RENT money allows you to double your payments every month?
If so, that's fabulous! (So might his).
So why suggest that "he" pay it off with his extra funds - when you don't/won't!?...