Overcoming the mindset of paying down mortgages is a dilemma for me. Considering the low interest rates I am going to refinance a couple of my SFH rentals and my primary residence. It makes financial sense to me to refi and use the proceeds to buy more and better assets. On the other hand its hard for me accept reduced cashflow and new 30 year terms. I understand all the reasons to use leverage and pull equity out. I have no desire to pay off any RE other than maybe my primary residence and even that goes against financial sense. Has anyone else had this struggle?

@Wade G. glad you wrote this post, I thought I was the only one that really hated debt :)

While I may still someday work to pay down the notes I recently had a change of heart regarding using leverage. In my area, I don't personally believe housing prices are going to drop, and with the ultra-low rates, I have a goal to pick up 2 new properties this year. I need plenty of cash for those 2 down payments so all extra cash right now is focused on growing my portfolio and with low-interest rates I've had a change of heart and little desire to pay them off early.

I think I made a mistake paying off my mortgage.Now I needed money for down payment for the two rental properties that i am planning to buy. What do you guy think of HELOC for down payment? It seems the rates are still very low.

I believe equity is security. But, you might want to talk to a tax specialist as to how it may affect your taxes.

It really depends on your goals and 'where' you are in your trip. If you are in your thirties, forties, fifties etc and scaling up you need to leverage and work your deals to get more, more, more; so within reason you should handle all the debt you can carry.

If instead you are in your seventies, you have the cash and don't intend to do that next deal. You might as well be the bank and carry no mortgages. 

However given the current virus climate you should have cash or access to cash so you can use it as needed for reserves and rainy days. Interest rates may be low, but lenders are not taking any risks. Besides a deal may turn up and this market will favor the cash buyer.

@Wade G. It doesn’t always have to be about optimizing everything and maximizing returns. There’s something to be said for having peace of mind and comfort

@Wade G.

The struggle is real. I could be much more aggressive but I like the fact that all my properties have relatively low Mortgage balances. I think it also depends on your goals. If it's immediate cash flow, leveraging really is the only option. For me- I have a solid w-2 so my goals have always just been appreciation, tenant mortgage pay down, long- term stuff.

Any time you feel like paying off an investment property is a good thing just sit down and go through your tax return.

It is a horrible idea.

Too many new landlords and "new age" landlords blur the lines between their personal and professional interests. From cancelling rent to providing free massages every week to off set the stresses of being a tenant. This is right up there. Milk the crap out of that asset in a responsible way.

Originally posted by @Patrick M.:

Milk the crap out of that asset in a responsible way.

"In a responsible way," means you also take your level of risk aversion into account. For some, that means a paid off property. That's ok.

@Andrew B. If you have an asset that averts risk best by being paid off- then that is an extraordinarily underperforming asset. You should have an asset that allows for you to mitigate risk through cash reserves, insurance etc.

Originally posted by @Patrick M.:

@Andrew B. If you have an asset that averts risk best by being paid off- then that is an extraordinarily underperforming asset. You should have an asset that allows for you to mitigate risk through cash reserves, insurance etc.

I'm not talking about the asset, I'm talking about an individuals tolerable level of risk. If you sleep better at night with a paid off house, that's ok. It doesn't change the asset's performance, just the return you receive on it.

@Patrick M.

With all due respect, I disagree. I don’t know why anyone would recommend keeping a mortgage strictly for the tax deduction. Why would you recommend paying 10k in interest to save 3k in tax. Your still out 7k!

for example:

if you are independently wealthy with all your properties paid off. 

Why put yourself at risk of having to go back to work by highly leveraging your properties? 

Seems like be happy with what you've won.  Don't put your winnings back at risk. 

@Kirk R.

I just hate debt! That said, I think everyone’s business model should determine whether they pay off properties or not. I would rather own 4 properties that are all paid off. That way I’m bringing in a ton of cash flow and my headaches and maintenance are rather low. I can manage a lower number of properties myself, without feeling like I have a full time job. Also, cash offers are a breeze. You can close so fast and you’re saving yourself a lot of the fees and hoop jumping that come along with a mortgage. Not to mention, sellers jump on cash offers first.

If you’re trying to build an empire, you would absolutely have to put the minimum down on every property. You’ll build much faster and the payoff could end up being really big, but you have to be willing to take on the risk and the job of owning a lot of mortgaged properties. With the whole coronavirus thing, I’m very happy with my current model. My renters continue to pay, but if they didn’t, I wouldn’t be in a bad situation.

Remember when you have a mortgage, your tenant is paying it. The mortgage includes interest, but you are also building equity in your home as you pay down the principal.

If you want to buy more rentals, keep the 'extra' cash for down payments rather than paying down mortgages.  

@Wade G.

I am not at the level where I have that many properties under my name but I have had this thought. Personally I plan on constructing my portfolio to have properties that will be paid down eventually. And other properties that I can add value and refi. My reasoning behind my plan is so I can have that large amount of equity to back me for future projects, and still have a great amount of cash flow coming in when I do refi my other properties.

@Wade G. as you can see we all have different thoughts on this. My two cents are that lifestyle design should dictate your (or anyone’s actions) in this regard.

If you want to grow, use leverage. If you’re portfolio is as big as it needs to be, increasing rents and increasingly paid off mortgages across the portfolio will only increase Cashflow overtime.

“Coach” @Chad Carson has a really good description of this on his blog. I would recommend taking a look: www. coachcarson.com

Make the decision that’s best for you

Really like what @Bjorn Ahlblad posted and totally agree. I think it’s a matter of assessing where you are in your journey, where you want to be next year, 5 years, 10 years, etc, and making a plan to execute on it.

Other factors to consider is your own personal risk tolerance and current climate. Risk tolerance only you can answer. But as far as the current climate goes, you could always use the current instability in the economy to secure your assets more through more aggressive pay down, then when its time to pounce, take credit lines out against your assets to acquire other assets. However, that’s highly leveraged and might not be what you want to do.

At the end of the day, I don’t think there is any wrong answer, all have pros and cons. Whenever I run into situations like this I’ll write down a two column notepad and make a pros and cons list, highlighting the pros and figuring out ways to mitigate the risks. Do that for each possible scenario and make a decision.

Good luck!

An awesome question which most of us have had at some time or other! I have been investing in real estate since 2009 and all of them in So Cal. Here is my 2 cents...

I over leveraged my money from 2009 through 2015. All my properties cash flowed and I personally felt like it will appreciate as well! I felt the risk was worth it. Fortunately for me, all of them did and all my properties checked off all 4 ways of making money (Cash Flow, Capital gains, Amortization & Tax benefits)

Beginning of 2018, I felt the property prices were too high, so I did not want my money to be leveraged anymore. I started selling some of my properties since then and am sitting on cash. I feel like now is not the time to leverage or over-leverage my money. I only have a few properties and only one loan. Life is wonderful! The peace of mind thing someone mentioned is real and I love it!

I know folks that leveraged their money in real estate between 2004 and 2007 and have had to file bankruptcies after that. So, I guess what I am saying is that timing makes a difference. Leverage money when you feel that the risk of loss is less and do the opposite when the risk of losing is high!

Good Luck!

Originally posted by @Bjorn Ahlblad :

If instead you are in your seventies, you have the cash and don't intend to do that next deal. You might as well be the bank and carry no mortgages.

 If the OP is in the seventies, he needs to bottle whatever it is he's doing, and sell it. 😂

Younger me used moderate debt to buy/repair/hold SFHs and build cash flow. Old me paid them off and retired early from a soul sucking W2 job. I used to live for the weekend. Now I live for Monday morning to begin another week of REI. Nothing wrong with smart debt or no debt. It just depends on what your objectives are. Life is good. Clocks and calendars are for kids.

@Theresa Harris

I used to say the same thing as well. It is true, but when your tenants don’t pay, it is your mortgage debt and for the majority of small time investors with a modest portfolio, the mortgage shows up on your personal credit report and you are personally guaranteeing the debt.

I have paid off some properties this year and it is great when the rent checks come in and stay in your bank account as opposed to paying the lender.

How much money per month do you need to [retire...quit your job...etc.]. 

Then work backwards from there. 

If you think you could live on $10k/month for life...and you'd be happy with that...why go through the effort of trying to get to 50 houses in X years. That's a lot of cash out of pocket...a lot of headaches...basically full time dealfinding..etc. 

---

On the other hand, if rents are say $1,500...with the 50% rule, you'd be cashflowing $750 on a free and clear. 

Why not just land 14 houses and get them all paid off...$750 x 14 = $10,500 per month. live off $10k per month forever? 

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There's no 'right or wrong.' 

It's "what is your goal with RE?"

For me? 

I'm not trying to build some RE empire and become RE famous. I like my work outside of RE. If I can cashflow 30k-40k per month passively and spend my days writing copy and screenplays and chill-axing with my wife and kids...that's my goal.

@Joe Cassandra

To generate $30,000-$40,000/mo "passively," you would definitely have a small real estate empire...especially if you used leverage to do it.

@Mark Welp True, but even if I own the property outright, I still expect tenants to pay.  I also have a few properties that are paid off and others with mortgages.  It is my debt to pay, but I budgeted for the rent to cover those expenses and make sure I have enough in reserves to cover the unexpected and didn't over extend myself.