Snow Ball Technique

15 Replies

When acquiring multiple rent houses, would it be a smart technique to start combining the cash flow from all of your rentals to pay off one and then after your first rental is paid off you start funneling that cash flow with the rest and pay off your next house and once momentum is created you start paying off all of your homes quickly?

Am I missing something in this line of thought?

What would the mortgage be 5%?  Couldn't you make more than 5% by buying another unit all the while the tenants are slowly paying off your mortgages?  Just asking, maybe you can't make more than 5%.....

@Drew W. Buy and hold! Rentals are mostly a long-term strategy. The point is to hold your mortgages and invest more and expand your portfolio, like @Jay M. said. This would be different if you had a loan with super high interest, of course. :)

For single family homes, I don't ever want to pay off the properties. Over the next cycle or two, the appreciation is going to dwarf any sort of paydown benefits. Small thinking is, "I want to save the interest." Interest is a cost of doing business.

I would much rather use the available cash now to acquire more properties.

@Drew W. Paying off all of your properties already? You seem to have a lot of room for growth left in your investing timeline. Why not reinvest all of that cash into more property at yields far exceeding your current debt's interest rate?

@Drew W. The reason people are encouraging you to not pay the houses off in the manner you describe is because that method is thought to be capital inefficient. The reason this is true is because when you prepay your mortgage, your effectively achieving a rate of return equal to the coupon rate, or loan rate. This is of course excellent for risk reduction as you're accelerating the payment of the note. But is that necessary? Most investors want a margin of safety in their equity, say 20-30%, and cash flow above that margin can be re-invested in future projects. When I run a calculation on my small rentals or my syndication investments, I'm making an average annual return (AAR) of anywhere from 14-30% on my capital. So the financial math says it's best to save up my capital for acquiring more assets. But real estate investing is personal and you need to adopt a strategy that fits you. If accelerating the mortgage fits your risk profile, i.e. you are highly risk averse, then you should do that. But, if you're more concerned with building a portfolio that is highly capital efficient, then aim for more assets that can achieve those double digits AAR's! Cheers!

Some want more income and fewer tenants to manage. This implies paying off the debt is a good policy. 

It is not the best strategy if your goal is making your cash work hard or as a way to speculate on future appreciation. It is a great way to have less hassle so you can do other things with your time.

@Drew W.

IMO less units and properties that are paid off equals on average less repairs, hassles, furnaces, etc to replace. If your looking for great cash flow and less headaches, to me that seems the best route.

@Drew W.

One of the biggest mistakes I see most investors make is that they focus too much on cashflow and have high equity positions in their investments. 

I don't like this strategy unless you have reached your net worth goal of 2-5M.

Smart investors are always re-lveraging their equity. Check out my article here:

https://www.biggerpockets.com/member-blogs/7810/86111-return-on-equity-why-i-sold-my-high-appreciation-seattle-rentals?created=1