Pay off loans on current properties or buy more units?

Question

I’m debating paying off my current 4plex or saving for a 12 plex. I want to retire early and can save about 70,000 a year. Any tips to accelerate my success?

Matthew Paul · Answer

@Darren Campbell  Retire early , that sounds great . But $2800 a month wont cut it , not even close .  It may sound like good money today . It wont be in 10 years . as you age so does the building , the maintenance cost increases as the building gets older , it will increase for you as you get older too .

Chris Mason · Answer

This depends on your risk tolerance. The closer you are to retirement, the fewer risks you should take. And sure enough low risk things have low returns, higher risk for higher returns.

Paying off a fixed rate mortgage has an ROI exactly equal to the interest rate. Low reward, low risk. But if you're trying to retire in 5 or 10 years, that's a GOOD thing, and if the only thing getting in the way of retirement is those pesky mortgage payments eating up so much of your rental income, go for it.

If you want to imagine a simplified model to retire on rental income, it would start with a higher risk higher leverage acquisition phase early on, a middle phase of optimizing -- 1031 that "meh" property for something good, stuff like that -- and then it would end with you ceasing proactive acquisitions (unless some great deal falls in your lap) and paying mortgages off to maximize cashflow as you ease into retirement, probably paying them off lowest balance to highest balance.

Unlike 401ks and IRAs, the government isn't in charge of when you do this, so no reason you can't do it in your 30s to 50s if you can pull it off.... there are people who post on these very forums who are in their 30s and could enter that end-phase if they wanted to. I wouldn't know the ones that have actually started paying them off, since those folks obviously don't need mortgages. :P

Costin I. · Answer

@Darren Campbell @Jeff Moore - do both - accelerate the payments and save too.

The loans are interest heavy in the begining portion - pay them down accelerated till the principal payment becomes the majority percentage in the payment (and it's up to you where that point is, personally, I would look for 75%+) and then let them ride since the rates are low and you are unlikely to get that low rate from anywhere now.

Nate Monson · Answer

@Darren Campbell I think this is an excellent example of something I preach to my clients everyday. The most optimal thing to do return wise, may be to go invest elsewhere rather than pay off your loans. But your lifestyle goals may actually say paying off the debt is the best thing for you to do. If $2800 a month puts you in a place where you can get to early retirement or get really close, I would say go for it and figure out the rest later. Good luck!

Jeff Moore · Answer

I've been struggling with this question too.  I own 5 properties and have mortgages on 4 of them. My cash flow is pretty good. For the last 5 years I have saved money to buy the next property. Now my income is decent and if I pay them all off I've reached my income goal. But the little voice in my head keeps saying "yea but if you buy one more..." If I was you, at your age, I'd save for the new property. Just be sure you can make the payments if there is a market adjustment in the next year or so.

Darren Campbell · Answer

@Brian Adzadi

I 100% agree. I’ve only had the loan for 3 years and I have a 3.25% rate. The only reason I was considering paying it off 100% is then I would have roughly $2800 of cash flow from that building per month. My end goal is early retirement and that would allow me to reach my monthly cash flow amount goal with less buildings to take care of and worry about. I understand I would not be able to receive the same long term goals as someone who leveraged more and purchased more doors to get to the same cash flow goal. Less buildings to worry about and less tenants to manage seemed appealing. However for wealth building purposes and longer term success I 100% agree with the comments.

Jeff Brower · Answer

It comes down to interest rates and your projected return on any new projects. If you have a low interest rate it makes no sense to pay it off early. If your rate is 5% but you can make a 10% return on the money you would use to pay off the loan then you are shooting yourself in the foot.

Brian Adzadi · Answer

@Darren Campbell

It depends on how far you are from paying off the loan for the 4plex. If you are only 2-3 years away from paying off the 4plex then I would do that so as to use the cash flow from it to help build up savings for the 12plex. However, if it will take you about 5 or more years to pay off the 4plex, I would not even bother and start saving to buy the 12plex. Remember, interest rates are only going to higher. So I would take advantage of it sooner than later.

Pay off loans on current properties or buy more units?

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