Do You Pay off the Rental Properties You Have or Purchase New Ones?


There’s a great discussion happening on the BiggerPockets Forums about whether it is better to pay off the rental properties you own or take your income and reinvest it in new properties. I’ll share some of the thoughts from the thread, and I encourage you to jump in and continue the discussion, or leave your comments below.

Will Barnard

You are best served to apply the appropriate amount of leverage in your RE investments.

While owning free and clear provides more cash flow, it actaul does not. What it does provide is a return on your cash invested and applying l;everage almost always makes your ROI better.

One of the greatest advantages to RE investing is leverage and the second is the tax deductions (depreciation). With leverage, you can control more properties which provide more tax deductions. While owning free and clear offers safetly in not having a mortgage payment, you have a lot of cash tied up in the walls

Anson Young

The great thing about rentals is, assuming they are cashflowing and not a money pit for you, the renter will pay off your mortgage in due time. You can pay down the mortgages until you own them, then cashflow a certain amount per month, or use that cash to leverage another 2-3 properties.

All depending on your goals.

David Collins

It might help to keep in mind a simple fact: Mathematically, paying down a loan which bears interest at X% is identical, in terms of net economic value, to investing that same amount at X%.

Putting it another way, if you have Y dollars available to employ somewhere, just think of ‘loan paydowns’ as one more investment possibility, among your other options.

Suppose, for example, you could either use your discretionary Y dollars to pay down a 6% loan, or could instead deploy the Y dollars into an 8% investment. Paying down the loan is economically equivalent to investing at 6%, making it (obviously) the inferior choice in this particular fact set.

Without a doubt, you MUST also evaluate other factors. You might, for example, want to de-leverage your personal balance sheet for other reasons (risk; too much leverage; anticipated future financing), and this might override the simple “rate of return” rule of thumb I’ve described.

Nevertheless, it’s a simple, and usually valuable, rule of thumb when evaluating your options.

Rich Weese

I like both. Buy more properties AND pay them off. A lot depends on risk level you are comfortable with, current tax situation, age, employment, job security and attitude of spouse. All of these would make a difference in what I would reccommend to you. I have free and clear, but I also have some highly leveraged properties to help offset the income tax consequences.

Again, chime in with your thoughts here or below.

Photo Credit: Jim Linwood

About Author

Joshua Dorkin

Joshua Dorkin (@jrdorkin, Google+) founded when he saw a need for free, trustworthy information about real estate investing online. Over the past 12 years, Josh has grown the site from self-funded hobby to full-time job and passion. Today, BiggerPockets brings together over 600,000 members, housing the world’s largest library of real estate content, iTunes’ #1 real estate podcast, and an array of analysis tools, all geared toward helping users succeed.


  1. Terri Pour-Rastegar on

    Sorry–I’m a little late to this blog. But this is a debate that is going around between my husband and me regarding our investment strategy.

    I like Rich Weese’s comment–it reflects my line of thinking. My husband has been gung-ho about getting all of our rentals paid off (a few are already free and clear, thankfully). Yet, in the same breath, he will get on my case for not leveraging those clear properties. (I am trying to leverage them–the non-owner-occ’d terms are awful, and I get my back up about them.)

    My thinking, however (and I think I’m winning him over to the dark side), is to get a rental and make sure we cash-flow from day one (which we always do, thanks to my being very stingy), and then buy one to flip–take those proceeds and use them to buy the next rental, and so forth and so on. For example, my husband said his goal is to have a monthly profit of $X by the time he needs to retire. Being the little bean counter that he is, he calculated that 20 houses, all leveraged, would get us there. I turned the tables on him and showed him that I can get him that same amount of money with half the number of houses, all mortgage free. After he checked my calculations a dozen times, he realized I was right.

    Of course, we all know the problem with this scenario–eventually, you run out of cash! That’s why I proposed the occasional flip, to feed our habit.

    Again, I agree with the others, that your approach depends on your goals. For our rentals, we’re in it for the long-haul. My husband will reach retirement age in about 10 years, but really won’t have enough money to comfortably retire at that time. He refers to me as his little 401k because I make more than his retirement investments. So our goals are, in one respect, short-term. I’ve gotta get our monthly cash levels up in a relatively short period of time.

    We also want our rentals to sustain us throughout our golden years. But I refuse to wait years for a property to make me money. I always want to clear about half of my rent as profit the first month rent starts coming in. If I can’t do that, I won’t buy the property. If I can do that from day one, it not only cash-flows now, but from here on out, too.

    So I guess I’m trying to play both sides of the field. So far, so good.

  2. Okay, here is my situation. I have seven rental properties; three are mortage properties, and three are signature loans. My question is should I continue to buy homes using a signature loan while houses are cheap or foccus on paying the signatures off? I roughly clear 300+ a house.

  3. Great question. I am going to be on a different side of the fence than most real estate investors. I very much subscribe to the road less traveled. I own 100% free and clear rental properties. I am a cash flow guy — I could care less about appreciation to be honest. Cash flow is what i personally invest for. And I don’t want my cash flow at risk ever. Now there will be a lot of guys on here that will say you can get just as much cash flow from owning 10 leveraged properties as I can get from 1 of mine. That is true — but there is risk. Vacancies mean a whole lot to that guy — to me they mean nothing. That guy normally has to get tenants in quickly so his screening process is probably a little more lax than mine. My average tenant has been with me over 8 years. Try to find that statistic in a highly leveraged portfolio. There are minor expenses for me when I have vacancies but nothing that is unmanageable on even the most modest of incomes.

    Now there is a great argument for leverage and I don’t dispute this. But there are a lot of guys that made those arguments a few years ago that are flat broke now.

    Someone that is successful at leveraging is in the long term going to have a higher net worth then me — but some times those guys are going to lose and lose big. My chances of losing are very slim — and I will in time have considerable net worth. If I didn’t want to — I could live without working – my cash-flow level is signifiant. Most leveraged investors have to wait at least 10-15 years to be at that level.

    Lastly, the whole renters paying off your mortgage thing — well I don’t have that. My renters pay for my lifestyle and for more rental properties for me. To me that is a better bargain!

    Anyway — just my rambling on what has worked for me. I am good friends with many highly and medium leveraged (50% guys) real estate investors — and I understand their argument. i just prefer my method personally — each person has to decide for themselves! Good luck my friend!


    • I agree I’m 31 and my wife is 28 and we have two homes. One is a rental and the other is our primary. I have been paying down the rental at a rate of 1000+ on top of the regular payment each and every month. I should have it paid off in a total of 6 years of owning. I don’t want the liability risk. I want it to all be dialed at which point I can start again and as time goes it should accelerate

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