An Investor Analyzes: When Does it Make Sense to Pay Off Your Properties?

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If asked when it makes sense to pay off my properties, my answer during most of my investing career would have been never.

I do understand that people have different investing strategies, levels of risk tolerance, and goals — especially at different stages in their lifetime. For me, up until recently, my strategy has been one of leverage and reserves.

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Leverage, Cash Flow, and Reserves

If you own $3 million in real estate and have $2 million in debt against your portfolio, with $2 million in accessible reserves in another more liquid investment, then what’s the difference if the real estate was paid off or not?

For me, I would have lost hundreds of thousands of dollars if I hadn’t tapped into the equity I had built in my portfolio. At one point, I had acquired 11 lines of credit on my SFRs and apartments, which I was able to borrow against at 3-5%. Then, I lent that money out to fellow rehabbers at 15-18%.

People say you want your money working as hard as you do, but I wanted my equity working that hard, too.

Related: Want to Secure Your Family’s Financial Future? Before You Pay Off Your Properties, Consider THIS.

From an asset protection and accounting point of view, it may make more sense to keep the real estate leveraged with debt (especially if any of your properties are in your own name) and to keep pulling the cash out of the real estate (in other words, sweeping the account). Then you could put the cash into safer, more liquid buckets, such as retirement vehicles, insurance contracts, or even other asset classes. For example, notes, private lending, and tax liens could all be a viable investing alternatives. You can also write off the mortgage interest while your tenants continue to pay on the debt on your behalf.

Two Deals Instead of One

Often, I encounter real estate investors who want to use their money or their lines of credit to finance their acquisitions and rehabs. For a period of time, that’s what I did too — at least, until I had a better comfort level and more experience under my belt.

Today, instead of using my own money for real estate deals, I use other people’s money (OPM). Then, I use my money for other things like hard money deals and notes. For example, I can even borrow money out of insurance contracts to invest in note deals that pay a higher yield than the loan rate. Now, if you think about it, I’m doing two investment deals at once instead of one. Anytime I can use someone else’s capital to build wealth in a safe way, I will.

As for cash flow, I’ve always valued it more than equity. Over the years, I’ve seen equity rise and fall and even go away, but cash flow is the saving grace when this occurs.

When it comes to paying things off, I just figured my life insurance could take care of that if it’s something my heirs decide to do after I’m gone. That was my viewpoint up until now, but sometimes things change.

Financing Constantly Changing

For many people, paying down their properties can psychologically feel good, bringing peace of mind.

As I’m approaching retirement, I’m starting to reconsider some of my strategy. Would it be so bad to have some properties paid off in retirement? Maybe my heirs really don’t want my properties, and some now live out of state. It’s not like they want to help me take care of them.


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

Much of the change in my viewpoint is due to financing. Banks just don’t want to let me refinance too much unless I go commercial, and some of the terms are pretty crappy, with me taking on way too much risk. Some of my properties have higher rates from before the downturn, and things like property taxes and flood insurance have been starting to skyrocket. Township rental licenses and inspections, along with everyday maintenance, have been taking a real bite out of the amount of cash flow I get.

So, if you have money on the sidelines, maybe it’s time to work on paying some mortgages off.

Did I really just say that?

[Editor’s Note: We are republishing this article to help out our newer members.]

What would you do if you were me, continue to re- leverage or start to consolidate and pay things down?

Be sure to leave a comment below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. – an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for over 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.


  1. David Roberts

    Cant help but feel like i inspired you to write this just a little. I think in your last blog I had asked a question about this. Moving money around when it is your oen money instead of someone elses money, etc.

    If i didnt inspire this you can just let me think it. lol

    It seems like just a maturing portfolio to me. As you get older you want to deleverage. I guess i view higher risk situation as having no debt against the house because that’s why you pay the bank (to take on the risk while you have your cash back).

    If you think the US will just continue to a japanlike environment with negative rates, why would you not keep refinancing out at dirt cheap?

    Im only 37 and I have no idea what rising rate environmenta are like, but Im just thinking out loud. Thanks for the article!

    • Dave Van Horn

      Hey David,

      You actually did inspire this one! You should comment more often, it’ll give me more things to write about haha

      And it’s true about deleveraging, in my opinion. The issue for me is it’s no longer dirt cheap to refi because I have too many doorways in my own name. So I’m at the point now where if I were to go from having a residential mortgage or mortgages to a commercial blanket mortgage, I might face some issues. Not only would I have less favorable terms on my loan (i.e. worse interest rate, LTV, term, etc) but I’d also have to pay the transfer tax and have to pay commercial insurance on the properties as well. And on top of that, the loan may recast in 5 to 7 years and in that scenario me and my property would have to re-qualify for the loan. And if for some reason by that time I or my property can no longer qualify they could call the loan in it’s entirety. Yikes!

      As far as rising rates, I’ve definitely had my fair share of experience with them. In fact, when I started back in ’86 we were at 14%! And before that rates were even higher just a few years prior. But the good news is, personally I’ve never found the rising rates to be too big of an issue as long as I was still cashflowing. Also keep in mind that property values halt and eventually drop when that happens, so if you have capital to buy there’s at least some silver lining!


      • Joe J.

        Hi Dave,

        I enjoyed this article as a relatively new investor who actually has 15-year mortgages on both of my properties. (This was prior to discovering BiggerPockets or, frankly, thinking about it much harder than “paying things off better is faster, right?” At least they cashflow, slightly.)

        You mentioned having too many doorways in your name and the obstacle of paying transfer tax, etc. to go commercial. Do you actually hold substantial investment real estate in your name or are they in LLCs (or similar)? If LLCs, did putting them into those entities also incur the same transfer taxes (or other difficulties) you mentioned?

        Thanks, hope to read more of your material in the future!

        • Dave Van Horn

          Hi Joe,

          Thanks for commenting!

          I’ve made the 15 year mistake myself in the past. What I’ve learned is that although a 30 year mortgage has a little higher rate it’s better to take it just in case and pay it off in 15 if you want to rather than because have to. Plus ideally the tenant is essentially paying it and you’re writing it off so it’s all relative.

          And to answer your first question, I do both. I have substantial in both my own name and LLCs. And fortunately for me, they didn’t incur the same transfer tax because they were put into entities at the time of purchase.

          Thanks for reading! Hope to see more comments from you in the future.


  2. I cant give you any sage advice. You are very experienced…but the fact you are asking the question, should I pay down? must be coming from somewhere in your situation…listing to that little voice… is wisdom.

  3. Scott Trench

    I love this article. As a 25 year-old investor, I think that paying off my properties makes very little sense, as leverage allows me to build wealth and put other people’s money to work for me at a much faster rate. The key difference between me and someone about to retire, is that I am actively adding value. I am managing the properties myself, and work a full-time job which of course is a basis for me being able to get loans in the first place. If I were to retire, never to work again and unwilling to continue managing the properties, I cease to add value. I therefore cannot expect returns beyond market averages on my equity consistently.

    To that end, I’d want to deleverage to produce more stable cash flow that I could enjoy without applying effort for it.

    If I were to sum it up I’d say this:

    In order to grow – work hard and use leverage.
    In order to passively enjoy – eliminate your debts, have huge cash reserves, and conservatively estimate cash flow after ALL expenses, including management, handywork, etc, are accounted for.

    • You just described my life, Scott. I’ve been investing in RE for the past 25-years and have finally reached a point where the fruits of my labor — passive income — are paying off. Congratulations on getting this concept at such a young age. The 55-year-old “you” will certainly appreciate your efforts.

    • Dave Van Horn

      Great points Scott!

      I second Randy’s comments, congrats! I wish I had it as figured out as you when I was 25.

      I also agree with nearly everything you stated, my only qualm is with the huge cash reserves. I agree reserves are certainly important and necessary but after a certain limit I prefer access to cash in liquid investments that are generating income vs. cash in a bank account. It may be a matter of personal preference, but if my money can make money and it’s fairly liquid, why not? What are your thoughts?


  4. Edward Synicky

    Scott summed it up well. As I have matured as an investor leverage has little value to me and the amount of equity even less. It is always fun to add up our wealth at the end of the year but the grand total is simply a nice figure to view. But you can not spend equity and the things I want to do and the things I want to buy all require cash (flow). So yes when I was younger I did use leverage, but my goal was always free and clear properties for maximum cash flow. As you pay off your properties it snowballs and as the cash starts flowing in you realize that it is far more important than any grand sum on a piece of paper or the bragging rights that my investments return “20% a year” or some such number.
    This strategy has resulted in a very nice life style and an estate that will provide income for my heirs until they screw it up in a generation or two.

    • Dave Van Horn

      Hi Edward,

      Thanks for commenting. When I first read your post I wasn’t sure I agreed with you. I thought about if I deleverage, I’d lose my write offs (mortgage interest deductions, taxes, insurance, and depreciation). And I thought about if I don’t utilize my equity (for example through a HELOC, which is a tax free loan), I lose that liquidity and opportunity to invest in other things such as notes (which cashflow just like a property but with less management hassle). Not to mention I lose the asset protection through debt. And like I said in the article above, if I have enough insurance on me and/or my properties, my debt against the RE might not really matter by the time I pass it on to my heirs.

      And although I haven’t completely changed my mind on these points I also thought about what you were saying. And I understand as we get older, our priorities change. Sometimes piece of mind and a simpler life style/business is difficult to put a price on and can be just as valuable as more investments are to a younger investor.


  5. Paul MacInnis

    Great article, Dave. I’ve read something else you wrote regarding notes and I need to learn more.
    I’ve been leveraging fairly significantly during the growth stage but can ‘see the light’ and as people begin to bring their money towards deals I’m looking at I’m optimistic that I will start to pay down some of my current buy and hold properties.

  6. Jerry W.

    As someone who is hopefully 5 years or less from retirement your article really resonates with me. About 3 years ago I got extremely aggressive in real estate and added 7 houses in one year, while getting rid of a problem house. Suddenly our local economy went bad so I am concentrating on fixing the big ticket items like roofs, and just paying down mortgages until things ease up a bit. No sense in letting equity sit in the bank so I spend it all on fix ups or mortgage pay down. If I can get 2 or 3 properties paid off in the next 3 years I will snowball payments to keep paying houses off. This way cash flow rises and I retire.
    Growing a larger portfolio would have been nice, but it is important to listen to the market. Maybe if prices drop I will leverage again to move into bigger or nicer properties. I could live off my investments now and have freedom if they were all paid off. If I buy many more just managing them would be a full time job.
    I think you are deciding more play time and less work time might be in order. That is why you are looking at possibly paying mortgages off.

    • Dave Van Horn

      Hey Jerry,

      Can always count on you for a comment! And I can’t argue with your strategy, especially in a down marketplace.

      And you’re right about one thing, I could probably use some more play time and less work time! You must’ve been talking to Mrs. Van Horn! haha


  7. Gary Burnham Jr.

    This is why I love bigger pockets. You all talk about things I have conversations with myself about all day long. For me I have leveraged and grown the past 6 years and feel if I completely want to get out of the W2 rat race its time for me to pay down and increase cash flow and enjoy the cash. When I do that I can always do a HELOC on one of the paid off rental properties and buy another in cash if I wanted. As a lot of you are saying the idea of starring at a piece of paper seeing your holdings has less and less value as I mature and my family grows. As my kids grow I would rather use the cash flow to enjoy vacations with all of them.

        • Dave Van Horn

          Sure thing Joel. The concept is actually pretty simple, it’s asset protection through debt. Basically if I have a HELOC on a property, even if I don’t touch it, on paper it looks like I owe whatever that loan amount is on the house. So if I were to get sued, it would look like my assets aren’t worth going after.

          I learned the strategy, among others, from an Asset Protection attorney.

          Hope this helps.


  8. JP Hill

    I have been wondering about this type of transition for a couple years. I like to consider long range plans with broad strokes and adjustable time lines that can be tailored to the near term future market conditions.

    • Dave Van Horn

      Hey JP,

      Me too, that’s why I pay off some of my properties I’m still planning on putting a HELOC/Business Line of Credit on them. Gives you a lot of flexibility while still being all paid off, it’s the best of both worlds IMO.


  9. I am turning 50 this month so I agree with the leverage comments, yet I also agree with the authors comments to deleverage closer to retirement.
    It seems prudent to me that by the time you are close to retirement to sell some of your cash flowing properties to pay off the remainder mortgages of your nicer cash flowing rentals. Now you have zero debt, some cash flow. At this point you should also keep some money in reserves. Now you are a banks dream with several assets and no debt. Next figure out the taxes you will pay since there is no mortgage deductions. Then use the reserve money to buy real estate so you are tax free. The new mortgage deduction should be equal to the taxes you pay. Now you have debt free assets, zero taxes, and one mortgage debt that can be paid off with your life insurance (or sold) when you pass away. You can spend your retirement years the way you want with less risk and little to no taxes.
    I am not a financial planner, but I do have several cash flowing businesses. I move the cash from the higher volatile, higher risk to the lower risk, less volatile areas yearly, like my whole life policy. This way, I get to still leverage money, but build the nest egg and re-diversify yearly. If you think taxes will increase in the future like I do, its more about moving your money into tax free areas now that will help you in retirement later. Its about having some risk, but moving it to lower risk and ultimately decreasing taxes. Enjoy your golden years!

  10. I’ve decided to keep being leveraged for the most part. Eventually I view high probability of rising rates. Not in the next 3-5 year, but 5-10. If I am right, I will look like a genius with most of my properties fixed 30 years and mostly below 5%. In addition I will have far more options. I value freedom and options over security of having everything paid off. The nice part is even if I am wrong, I still think things will work out ok.

    • Dave Van Horn


      I’m hedging my bets as well. I just refinanced some of my higher rate loans on a few properties because it looks like rates are going up. I have some properties with higher rates that I have trouble refinancing, so I’m toying with paying them off (hence the topic of this article). And some properties I’m not touching because I’m thinking of liquidating them in the near future. Let’s hope we’re both right!

      Thanks for commenting.


  11. What caught my eye was this line, ” which I was able to borrow against at 3-5%. Then, I lent that money out to fellow rehabbers at 15-18%.” Why would fellow rehabbers agree to borrow from you at such exorbitant interest? It seems like that kind of interest would make an otherwise promising flip a really bad idea.

    • Scott Wang

      I believe he’s referring to a “hard money loan” – they’re usually very short term (less than a year?) and come at a high interest rate because traditional banks/lenders won’t loan money for that particular situation.

      • I know he is referring to a hard money loan. However, that changes nothing. Rehabbers discover all kinds of things after they open up a house. “Short-term” can become “not-so-short term” in a heartbeat. Then after the rehab is finished, the rehabber needs to sell the house to pay back the loan. Selling can take months, and this kind of interest can eat up all the possible profit. I get that rehab loans can be riskier, so if a conventional loan is 3-5% (per article), how about a rehab loan at double the interest rate? 15-18%, though common, is outrageous and predatory.

        These hard money loans have done a lot of damage to “greater fool” rehabbers who believe the HGTV hype that it is easy to be in and out of a project within a week to two months.

        • Dave Van Horn

          Hi Katie,

          Thanks for commenting again. I understand what you’re saying, it’s not for everyone and by no means am I recommending a newbie apply this strategy without any experience under their belt. But I should clarify that what we’re talking about here is not actually “predatory lending” because it’s not a residential loan to a consumer, but rather a commercial loan to (hopefully) an investor that understand the risks/rewards of the deal.

          As for the rate itself, I also want to mention that it isn’t chosen arbitrarily or out of greed, rather it’s determined by a free market. This common rate is accepted by the community in relation to the risk and cost of capital to Lenders and their business models.

          And hey, if you can get cheaper private money elsewhere, go for it! There are plenty of private parties happy to accept less because they’re okay with a smaller return and it’s not dependent on their business model. I’ve also seen lower rates for seasoned investors, so when you’re new it may be 18% but when you’re experienced professional lenders could offer rates as low as 12%.

          The last thing I want to add is that it’s a two way street. Just like the lender can make money on interest and penalties, the borrower can also make money on the draw. So for example, say you were to borrow $15K on your first draw for repairs and managed to finish the expected work for $10K. Coming in under-budget, can make you a profit of $5K which is still part of the loan. And the better you get at doing rehabs, the more money you could make on the draw with greater frequency. The lender doesn’t mind because borrower’s often use the excess from the draw to make payments (as to avoid out of pocket expenses) until the loan is paid off in full when they sell or refinance.


  12. Dave Van Horn

    Hi Katie,

    These types of rates are actually quite common, mainly because these are only short term rehab loans. Traditional banks usually won’t lend for rehab projects (unless maybe you’re a developer or construction company), and since the term is so short it can be a win-win for both parties.

    – Dave

    • I know that “short-term” is how some tax preparers sell refund anticipation loans (RAL) of 36% APR. It only two weeks so the total interest might be a paltry twenty bucks. At least the term for a RAL is a known quantity. Often for rehab projects the “short-term” can turn out to be quite long indeed, even a year or more. The interest could turn a promising project into an actual loss. The fact these rates of 15-18% are quite common is not an argument in their favor. I am sure anyone can think of a number of common practices that are now considered wrong.

      • Adrian Stamer

        This is a business, not a consumer targeted lending activity. So the rehabber miscalculates runs out of money and walks away from the project. Months pass before the lender can even go through the long foreclosure process and during this time the property could end up with even more issues potentially leading to large losses by the lender. The risk and demand of the loan reflects the rates.

        It’s business not charity

        • How about business occupy some reasonable middle ground between charity and usury?

      • Jade S.

        If the marketplace supports those rates for a short term, higher risk proposition, so be it. Expecting someone to put at risk funds on a speculative project at a rate that doesn’t fully account for the prospect of loss doesn’t make economic sense. And the rehabber is under NO obligation to use such funds.

  13. Patrick Liska

    Nice Article, I am investing so that i may retire from my line of work and the main thing, for my Heirs. but why not provide for them now? you never know when your time is up and you may never reach that goal of paying all your property off. as stated by you and others leveraging is the way to buy more or pull more money out for you to use other ways. why not pull it out and start distributing it as gifts ? also there is a benefit for you to having these properties and making income, they are considered passive income, in the eyes of medicaid and Medicare, passive income does not count against the amount of care you would receive, they do not consider that income,

  14. My situation is own a drug store pai4 million, loan 3 million at fix rate 6.11 % for 25 yrs. After 2 yrs the can renew lease up to 75 yrs at annual option. if they do not, property will be free n clear, land value 1 million for heir to get cash with no tax to pay, stepped up basis. My COC is 5% on my investment, happy now, good or bad for you, no idea.

  15. Scott M.

    I always been somewhat baffled at the blow back most have to paying off mortgage or paying cash for a property. The notion of using “others people money ie: bank” is not as simple as it sounds. You will have personal guarantees on that money you are borrowing, so if an investment starts going bad or negatively cash flowing and the investor decided to stop paying/walk away, well it’s not that simple. You are on the hook and the lender will come after you. I get most wanting to acquire more properties quickly, but one bad one can do a lot of damage. If you have a portfolio paid off, albeit much smaller number of properties obviously, you have much more safety and security. The disdain for paying off properties is usually short sighted in miy opinion.

    • Dave Van Horn


      I think there’s a time and place for both strategies. I agree that the model is designed so the borrower takes on more of the risk. The same goes for those who borrow money from banks as well.

      If you’re still working and have income, I think leveraging using Other People’s Money or a HELOC makes more sense. Since you’re limited to your own capital, you can acquire more properties. The tenants are paying the mortgage/loan for you while you cashflow, you have more write-offs, more potential appreciation, and you have more mortgage pay-down. Not to mention the potential for more equity buildup. And you could have less market risks considering your portfolio would more likely be diverse.

      But obviously no one should spread themselves thin or have no reserves. And certainly leveraging with OPM with little to no experience, I wouldn’t recommend. Shadowing someone who uses and/or lends hard money is a great start to understanding the in’s and outs of the business. It might not seem simple at first, but speaking from experience that’s how I learned.


  16. Jim Piper

    Just an observation. Leverage works both ways. I saw a lot of investors go broke back around 2008. To a man (or woman) they were all leveraged. Values were going down, and in some cases rents were under pressure. If you were highly leveraged, there’s a good chance your properties were under water, at a time when your cash flow was narrowing, if not disappearing. At that point, you probably won’t be able to pay them off. The time to pay loans off is in the good times. Btw, I don’t expect to convince anyone of this. But for me, most of my properties are free and clear. I’m a believer in low leverage.

    • Dave Van Horn

      Hi Jim,

      I agree with you to a point. I was fortunate enough in down markets since my cashflow never took too much of a hit. And where I’ve invested, the markets never dramatically shifted so my leverage was never a problem. I saw the swing markets take the hardest hits. Also I should be clear, when I talk about leverage I don’t necessarily mean high or fully leveraged. And I certainly don’t mean investors should leverage their properties enough and not cashflow. All of my properties that are leveraged, still cashflow nicely.

      Who I’ve yet to hear from are those who have taken their leverage and invested in a different asset class. Why pay down mortgages (or even reinvest in the same vehicle) essentially having all your eggs in one basket?

      Not trying to single out your strategy Jim, preference, piece of mind, and how an investors wishes to spend their time goes a long way as well. Just trying to get at a greater idea from the audience at large.


      • Colin Reid

        We’ve been crunching numbers and decided not to down our loans, in favor of using that money to diversify our investments. We have 3 cash-flowing rentals, and mostly use it to build up emergency funds and save for future down payments at this point. All our excess money from our day jobs is going elsewhere, to more traditional investments (401k, TSP, IRA, etc). We’re taking a few years off acquiring real estate to get the rest of the financial house in order and build more capital. So in a sense, we’re leveraging into other asset classes since leverage allows us to allocate our money elsewhere.

        • Dave Van Horn

          That’s great Colin.

          I did something similar. I stopped acquiring hard real estate for the close to 10 years (especially due to the downturn since my market has at best remained stagnant). But since then I’ve been able to build businesses, start funds, and invest in notes.

          Best of luck and thanks for chiming in!

  17. Scott Wang

    I’ll echo all the other comments you’ve gotten. My plan (as a 35-year old) is to use leverage to build my portfolio until I’m in my 50’s, then stop acquiring and pay off the mortgages for the next 10 years. Should create a decent retirement with no mortgage payments. 🙂

  18. I have about the same real estate worth as you do, but only ~$500K in mortgages. Soon to be a lot less, as I am paying off a mortgage of ~$110K this year.

    I like less leverage. I am quitting my Ft job, and I want to travel. I still have to manage my 25 renters, but travel within the USA is very do-able and managing the tenants at the same time.

    • Dave Van Horn

      No Nonsense Landlord,

      Not to upset the apple cart here, more-so just thinking out loud, but why put that money towards your mortgage? The only way I can see that making fiscal sense is if you didn’t have an investment vehicle that didn’t have a higher yield than the rate of the mortgage on your property.

      Plus, why not just let the tenants pay the mortgages for you? You could use that $110K this year alone to invest in other cashflowing investments. For example, let’s say conservatively if I bought $110K worth of re-performing notes (at the average price of $23K per note) I’d have enough money for at least 4 notes that cashflow about $1200+/month (with each note cashflowing the average amount of $300/month). Now that doesn’t account for the servicing fees, but those are probably going to pretty modest and that takes care of any hassle that comes along with the re-performers (i.e. tracking payments, borrower’s accounting, etc.).

      So, in this scenario I’d be making $1200/month for however many months (could be anywhere up to 30 years worth of payments) plus in this example I’d still get to keep my properties (that I cashflow off of) and the write offs that come with it. And with the tenants paying the mortgage, eventually they’ll be paid off anyway (unless I choose to leverage and re-leverage in the future). Plus with that extra capital I can pay a management company to deal with all the tenants and travel wherever I want. Talk about no nonsense!

      Just an alternative strategy I thought I’d throw out there. You could also employ a similar strategy by buying 3 or 4 properties (which would cashflow about $900 to $1200/month after PITI), and now your net worth and portfolio are much larger but of course that comes with more management than note investing.

      Thanks for reading.


  19. Thomas F.

    While I am new to real estate and cannot give any sage advice to an expert I feel compelled to ask, how much have you discussed this matter with your heirs and what was their opinion on this issue? If this issue was just about how your investments impact you personally then the question of your heirs would not even come up, but from seeing you mention them multiple times in a relatively brief article this makes me think that they are a large factor in your decision making.

    • Dave Van Horn

      Hi Thomas,

      That’s a good point. I have discussed it with my heirs quite a bit, and I’m sure other investors here can relate when I say this, they have pretty much zero interest in managing my Real Estate portfolio! That’s whether the properties are leveraged or not. And who can blame them! They want to do what they want to do, and if I can leave them something behind when I go, they’re all the more grateful.

      So with that in mind, without getting too personal, we’ve all agreed on building and maintaining a nest egg as long as possible. Maybe unlike other investors, there’s no stopping point for me. I live to work, rather than work to live so I don’t plan on winding down completely by age 62 to 67. I just want to make money easier by then and if I can leave behind capital and/or a portfolio of liquid investments that generate capital for my heirs to do whatever it is they want, then everyone’s happy.


      • Thomas F.

        Is there any chance you would be willing to write an article about this very process? Discussing with heirs, what to do if they say “Yes I want them” or “No thanks”, how to cash out while minimizing tax exposure, what sort of entities would be best for transferring to heirs or what kind of investments should the liquid cash be put into if the heir wants nothing to do with real estate?

        I am 24 so this will not be an issue for me for quite a while but I have not seen any articles that go into the details of this subject(perhaps I have not looked hard enough) and I am sure there would be plenty of other people who would be curious as well. Just an idle thought.

        Thanks for the reply,

        • Dave Van Horn

          Sure thing Thomas! That’s a great idea for an article.

          In the meantime if you haven’t already, you should check out the book “Missed Fortune 101” by Douglas R. Andrew. It will definitely point you in the right direction and a great place to start.


  20. Amy A.

    If your properties are not cash flowing well due to flood insurance, property taxes, and fees, pehaps you should consider selling them and investing in a different area via a 1031 exchange. Otherwise, I don’t see any reason to change what you are doing. With mortgage interest rates so low, it makes sense to keep them leveraged.
    The majority of my properties have commercial mortgages which will adjust in a few years, so I understand your concern about the risk. However, if your cash flow is robust enough to absorb a large interest rate increase you will survive. Alternatively, you could use your cash on hand to pay down your mortage when you refinance and thereby maintain your high cash flow.

  21. Deanna Opgenort

    So with only 1 door to my name I’m no investment expert, HOWEVER in my “day job” last month I sat in a room full of several hundred large commercial real estate folks.
    When I say large, I mean some of these guys last year brokered commercial leases that start with a “b”, as in “Billion dollar LEASE agreement”. That big battery plant Tesla’s building in NV? Yeah, that got the nod for most floor space, not largest $ amt. Just sayin’. These guys aren’t amateurs, or even your local REI club.

    Anyhow, the standard real estate conference quiz is “how long is this market gonna last”.
    Nary a hand in the air for “5 years”, 60% voted “maybe 2 years”, solidly 1/3 checking in at “1.5 years” & a smattering at “less” (along with a few folded “not gonna say” arms).
    So. If there’s a good chance that the market might flatten or turn down within the next 1.5-2 years, does it make sense to deleverage or at least approach leveraging with caution? Probably, especially if you are in a position where it’s a choice you can make, and you want less stress when (not if) the market turns. Everyone’s situation varies, but while I am CONSIDERING a second property this year, it’s going to have to be a screaming good deal and I’m going to have to have good reason to believe it will entirely support itself even in a bad economy.
    For what it’s worth, I listened to similar groups in similar (though smaller) conferences starting to raising red warning flags around 2005, and in 2008 the majority were firmly voting that a solid recovery in commercial RE was likely no earlier than 2013.

    • Dave Van Horn


      Thanks for chiming in!

      The market is always a factor to consider. A book that really changed my thinking about it that I highly recommend is “Timing the Real Estate Market” by Robert Campbell.


    • Colin Reid

      A lot of that seems to depend on your market. In most of the areas we’re in, they’re smaller towns, and didn’t get hit as hard as the big cities in 2008. Rents certainly didn’t take the hit that values did. Consequently, we haven’t come up much since then, either.

  22. Bradley Benski

    I also think of paying off the mortgage in terms of the investment. So for example, if I could invest 100K in a new property and create 1K per month of income, or pay off a 100K loan and reduce expense by 735 per month then the invest in new property wins. Likewise, if invest 100K provides 1K per month of income, but payoff 100K mortgage results in reduced costs of 1.2K per month then payoff is a smarter choice at the time.

    I have to admit there is something about the feel good of having no debt on properties and ultimately it comes down to one’s own analysis of investment objectives and goals.

    • Dave Van Horn


      I can relate to what you’re saying but I cant stop thinking about investing $30K in 3 properties rather than 100K in just one? Consider this scenario. you purchase three properties (mortgaging $80K a property) and let’s say in this example market rent is about $1100/month. Your monthly mortgage payment would be $405.35 (at 4.5% on a 30 year mortgage). So in my area, let’s say, with taxes,insurance and other expenses you would owe $755 a month but properties at that price range tend to rent for about $1100. That’s $345 difference is your cashflow per month for each property. Multiply that by three, accounting for each property and your cashflow would be $1035/month. It’s still the same cashflow as buying one $100K property but now you’ll have $15,000 left over for reserves, plus you’d own 3 houses and have three times the write offs and three times the appreciation.

      The only downside is the maintenance and management on three houses, but you could adhere to a similar model that illustrated above with re-performing notes. Less hassle and maintenance, same cashflow.


  23. Lance Robinson

    Great article! Resonates so well with me. I’ve decided over the past month, that I want to begin paying down my portfolio and unleverage a good chunk of it then re-evaluate. It would be so nice to have most of it paid off and feel good about taking on a leveraged apartment knowing that in a bad economy, you will be able to cover for everything.

    • Dave Van Horn


      Thanks for the comment!

      Not sure I’m understanding the correlation though between de-leveraging your residential to take on a leveraged apartment building? Other than maybe having a better chance to qualify for a traditional commercial bank loan? Could you elaborate?


  24. Karen F.

    Totally struggling with this myself. I have very little debt (roughly 30% leverage), a sale pending on a debt-free SF that will yield me nearly $400k cash .. and I’m tempted to keep it on the sidelines, *possibly* using all of it to retire debt, or at least to pay down (but leave open) my LOC and put a chunk towards my highest interest loan. I do have a renovation in the works, so I’m still investing. But I may even sell another property, because my neighborhood is just HOT at the moment. In addition, lots of people are buying multifamily in my market, which I think will be my hardest to sell. My plan was to shift out of multifamily and into SF rentals, for easier re-sale in future years (I think my market is going to see millennials shifting out of luxury rental and into purchasing.) I’ve always heard that if everyone is buying, you should be selling — and it’s a strong seller’s market here, now, even for multifamily. I had a stretch goal for net worth at 50 — turned 50 in September, and the goal is in the bag. So …on the fence. I’ve been living on my investments since about 2010, and I’m a single mom putting her kids through private school with college ahead, so I’m not looking to get out by any means, but lowered risk has a strong appeal at the moment. Love to hear the input, especially from so many of you who are so much more diversified and smarter than me!

    • Dave Van Horn

      Hi Karen,

      Your strategy definitely seems viable especially if your biggest concern is risk (and simplicity). But the trade off, in my opinion, is your not maximizing cashflow or equity. What’s the rate of return of the equity in your property? If the house is paid off or you’re not utilizing your HELOC, the answer would presumably be zero.

      Now, if you’re not looking to get out of investing and want to put your HELOC or $400K to good use, there are plenty of options. Other than hard property, if you were to purchase a modest re-performing note or create a hard money loan for an investor at 10% (which is below the average rate), you’d still yield $40,000 a year. And those options are both nearly completely passive.

      Either way I do like the idea of having the HELOC for liquidity and asset protection.


      • Karen F.

        Thanks for the input, Dave. Sale went through and net was $353k- hooray! I am going to use proceeds to pay down LOC ($100k in use on $175k line; pay down and leave open), fund my current renovation ($90k) AND purchase another single family and renovate that (purchase + reno = $265k.) So, before the renos are complete I’ll be back on my LOC for about $110k. Hope to profit $100k on both renovations for $200k gain (or one college education.)

        With a portfolio of 6 properties (2 multifamilies and 4 single families) I’ll still have a very modest debt to equity ratio.

        My multifamilies are giving a good cash-on-cash return, but if you look at it from a return on equity at current value, I’m really only yielding at 10% — so following your advice of liquidating and doing a hard money loan or buying notes sounds like a lot less work. I’ll start researching notes in earnest, and any advice on getting into this market, which is new to me, would be appreciated!

        Also, a 1031 Exchange question — can you exchange a multi-family for a single family? I thought you had to go up in size (I saw Joseph Quarto was thinking about exchanging a 5 unit for a 2 unit — is that permissible?)
        Thanks everyone!

  25. Joseph Quarto

    What a great thread. I feel I get caught up too much worrying about TAXES, whether to 1031 exchange, etc.

    Here is my “good, but confusing conundrum” We are retired with SS and a Pension, 401k, etc.. Have owned a Seattle 5 unit multi-use building for 15+ years with good longterm tenants that we presently also live in for free since we sold our house last year. GREAT Cashflow, equity & appreciation (owe $52k on a 7 figure building). We have a $200k LOC on the building & are preapproved for a $400k SF home purchase.

    The building is in pretty good condition overall. However, it is an older building, but I am tired of Seattle, I DO NOT want to live here anymore, we want to travel, but not be too far away from an Airport, etc. So we are looking to buy a rehab property near a lake a couple hours from here with the $200k building LOC. Then a months afterwards or sometime next year, sell the building, use the $$ in a 1031 to buy a nice SF with a MIL that we use, to stay nearer the City. We would likely then pay Taxes on the “Boot”. But we would have 2 homes paid off, some rent income and good chunk of cash.

    Is this stupid? Would I then refi the Rental House & the Lake property to pull the cash? What happens taxwise to the $200k LOC that I use to buy & rehab the Lake property?
    OR should we just buy the Lake property OR a SF house/condo with the Pre-approval $$ & keep the building.

    I keep thinking I am over analyzing everything.

    Oh and by the way, I am in close negotiations with someone who is very interested in buying the building ASAP.

    Any thoughts, pointers, very greatly appreciated,


    • Dave Van Horn

      Hi Joseph,

      Thanks for commenting. The good news is you have options.

      After reading what you wrote, my first thought was this: Why not keep the building, turn it over to a manager and borrower the money out of it to do whatever you want? Since you cashflow so well, it sounds like you could borrow out the money from the building, the tenants could pay back the HELOC and you would still cashflow.

      Or if you’re looking to liquidate, you can get creative if this is a commercial building in an LLC because in that scenario you could sell shares in the LLC instead of the building itself.

      I would suggest talking to an investor friendly tax advisor. I have a friend at Financial Gravity Holdings named John Pollock you could reach out to. This is there website if you’re interested:

      I think once you get tighter on your personal goals and taxes, the right exit for you will be made clear.


  26. Andy H.

    I really appreciate the article (and all the great comments). Though not as close to retirement, we’re at a bit of a transition point in our lives, and this really got us thinking more about our long-term strategy for our investments. We’re pretty sure we want to move into the note space as part of this strategy (still researching that part), but now we are re-considering whether it might also make sense for us to pay down some of our mortgages. Thanks for the food for thought!

  27. Jeff Brown

    What often gets lost in the shuffle are a principle, and some simple math.

    The principle is that capital growth is your best friend getting to retirement, while cash flow is your best friend in retirement.

    The simple math? If an investor has 4 4-plexes they acquired with 25% down each, and assume the annual cash flow is about 10k or so. Once the last payment is made on those loans, assuming they began in the last 5-8 years at prevailing interest, the following month the retirement income zooms by a factor of at least 3.

    Tripling your income via no debt appears to be an attractive option.

    • Michael Greenberg

      Jeff – you read my mind and I was just about to post something similar, though not as profound because I was going to leave out the second paragraph, which is the most important piece. I only started to move in this direction recently and wish I would have started this in my 20’s and 30’s instead of playing into the long term financial investment mutual fund strategy. I used to think cash is King, now I think cash FLOW WILL BE KING and I’m working hard in that direction so when I’m 65 (50 now) I can reap those benefits.

  28. Frankie Woods

    Loved the post! It is so relevant, yet not often talked about. I’m always looking to learn about ways to create multiple streams of income. As such, I would love to get a copy of your Note E-book so that I can learn about a new area of investing. Thanks for sharing this!

  29. Derrick Williams on

    I had this brilliant plan to own 10 rentals in 10 years through leverage. Then start to snowball my loan payments to increase cash flow as retirement set in. Things didn’t go at the pace I expected. As of yesterday I’m sitting on 9 rentals with another in my sights at the end of the year. It has only been 18 months so that puts me almost 8 years AHEAD of schedual!!

    So now I’m trying to set new goals and plans. Right now I can squeeze out 2 rentals a year. If I start to snowball loan payments at house 10 as originally planned it could increase my buying power by several more houses a year. Or, I can just keep on doing what I’m doing. It’s very hard to decide on but eventually the bank is going to put the breaks on until I knock out some debt.

    Guess I could keep going until the bank says no then start paying off stuff…..I’m open to suggestions!

    • Dave Van Horn

      Hi Derrick,
      Wow, congrats on purchasing 9 rentals in 18 months!
      I was in the acquisition phase, purchasing as much real estate as possible, before the bank cut me off as well, then I went into lending private money, and then eventually investing in institutional notes. For me, it made more sense because I was making more through lending private money than what I would’ve saved by paying down my properties, not to mention would’ve lost some of my write offs. Hope this helps!

  30. Here is a model that has worked and also gives me the freedom to write all-cash low-ball offers: pay off my primary residence and then open a HELOC on it. You cheap money? I think a HELOC is the cheapest there is. Then pay down the HELOC with your rent income. Repeat process. I’ve now got 31 doors worth about $2M against $200K of debt. I sleep very well at night because I don’t like owing money!

    • Dave Van Horn

      Hi G Monet,
      I’ve utilized my HELOCs to purchase properties as well. Although, I prefer to build equity through appreciation rather than paying off extra principal. That said, we all have our own preferences and comfort levels when it comes to how much we leverage our portfolios. It sounds like you found what works best for you. Congrats!

  31. What is the emergency to pay off these loans? The money is extremely cheap by historical standards. If you have purchased a wise investment, a good property in a good area w strong reason to believe it will stay that way, why pay off the note, you are getting the write off on the loan and taking opportunity off the table for your own businesses expansion. On the one hand you say use opm but in the other breath you say pay it off to be safe or maybe loan it to somebody else where it will be much riskier, I would rather have greater control by controlling the deal myself.
    Lastly the mindset that you are getting older and somehow you need to have all your equity liquid at the time of death is problem, is a fallacy. If you did die w a bunch of leveraged properties it would really be no worse for your heirs, they would sell at the stepped up prices and keep the equity – the debt that was closed out when they sold. If you do not want as much management headache as you move toward retirement age thats a different story and it matters little whether you are leveraged or not. I’m 54 have alot of properties and no plans on slowing down for the foreseable. If I did want to slow down I think I would stop looking to buy and get management help, cheaper than selling and losing all the rent to get what?

  32. Claude S.

    In my opinion it depends on what stage of life you are in. I am a few years away from retirement so taking out 30 year mortgages now makes no sense. I probably won’t be alive in 30 years to enjoy the higher cash flow. Paying cash now for properties and building passive income which I can use during retirement makes sense for me. And allows me to sleep well at night even if the market dips.

    • Dave Van Horn

      Hi Claude,
      I agree that paying off properties can bring peace of mind. As I’m getting older, I’ve had mixed feelings about it. Personally, I’m paying off a few properties, while continuing to leverage the equity from my other properties and either lending private money or investing that money in notes.
      That said, it sounds like you found what works best for you, and you have a solid strategy in place.
      Best of luck!

  33. Steve Vaughan

    I’ve enjoyed your article and all the comments, Dave. Lots of folks out there crushing it – so huge congrats to all!

    Not all debt is the same. I am perfectly comfortable leaving long-term fixed rate mortgages in the 3s and 4s alone without accelerating. They aren’t bothering me and a child could beat a 3-5% passive return in their sleep.

    Commercial debt, however, is a different animal and I am paying off or refinancing all of mine with l/t fixed private money aggressively.

    Commercial lenders bother you every year to submit your tax returns and PFS. Then every 5 years they basically make you re-qualify at a new adjustable rate. Some aren’t just callable, but expire every 5 years. They make you originate the loan again with a full $3500 appraisal and full underwriting. Rate risk and PITA. No thanks!

    On top of all this, commercial lenders make (me) you sign personally and give commercial guarantees and rights to rents of every business you own. At lower LTVs. When they are triple covered, I’m not. I am at a much higher risk as a borrower and they need to go bye-bye.

    Something to consider besides life stage or return maximization – commercial or residential debt. Cheers!

  34. Eric Jones

    Hi Dave, great article. First of all, this is a great problem to have! I have some family members in a very similar position so it’s something I’ve thought about – lots of properties with no real desire for more property, but plenty of cash, untapped equity, and monthly cashflow. If it were me, and I already had exposure to notes and private lending, I’d consider diversifying by looking outside of real estate at muni bonds in my state of residence for double tax free income before paying off mortgages (assuming you have low interest rate mortgages). For example, if I can pay off a 5% mortgage or invest in a 5% muni bond, I’d choose the muni bond since my pre-tax equivalent return would be 5%/(1-tax rate). So if I assume a 35% tax rate, the muni bond has a pre-tax yield of 7.7%, which easily beats out the 5% mortgage. Now if I had a steady supply of good note deals and/or lending deals maybe I’d choose those over muni bonds, but as my wealth builds I may see some value in diversifying into other asset classes.

  35. Aloha Dave,

    I never thought that I would get old when I was younger. And then, one day, I looked in the mirror at my grey hair and ugly body and realized, OMG, I am old now! It wasn’t pretty but once I accepted the reality of it, I began to slow down my investing.

    You are wiser than I ever was because you are realizing that time is moving on for you and when you are older, you will be prepared.

    Your article about paying off mortgages or using leverage was excellent, as well as all the comments your readers made. For peace of mind, I would love to pay off mortgages and get higher cash flow, but mortgages come with their own kind of peace of mind – some protection from dirt bag law suit predators, and automatic payment of insurance and property taxes. However, Jeff Brown’s (one of the smartest people, imo) model of living mortgage free in the sunset years with higher cash flow is very appealing.

    I recently re-financed 2 properties in Hawaii at 50% LTV, with a 30 year (yikes) at 3.5%. Beautiful rate but I still pay almost $3000/month on each. I live in one and rent the other. I could possibly pay off one, or half of both.

    It would be a waste of equity. And I still would be paying a rather high monthly mortgage.

    I recently bought a condo/hotel unit with cash, and get about $900/month net cash flow from it. Potentially, I could use the 2 Hawaii properties’ equity and get 4 more condo/hotel units, but the equity would be financed and incur monthly payments, resulting in far less net cash flow than the single unit.

    I think at this point in my life, I have a lot of thinking to do. What do I need to live a life of simple luxury, and how do I use what I already have to get there?

    Mahalo for your thought provoking article!

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