If You're Well-Prepared, You Can Lower Your Loan Length

I will never understand why someone will put a $60,000 car on a five-year note but won’t put a $60,000 house on an eight- to 10-year note. At this stage in my real estate investing career, putting a house on a 20-year note to profit $300 per month is not worth it.

I’m not saying $300 per month isn’t a lot of money. What I’m saying is look at the big picture, and you will see giving up that $300 now will save you big in eight to 10 years. I’m not living off the income of my short-term note properties because I want them all to be paid off sooner so I can leverage them in the future and increase my net worth.

Be Experienced

Don’t do this if this is your first few deals or cash flow is not strong—or if you don’t have a W-2 job to help support this. This is not for the weak of heart or the newbie investor. This is for those of you that are on a good path with investing and want to crush your debt and build your net worth and equity. If you have great, long-term tenants then this type of investing is for you.

The investors that can handle the curve balls that are thrown at them can take this on. Make sure you have a sufficient reserve. Make sure that your properties big ticket items are in good working order such as the roof, furnace, etc.

I like to start off with turnkey rentals that I either purchased or recently flipped. You want to make sure everything is going to have at least a 10-year life span left, and that my tenants are in for the long haul and not just a 12-month lease. I also make sure I have a back up plan such as a savings account or line of credit to use just in case something bad happens.

Don’t Live Off the Income

When you’re putting a property on a very short-term note, don’t expect to live off the income. You don’t want to buy a negative cash flowing property, but you also don’t want to have to depend on paying your personal bills with the profit. I like to take every dollar I make from these short-term notes and put it right back in the principal. This way I am paying down the debt with the renter’s rent check, while simultaneously increasing my net worth and increasing the equity in the property.

When running the numbers on a short-term note I am always conservative on vacancy, repairs, and unexpected problems. This way when things go great I have more to throw at the principal. Again, do not live off the income or attempt to live off of it. Things can go wrong. Things will go wrong. Be prepared.

Pockets of Joy

I like to look at my short-term notes as little pockets of joy that, sooner than later, they will be free and clear and catapult my real estate portfolio into much larger deals. By using shorter notes I’m creating little savings accounts all over my market. These are on auto pilot thanks to my property manager. I have discussed this with my property manager and we have adjusted our renting practices to accommodate this. We generally give rent breaks to those that sign longer leases and are more lenient on our pet policy.

All throughout my portfolio are these single-family homes that are going to be paid off all at different times, which are essentially getting paid for by my tenants. I’m not living off the profit, and thanks to my property manager I’m not getting calls about it. Once a month I get a report on my portfolio and adjust my investing plan if needed.

My Emergency Plan

When I started this process I had a large line of credit and plenty of passive income to fall back on. Now that I have been doing this for a few years and built up substantial equity, I no longer need that line of credit as my primary back-up plan. It is now my back up to my back-up plan—two is one, one is none.

Because most of my properties’ loans have had a huge chunk paid down, I have more equity to fall back on in case something went wrong. For example, one of my loans is 22 percent of the property’s value. In case of an emergency, I can barrow money against it to fix that property. Now this is only in case of an emergency, but it is there if I need it.

Another great emergency plan, if needed, is selling. Because the loan is being crushed down at a remarkable rate, and I have more equity in the property, I can afford to sell at a discount if I need fast cash. With paying closing costs, real estate agent commissions, etc., I will still walk away with cash at closing all thanks to my short-term loan. This is my absolute last plan of action but at least my lender and I know it’s there in case I need to sell.

The Exit Plan to Expand

You will be sitting on a large amount of equity and need to make a plan. There are a lot of different ways you can approach this. My plan, as of this writing, is to sell either as an entire portfolio or in small groups. My plan is to use a 1031 exchange in order to buy much larger multifamily properties. Of course with owning these free and clear I have a few options. I can either live off the income or use them as leverage to buy more property. Before doing anything, you need to talk to a tax consultant to come up the best plan for your future.

No matter what you decide to do down the road, you will have a lot of equity by playing the patient game and crushing your loan. By being disciplined and sticking to short-term notes you have not only saved mega bucks in interest, but you have greatly increased your net worth and buying power. Just make sure that before you go down this equity-building journey you prepare for the worst and stick to your plan.

How do you go about lowering your loan payment timeline?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.