When to stop and pay off

Question

David Krulac · Answer

@Steven Bays

1.  There is no rule, that I'm aware of that governs when to pay off mortgages.

2.  Rules of Thumb, or Rule of Thumbs, not sure which is more correct, are generally like old wife's tales, some kernel of truth, but probably not applicable.

3.  Its personal and depends on you. (like adult diapers)

4.  Debt is a big issue, and there was a lengthy discussion here on BP a couple months ago of Dave Ramsey versus Robert Kiyosaki.

5.  I think that there are 3 phases in an investor's life, 3 real estate cycles.  The first is the acquisition phases, where you buy a  bunch of property, and finance a lot of debt to do it.  Then there is the middle phase where you take less risk, maybe acquiring fewer properties and less debt, maybe better quality properties or larger investments.  The the last phase, little to no acquisition, little to no new debt, jettison under performing properties, paying off debt, keeping the cream of the crop properties and living off the fat of the land.

6.  imho forget all that good debt/bad debt ... its bull hockey.  If you need debt to acquire and grow, you use debt.  When you don't need it any more, you discard it, like training wheels on a bicycle.

Kyle Hipp · Answer

I personally take out 15 year ammortization notes on my properties. This pays them down faster and forces me to get great deals because I still must cashflow just as well as those that plan with a 30 year ammortization.  By paying down the mortgages faster, I have a better LTV ratio and thus more options as time goes on. During the last couple years, little as 5 years away I could pay off a mortgage early with a couple months of cashflow savings if that fit into my plan, but this way I have the option.

Like others have said this is about personal preference. I prefer to have as many options available to me as possible which allows me to be nimble. If property values go up, I'm good. If property values go down, I'm still good. If rents increase or decrease, again I still have options. I would hate to paint myself into a corner.

John Rooster · Answer

When you reach the point where you have more money than time.

Chanté Owens · Answer

When I lived AZ, I met a gentleman when I first moved there. At the time I met him, he owned four SFR. His story was awesome, but I'll shorten it. He didn't have nor make a lot of money, but he received about 10k from the death of a family member, so he used that to buy a 2bd/1bth home. He rented it out, and rented a room from a friend for few hundred a month. The amount the renters paid, covered his small mortgage and his rent.

He purchased another property, and the people who were renting his first house moved into the new house he purchased as it was 3/2, and they wanted more space. He moved into the first house, and with the rent he received from the second house rental payments he paid off the first house in about 2 years.

Fast forward, when I met him, he was having his house for himself built. He started about 12 or 13 years before I met him, but he said that he always lived small and added to his mortgage payments, and three of his four homes were paid off (not including the house he was building). At the point I met him, he had 1 mortgage, and then a contractors loan for the new build he was doing for himself. He said even with the new build, he was actually debating if he would rent it out and live in one of his paid off homes. It was very inspiring, as he went from a person who made maybe 20k a year, to owning for 4 properties in less than 15 years time.

I said ALL of that to say, it's definitely personal preference, but he seemed happy that by and large he expended a minimal amount of his own money to pay off the homes he owned. He said the renting from a friend for those 3-4 years helped. He said it sucked to know he owned a home, but was renting a room in a friends house, but in the end it paid off big for him! Sacrifice.

Lisa Phillips · Answer

Im on the opposite side, and I second the thought that it is a personal choice. I only invest in houses that cost under 30k, so with purchase and renovation costs, I am looking at 2-4 years to own a 900/mo cash flowing property. So for me, Im okay with taking the funds from my houses to pay down my real estate, while my paycheck goes to scavenging up more funds. However, I think thats an easier thing for me because of my price point, because its not a 10-20 year turn around time.

George P. · Answer

paying it off just prevents you from getting more since you will "tie up" your money in bricks or siding.

i have 9 mortgages and looking to get one more. at that point.... we'll see.

Ryan B. · Answer

Not stopping until the bank says no.  Since my debt to income ratio keeps going down with each purchase, probably won't stop until I can't manage anymore.  Even then I could turn some over to property managers.

Michael Seeker · Answer

It's definitely a personal preference thing.  You'll hear people say that debt is the devil and you should own everything outright, but you'll also hear of people leveraged to the hilt buying up everything in sight and spreading like wildfire.

For me it boils down to interest rates.  Let's assume I can make 10% on my money by investing in real estate or stocks or whatever.  If the interest on my loan is >= 10% then I'm better off paying down the loan (or not getting one to start with).  If the loan is < 10%, might as well let the tenants pay it off and put my capital to use elsewhere.  This doesn't take into account any tax consequences, but is a pretty easy rule of thumb.  You just have to figure out what kind of return you can get on your money :)

George Ghiorse · Answer

Steven,
No general rule on this.  It is a personal preference.  Some like to never pay any off, some like to pay cash when they buy, many are in between.  I don't plan on paying any off until I'm done acquiring as many as I need for retirement which probably will be 15-20.

When to stop and pay off

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