Any thoughts on early paying the mortgage on a BRRRR?

Question

I have a new Rental property that I BRRRRed and is cash flowing relatively well. There is no early payment penalty on the loan. An extra $100/month would equate to the loan being paid off 7 years earlier and $27k in interest savings over the life of the loan. Does anyone have any thoughts on overpaying the mortgage?

Nathan Gesner · Answer

Joe is right. Let the Tenant pay off the mortgage and keep your cash free to build up an account for the next purchase.

Have you heard of the law of diminishing returns? The longer you hold an investment, the lower your return. This graph demonstrates it visually, though your return may drop faster/slower depending on circumstances:

This chart shows that the property earned an 18% return the first year, but after year 10 the return has dropped below 12%. If you're trying to keep returns above 12%, you would want to sell this property and reinvest the equity in a new rental that earns a higher return and maximize growth.

People think "buy and hold" means holding on to a property forever. The truth is you will get a better return by reinvesting your equity to maximize the rate of growth.

Read a few books on real estate investing to learn the power of leverage. I like the Unofficial Guide to Real Estate Investing. Here's a very basic explanation to get your juices flowing:

Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.

Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.

Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.

Joe Villeneuve · Answer

Paying off a mortgage on a rental property with positive cash flow is just adding to the cost.  Your tenant is buying the property for you with the rent.  When you add your money to pay it off sooner, you're just adding cost to you...Don't Do It.

You're not saving the interest since you're not paying it.  If you added $1200 a year from your pocket it's an added cost to you.  Plus, the way a mortgage works, is you are subtracting the interest from the back end, which are the months with the least amount of interest, and you're taking money out of your pocket to do it.  With that in mind, before you actually see a savings, you must also recover the extra $100/month ($1200/yr) that you paid over time.

If I knew the numbers with $$$ in front on this property, I could tell you the specifics of what I mentioned above.

Eliott Elias · Answer

If you're in growth mode and wanting to buy more don't do it, if your goal is to get these paid off and live of just these do it.

Nate Sanow · Answer

Yeah , my thought is don’t do it… not yet. For starters the goal of Brrrr is having none of your own money in a deal, and getting a return for it. Paying extra with the return is almost like saving up money or using your own money - and the most successful REI uses leverage and OPM.

Once at a place of scale and growth, it’s something to consider.

Lately I’ve been saying stuff like “equity is great, but I can’t buy lunch with equity.” What do I mean? Your hot water tank goes out and you will be happy you kept that $100 to cover random repairs and didn’t pay down the loan in the name of equity.

Again the goal of Brrr is to use someone else’s money to buy a place, someone else’s time to fix it up, and someone else’s money to pay it off. Anything else isn’t necessarily wrong, just not ideal.

Theresa Harris · Answer

Everyone has a different take on things and goals.  This is reflected in what they do.  I know that the BRRR is to have as little money as possible tied up in a rental, but for me the costs of refinancing and having the mortgage maxed out doesn't appeal to me (mortgages are also a bit different in Canada where I am).

What are your goals for the next 5 year?  next 10 years?  Can that extra $100 a month be used to save for another property or something else where you get a larger return?  Will the current mortgage prevent you from getting another mortgage on another rental?  It also depends on what the rate is on your current mortgage.

Joe Villeneuve · Answer

With positive cash flow, the tenant is paying the mortgage, and all of the rest of the expenses because they are the source of funds.

Debt free is losing money.

Terrell Garren · Answer

"You're not saving the interest since you're not paying it."

I am not smart enough to understand that. I do understand being debt free.

Becca F. · Answer

This is super helpful. I thought about paying extra each month on my Indiana SFH rental to be mortgage free sooner but I'm still trying to acquire a few more properties.

I had a lender suggest to me to take out a HELOC on a California property (no first mortgage) and pay cash $150,000 to $300,000 for my next rental out-of-state to avoid those pesky interest rates which are going up and down and have a faster closing.

That makes no sense to me to pay $300,000 cash for a house, let alone $150,000. I'm seeing San Francisco Bay Area investors do this, pay $680,000 cash on a fixer (Selling agent said they had all cash offers. I looked at this property and he can't get it rented out now on Zillow $3750 asking rent). I did do a cash out refinance (pulled equity out of that California house) so I could do 20% down on a Midwest property. I'm not a huge fan of HELOCs with variable interest rates

Any thoughts on early paying the mortgage on a BRRRR?

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