What to do with cash, pay off a rental or buy more

Question

Hi,I keep looking at current interest rates and property sales. It appears mostly property prices are on downturn all the zillow listings are showing price cuts left and right. I have one rental I can pay off possibly, and be free and clear that would increase my cashflow about $1000/month using 150k left on mortgage. I was thinking I pay that off, and then snowball that into my primary house, and try to pay off primary house, about 470k left there. And then I try to save up cash to buy rentals. I know this is pretty conservative approach, but some of this is tied to our spiritual beliefs on interest and leverage. I follow a lot of Dave Ramsey groups and listen to him a lot, and this seems to be the approach he promotes. In this type of environment I think cutting risk is a good idea. But also thinking how else could I play this out. I was also wondering, would you take 2 paths and end up at the same destination, ie 1) Pay off houses save up cash buy rentals, 2) Use leverage now buy rentals with 20% down , do you just end up in the same place ? Should you pay off rentals / current homes, then snowball cash to buy more rental?

Steve Vaughan · Answer

This should be just a simple optimizing return on cash or cost/bnefit issue.

We can all earn 5% risk-free in money market MFs and accts right now. That's our basic bar of comparison.

Is it better to earn 5% risk-free with 100% liquidity? Or is the rate on your mortgages higher than 5% + a lack of liquidity premium?
Are your mortgage rates at least 6%? No = save the cash at 5%. Yes= consider paying down the mortgages.

No mathematical reason to pay off low rate mortgages only to turn around and borrow at 7.25% (plus $5k and hassle of obtaining) your money back that you used to pay off your 3% or 4% loans.

Best to buy your next rental with cash to save yourself the $5k loan fees and 7.25% interest👍

V.G Jason · Answer

As much as finance is mathematical, it's also behavioral. I would do what makes you sleep better at night, not what some fella on the internet tells you to do.

You can read what they have to say, but they aren't going to bed with your stress, your problems, your goals, and everything in between. No one, but you are.

Ko Kashiwagi · Answer

Hi Farooq,

It seems like a matter of risk tolerance. If you want to scale faster, using debt is really important. It seems like you are doing rentals, which is much safer than strategies like flips/BRRRRs - paying off your rental would lose out of a lot of equity you can tap into.

Theresa Harris · Answer

I'm pretty conservative with my money, but if I knew I wanted more rentals in the near future, I'd be saving my money for a down payment and looking for the right property.

If I didn't want any more rentals (or had no more borrowing power as I was maxed out), I'd still probably save that money as I can earn more off interest in a savings account than I'd save in interest as my mortgages currently have low interest rates.  I'm in Canada, so our mortgages are a bit different and when my mortgage terms are up (which they are every 1-5 years, though some now have 10 year terms), I know my mortgage rates will increase so I have been paying some down a bit faster by increasing my mortgage payments.

Mason Weiss · Answer

I think an important piece to note is you will not end up at the same destination with both approaches. By acquiring more properties, you will create larger amounts of wealth diversified amongst several properties through leverage and appreciation. By removing risk, you create safety but the snowball does not go as quickly down the hill.

Joe Villeneuve · Answer

As long as your rental has positive CF you should never pay it off.  You're just losing money.  Take that cash and buy more.  It's the most basic math there is.

Daniel McDonald · Answer

I am in the team of smaller portfolios with more cash flow vs. 100 doors. However, it depends on the interest rate. I have often thought of doing the same thing but I have a 2.9% IR on my duplex which is so low that I don't see much of a reason to pay that one off quickly. If it was a 7% I'd probably feel differently. But this is a question I think most investors ask themselves. This is where your goals needs to be crystal clear.

Caleb Brown · Answer

Everyone is different. I like Dave Ramsey and he is very anti debt. For consumer debt I agree. Real estate I understand it but debt is used by most in real estate. No debt works for some and not for others. Ultimately you have to decide. Paying off all the mortgages is a slower way, it's also safer. The downside is you scale slower and you could "make" more leveraging. What many do is accumulate "x" amount of properties then pay the debt down. I would do what's best for you and make sure you have reserves with using any leverage.

What to do with cash, pay off a rental or buy more

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