Pay Toward Rental Mortgage, or Save For the Next One?

Question

Hi!  I haven't been on BP for very long.  We own five rental units in our area (four apartments and a house), so we're still small potatoes.  I really have big dreams of owning a lot more, but I don't know at this point whether to use our income surplus towards those rental mortgages or to start paying them off.  At the moment, we have two mortgages.  I'm sure I'll get differing opinions on this.  Part of me really wants to get things moving along with more profit, and then use that new profit to start paying off the other properties.  But then there's the other part of me that would feel really great about starting to pay them off now, but then there wouldn't be any new income coming in until they're paid off.  What do all you other investors do?  Are you willing to take on more debt if you know you're income will be more than your expenses?

Ed Caldwell · Answer

Jen, there is no right or wrong answer to your question. Investors all have different risk tolerance and no two investors ever seem to look at things the same way. In order to stay married, you can't discount the concerns of your husband. He sounds a lot like my wife by the way as I am the risk taker and she is not. I would suggest not immediately paying down the mortgages, but instead build enough reserves to put your husband at ease. With enough reserves to cover the mortgage payments for an extended time and any required capital expenditures that may come up. Once this is achieved, I would bet your husband is more on board to save more money for the next investment and with mortgage rates this low, let your renters continue to pay off your current mortgages.

My two cents as and investor, CPA and husband.

Linda Weygant · Answer

There's the concept of good debt and bad debt that it might make sense to see if it resonates with your husband.

Essentially, debt for productive or appreciating assets isn't really debt.  I mean, obviously it is.  But like @Joe Villeneuve said, you're not the one paying for it - your tenants are.  It's also going towards something that should - in general - increase more in value as time goes by.  So you've got equity gained by retiring the debt with the tenant's payments plus the equity gained by the asset appreciation and it's like a double bonus.

Debt that is not productive or is for depreciating assets, such as for old credit card debt or automobiles, is the type of debt to avoid.

Aaron Mercer · Answer

@Jen Faulkner I agree with the other guys. More leverage will bring more cashflow for more purchases and more cashflow. Of course this assumes the deals are solid.

Our philosophy is to use cashflow to fund more purchasing for at least the next 10+ years then start the pay down. We are in our 30's (which I still consider young), so growth is our aim. This is a personal choice. Good luck deciding.

Joe Villeneuve · Answer

Yes.  If more debt brings you more cash flow income...do it.  That's the object.

Remember, as long as you have positive cash flow, you're not the one paying off the debt...your tenants are.  So why help them pay off your debt, when they are perfectly fine with doing all by themselves?

Linda Weygant · Answer

Yes, I'm absolutely willing to leverage equity and cash in order to bring in extra cash flow.

Have you considered getting an equity loan on the properties that are fee and clear and using that cash as down payments on more property?

Jen Faulkner · Answer

Thanks all for your input!  We joined a local REI group, so it's my hope that my husband gets a little more in tune with the business aspect of it all (he's more of the maintainance/handyman, and I am the biz end).  We've been landlords for 7 years, and I really feel like we could have been a lot further into this if we'd planned better from the beginning, but now is the time!@Aaron Mercer, I'm in my 40's.  You're darn right 30's is young!    :P

JD Martin · Answer

I think this is an excellent point. If you have a huge amount of liquid reserves relative to your monthly expenses, and your husband is still worried, that may just be his nature, or he may not understand the concept of debt as a tool. If this is not true, however, he may be coming from a perfectly rational place in that a misstep or two could put you in serious financial peril.

Mark Gallagher · Answer

@Jen Faulkner

Would just like to add that whatever direction you head, make sure you're not paying off low interest loans when you have outstanding high interest debt.

Personally I would leverage and keep buying. If you're buying right, you shouldn't get your hand caught in the cookie jar.

Jen Faulkner · Answer

Can I edit my original post?  I just realized that my first question doesn't really make sense...but I can see that you know what I meant.   lol

Pay Toward Rental Mortgage, or Save For the Next One?

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