How quickly should I pay down rental properties?

Question

I'm evaluating how much longer I want to stay working and I have a portfolio of several rentals which will, in part, fund my retirement.

If I continued to make the same amount at my job and rents stay the same, I would be able to put about $10,000 per month towards the outstanding balance of several mortgages.

I owe about $650,000 in mortgages.  If i were to accumulate the money to pay one house off and then further increase my monthly savings until I paid down the next, etc, I could have all paid off in < 5 years.

Once paid off, I would gross about $105,000 per year.  2 of the houses are < 10 years old and 2 are > 25 years old.  All have new roofs, but regardless, for the sake of this discussion, let's assume the 50% rule.  that would generate $52,500 per year which is well more than I spend in a year and wouldn't require me to touch any of the stock investments that I have.

Interest rates are between 3.75% and 4.25% on all properties.

What are some things I should consider before I ever choose to do this?  For now, I'm just building up cash as quickly as I can and this analysis assumes I don't add any other properties to the portfolio.  It also assumes I don't seel them.  I've owned all these properties < 3 years and have them on 30 year notes to allow me maximum flexibility should i want to pay down more slowly or add extra capital to them to pay them off more quickly.

Alex S. · Answer

It depends. Do you like your job? You can put money aside and invest it for 5 years. What rate of return would you get.  You can decide later. I like having a mix of real estate, notes, and Stocks that pay dividends( and increase). I also do it strategically to minimize taxes.

How will it affect your taxes. How much debt based on total net worth. Look at your debt to equtiy and manage risk. I have seen too many people make a bunch and give it all back by to much leverage.

My personal opinion is market is high here. Have no idea when it will shift or what will cause it. Higher interest rates might. Perhaps 1031 tax law change. Not sure

Then you might be able to get higher rate return on cash. I like the idea of fucus on one property at a time rather than scatter on multiple properties  to get it paid off.

Hope that helps.

To your success,

Alex

Thomas S. · Answer

When the real estate markets turn, if it is at a bad time, you risk losing all your equity for a very long time if you have put all your cash into paying down mortgages.

Kevin Childers · Answer

@Steve S. Then I would keep the mortgages and invest in more properties. Just make sure you buy right so if the market goes south again you come out ahead.

I could be wrong but the way I see it is that you are paying your mortgage payments with other people's money. I would let that ride as long as I could leverage their money to invest in bigger better deals. Why risk your money if you don't need/have to, put it to work in other investments.

Thomas S. · Answer

With interest rates at the 4% range you never want to pay off your mortgages. You would be buying artificial cash flow at a very high price to save a measly 4% interest rate. Opportunity value of cash is worth 10% meaning paying down $650K would cost you $39,000 (6%) per year in lost income while only generating an additional $26,000 from your 4% savings.

If you do not want to invest in more properties keep the rental mortgages maxed out and invest the cash flow and equity in mutual funds or a similar vehicle which should easily average a 8% or better return. You will double your profits over paying down your mortgages.

Steve S. · Answer

I would either use the money to live off of instead of selling my time to corporate america, invest the excess above living expenses in the stock market or find new real estate deals.

I invested in the properties to primarily generate cash flow and probably at some point, maybe 30 years in the future, sell them to get out of the real estate game.

At this point, I'm very stock heavy in my portfolio and am trying to add real estate as a 40+% piece of my overall portfolio.  Right now, I'm much closer to 80% stocks vs real estate (and some bonds).

Kevin Childers · Answer

If you pay them off will you be pulling the equity out to reinvest it? If not, other than increased cash flow, what is your long term goal with the properties? My take is that any equity you have sitting in a property is money that is not working for you.