Overarching Strategy: 100% Equity / accelerated mortgage payment

[Francesca S.]

Hey all,

I was reading Millionaire Real Estate Investor, and stumbled onto a story of a couple who aggressively paid off their properties. They would buy a single property at a time, use a 30 year loan, and pay it off aggressively so it would be paid of in around 2 years -- then rinse and repeat. Each paid-off property's cash flow would then be used to pay the mortgage of the next property.

This strategy was interesting and I wanted to project this model to see how far I could go and what are the cash pay offs at the end of 30 years. So a quick model would look like this:

Year 1

- Purchase Property 1 at 100K

Year 3

- Pay off Property 1.

- Purchase Property 2 at 100K

Year 5

- Pay off Property 2.

- Trade Property 1 in 1031 exchange, use as 20% downpayment for Property 1-2 at 500K

Year 7

- Pay off Property 1-2, use 100% cash flow to pay mortgage of Property 2-2

- Trade Property 2 in 1031 exchange, use as 20% downpayment for Property 2-2 at 500K

Year 9

- Pay off Property 2-2,use 100% cash flow to pay mortgage of Property 2-2

- Trade Property 1-2 in 1031 exchange, use as 30% downpayment (lets say its a commercial property) for Property 1-3 at 1.5 Million

Year 11

- Pay off Property 1-3, use 100% cash flow to pay mortgage of Property 2-2

- Trade Property 2-2in 1031 exchange, use as 30% downpayment (lets say its a commercial property) for Property 2-3 at 1.5 Million

and so on...

So from my understanding, there are some advantages to this strategy:

1. You will only ever have 1 loan in play, so there isn't any trouble of trying to acquire more loans

2. This is a guess, but this scheme probably looks better to lenders, as you are providing a history of not only paying the mortgage, but paying it off quickly. Is this true or not?

3. You are building massive equity in the property, which you could then pull out using a refinance

4. Properties can be traded up with a 1031 exchange.

5. My understanding is, this is a low risk method where you will not over leverage yourself in the debt / equity balance

Cons of the strategy:

1. All of my personal savings and cash flow will be funneled into the mortgage.

2. Since I aim to have 100% equity in each property...if the property sinks in value, so does my net worth?

Questions:

1. Lets say I have 100% equity in a $100,000 Property. Can this property then be traded in a 1031 exchange as a 20% down payment for a $500,000 property? What happens if you have less than 100% equity? What happens if your property appreciates, and you have 100% equity? What happens if your property appreciates, and you only have 50% equity? I am trying to get a feel of how much value the property will have, when it is traded through a 1031 exchange for another property.

2. What are other ways or strategies to reach wealth more quickly with this method? Other than getting private lenders / partners.

3. Would you recommend having 100% equity or less in this scheme?

4. Would YOU pursue this method? why or why not?