Paying off rentals early

[Caleb Green]

I just wanted to get opinions on applying the rents you collect every month to the principle loan amount.

I have 2 rentals that are currently rented. The first one I've had for 3 years. I did not escrow the insurance and taxes and pay them once a year when they are due. The monthly payment on a 15 year note is roughly $185. I collect $400 a month for this property and have always applied every dollar of this to the payment. I started with a loan balance of roughly $25,000 as of right now I owe roughly $19,000. With the property being valued at $40,000.

My second rental is a little nicer home. The taxes and insurance are escrowed with the payment and the monthly payment runs $380 on 15 year note. Rents for $575. Again I plan to put all rents toward the loan. I owe $35,000 on this property and the value is around $65,000

My goal is to use a snowball effect with these properties since I make a decent salary right now and don't need the extra money that is generated from the rents...

For example when my first property is paid for in a say 5 more years I will take that $400 rent and put it along with the second rental of $575 until that property is paid off. I will continue to buy at least one house per year until I am 30 years old. Financing them on 15 year notes I would like at least 10 houses paid for by the time I am 45. I am only 24 right now.

Does this sound like an ok business plan? What are the benefits of just pocketing the "extra" money left over from the monthly rents other than having a reserve account for vacancies, repairs, ect... Which by the way I already have an "emergency fund" for these situations.

I hope I put this in the correct section of the forum. If not an admin can move it to the correct spot.

Thanks in advance for any opinions or insight to this.

[Harry M.]

Caleb,
I think it's a trade-off between better returns and reducing risk. A good rental can quite easily bring in about 15% cash-on-cash - a lot better than the 5-ish% percent you save by paying down the mortgage. That said, that said there's something to be said for the security of having some free and clear rentals and in general taking it slow and steady - it will just take a lot longer to build up your portfolio.
I also think the benefits of doing 15 rather than 30 year mortgages is very debatable. By taking out a 15 year loan, you are basically committing to making extra payments for 15 years in return for usually around an 0.5% decrease in the interest. Not worth it in my opinion - if a person wants to pay the loan off in 15 years, they can still make extra payments but in exchange for a very slightly higher rate, maintain flexibility if plans change or you have a bad month.
One possible hybrid between the two approaches could be to split your long term plan into two phases - an acquisition phase where you roll all cash flow into your next purchase, and add properties as quickly as is prudent. Then maybe 10 or 15 years down the line have a consolidation phase where you shift your focus to paying down the debt. Except by then you have a good number of properties, and you can really use the cash flow to "gang up" on the mortgage of one property at a time.