Payoff mortgages or buy additional rentals?

Question

I’ve been struggling with what my next move should be. My goal is to get out of my 9-5 ASAP, and have my real estate investments replace about $4k of my income. I’m leery of being highly leveraged, but also dreading the idea of staying in the rat race for another 10 years. Two opposing desires.

I already have 1 paid off rental house that nets appx $1000 after taxes/maintenance/vacancy/etc. I did open a $125k HELOC in order to facilitate purchasing future houses if I needed it, but I have not used it yet. It took me about 5 years to pay off this house while working my 9-5.

I currently am live-in rehabbing/house hacking a second home that will turn into a rental later this year. When rented, this should net about $500.

I’m caught between these options as I can see it:

1) throwing all effort into paying down house 2’s mortgage. Would likely take another 3 years working the 9-5, but would then net about $1000.  So by year 2023, I’ll have replaced $2k of my income. Repeat the purchase and pay-off method, with each house being expedited by the additional income of the houses before, but will likely take 9 years and I will have to stay at the 9-5 to cover personal expenses. Slow, Low leverage.

2) leave 2nd house’s mortgage in place. Use HELOC/personal savings/etc as down payment/rehab budget for third rehab to rental, hope for $200-300 additional income. Repeat yearly or quicker, stay at job for another 5 years or so to cover personal expenses. Year 2021-$1700-$1800, 2022-$1900-$2100, ect. Moderate speed, Moderately leveraged.

3) save enough money to cover a year or so of my personal expenses, leave 2nd house’s mortgage in place. Quit job, throw caution to the wind, and use the HELOC to rinse and repeat the BRRRR strategy? Highly leveraged, fast, could bite me in the butt when the savings runs out if I haven’t made enough progress.

I know this is ultimately a personal decision based on risk tolerance, but I’d appreciate any words of advice from those further along in the journey. The goal is financial freedom as quickly as possible without having 50 doors to manage that only $50 a piece.

Thanks!

Joe Villeneuve · Answer

Paying off mortgages puts you behind with every dollar that comes out of you pocket.  The cost to you for every property that has positive CF is only what comes out of your pocket in the form of cash.  This means when you use your money to pay off your mortgages, you are adding to your cost, and you are not increasing your cash flow's goal...which is profit.  All that added cash flow is doing is paying you back.  All you are doing is transferring the exact same dollars in cash from your bank to your property.  You haven't gained anything, and you've added to your cost.

Example:

Existing: Cash flow w/ debt = $400/month
Payoff = $80k
You payoff mortgage: Cash flow no debt = $750/month; $9k/year
Added CF: $350/m; $4,200/yr

Years to recover cost of payoff: 19 years +
In other words, it will take you 19 years before you see any advantage to your payoff. If you used those funds as DP's, your desired CF increases would be free (as in the tenant paying off your mortgage) and you would reach your CF goal within 5 - 6 years.

If you don't like debt, then if I were you, I wouldn't do either.  At least you wouldn't be going backwards.

Melanie Dupuis · Answer

@Melody Wright NEVER pay off any mortgage!!!

Chuck Webb · Answer

My suggestion would be to leverage your debt better for yourself.  I started by selling my paid off house giving me 200k in capital to work with.  I rented a modest apartment and bought 5 single family homes in one year.  I used hard money loans then refinanced to conventional 30 years after the rehab was done.  Each home cash flows over 500 and I captured about 25k on the low side and 85 on the high side (after reno).  I pretty much more than doubled my 200k and I haven't even used all of it yet...still have about 20k from it.  It's always easier to acquire property if you have capital.   People who want to get rid of their homes with deferred maintenance want to get out fast and not mess with creative deals like lease option sandwiches etc.

Theresa Harris · Answer

IF you pay down the mortgage and then take a HELOC to buy another and repeat the process, why not just use the money that you would to pay down the mortgage as a down payment for the next place?  If you live in the house for a few years, then turn it into a rental and repeat, you can get further ahead faster.  You need to think about tax implications as I think you can get some tax savings if you sell it within a set amount of time (I'm in Canada, so tax laws are different).

Lance Thibault · Answer

Melody,

I bet you know what you actually want to do.  My guess based on your post is that you are very safe with your money and any leverage goes against your will.  It's slower, but there is nothing wrong with being debt free.  Especially if you enjoy your job.  If you hate your job, and it's killing you a little every day...then maybe the priority to leverage more comes into play to get out of the 9-5 a little faster.  I paid off a house a couple years ago and I'm 5 payments from paying my next home.  I have no regrets.  There is lots of advice out there opposed to this, (mostly from people who have not done it).  But there's freedom in knowing you're free in clear.

Ian Walsh · Answer

It really depends on your end goals and resources.

Dan Bass · Answer

@Melody Wright I. Totally. Feel. You. I have 7 rentals plus house hacking my house. I have almost enough cash to pay off the 7 rentals and get some good cashflow and start stepping out of the W-2 world.

Do I buy more with that cash or wait for deals in this highly competitive market?

Do I want the time now or later and have time to build later?

All, yes, personal decisions. Being a nurse, I’m spent after last year and currently.

As deals are hard to come by in many markets, I’ve highly considered paying off the houses and enjoy some time now and I can always leverage back up or use the cashflow to buy more houses when deals come by.

That’s just my internal struggle and thoughts as it seemed to be relevant.

Melody Wright · Answer

@Jason Wray

Thanks Jason!

I definitely agree. No one is rich with two houses.

I’ve always struggled with understanding how the refi strategy was effective, but maybe I’ve interpreted it wrong. I have $116k mortgage on the second house. With current mortgage in place, I could likely net $500. If I refi, I could likely get $30k+ out, but the mortgage would then increase and decrease my net profit, say by $200. I would have to hope that I could use that $30k to get a third property that would net more than $200, which isn’t a guarantee so I’ve always kinda of stopped the math there.

Jason Wray · Answer

Melody,

The goal is to build up your portfolio of investment properties so that you have more equity and rental income.  More properties helps increase your profit but also covers any lost rental income if one property is rented but one becomes vacant it's a wash.  But if you have multiple properties you have a little more spread of income to help alleviate that burden.  You could look at that a few different way but your most successful investors have more than a couple of properties and their equity helped purchase the next one!

You can always refinance one of the properties to take out some cash to buy another property.  HELOC's are good for quick jobs or fast fix and flips but most of them carry an adjustable rate or an interest only option which can lead to having to consolidate them into a property down the road.

Payoff mortgages or buy additional rentals?

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