pay off properties or use money to buy more?

[Fred Damali]

My goals are to own enough real estate property that can produce 100k a year after all expenses and after having paid the ALL OFF. This will facilitate early retirement.
I am in mid 20's, and have 160k salary. I am paying a loan for my 1st rental property (3-unit house). The rent income pretty much pays for the property with little money coming from me everynow and then to pay any difference.
I have 100k cash and I want to keep buying more rental properties to reach my goal. I am currently looking at a 200k property (3-unit house).
I wonder if its wiser to
A) just finish paying off my 1st property and then getting a 2nd later
B) use that money to make a big downpayement for a 2nd property
c) get (2) 200K rental properties and put down 50k as a downpayment for each.
d)buy a single-family house CASH paid in full.And probably make $1000 month in rent and then use this INCOME to either help pay off my 1st prop mortage or to buy a third property later.

[Nathan Emmert]

Originally posted by Venkat Raghavan:

Simply put... if you pay off the mtg, you have a
*Stuck in Equity doing nothing
*You don't get tax breaks on interest
*You are not LEVERING UP.
* Missing the boat big time - you are getting cheap money from banks...borrow as much as possible and lock it for as long as possible.

* Equity saves you interest and lowers risk.
* Interest tax breaks are a falacy. Give me $1, and I'll save you $0.25 on your taxes. How much are you going to give me?

Fred, the logic for leverage is pretty simply. Because of how cheap money is right now, there's a very wide spread between what you can make on $1 of cash versus what you pay on interest for that same $1.

Lets look at a simplified example. I bought a duplex for $72,000 and it will rent for $1,400 a month. My payment on $54,000 (75% LTV) is $389 a month. If I assume 50% expenses, my projected cash flow is $311 a month. My $18,000 downpayment (yes, I'm ignoring closing costs for simplicity here) generates $3,732 a year, a 21% CoC return.

Now lets say you bought the same place in cash. Without a mortgage, your cash flow would be $700 a month, $8,400 a year but that's only a 12% CoC return.

Lets go a bit further. Lets assume I did have $72,000 in cash. Instead of going above and buying a property in cash, I split that into 3 equally performing properties (couldn't really do 4 because of closing costs, origination fees, etc). Your cash flow was $8,400, mine would be 3 * $3,732 = $11,196, that's 33% higher than yours.

Here's a few more things to think about. While I am making 3 mortgage payments for over $14,000 a year, about 2/3rds of that is principle, equity. I'm really getting another $8,000 to $9,000 a year in "value", you're getting 0.

Also, I'm depreciating (for tax purposes) 3 properties to your 1. That means you are making less cash AND paying more taxes on what you do make.

Lastly, I now have $216,000 of property to your $72,000. If the market goes up 10%, my equity increase is $21,600 to your $7,200.

Put those things together and you can begin to easily see the advantages of leverages given the cheap cost of capital. You will get greater cash flow, you'll pay less in taxes, you'll build wealth faster through equity payments, and you have greater potential for appreciation.

That said, you do have more monthly payments and therefore more risk. Balance that at your discretion.