Paying Off 1 by 1 vs Waiting and Leveraging

[Hariharan Elavarasan]

I bought my first rental property earlier this year. Cash flow after I move out (house hacking) and renovating should be 200-300. 30 yr fixed mortgage @ 6.625% with about 76,000 left. Over time, I'll end up paying 96k in interest payments. I had originally planned to buy 9 more properties, hopefully around or below 150k with a 200 cash flow. Then I wanted to snowball pay off all 10. Of course these are approximate numbers and anything can happen, but I anticipated it taking 25-30 years to do this process. At one point, I'd approx. be 1 million in debt, and it will always be hinging on all 10 rentals' tenants paying on time, and no major major problems.

Into my Youtube feed comes ye olde Dave Ramsey (surely you know where this is going). I'm wondering if I should just pay off this property in full before moving to my next one. I'm young, and I make a very good salary for my age. By summer I should have a good emergency fund, and even if my future share of rent when I move in with my partner is $1,800, I could still have an extra $1,100 to contribute to the loan. I could go from making a $780 payment to a $2000 ($780 from tenant rent - cap ex, utilities, prop mgmt etc, $200-$300 from cash flow, $1100 from personal). I could get this paid off by late 2027/early 2026, and save 90k in interest.

I'd then be sitting on $900-700 cash flow without considering rent increases. Then I'd pick up another mortgage and do the same thing. I'd be snowballing these one by one, but at any given time have 100-150k real estate debt (not considering personal home debt, personal car loan)

What makes more sense? The payoff method sounds slower, I'd probably only get to the same 10 properties in 35 years (I haven't considered how quickly it'll snowball, maybe the last 5 may take only 10 years to do with all the cash flow from 5 paid off properties), but I'm not desperate for real estate cash flow. Without it I can very comfortably live and retire. Just doing this to help my parents in retirement, and help my future children get through college debt free as my parents did for me.

For context, during this time, I'd always be maxing out my company match for 401K, maxing out my Roth IRA, have 15k for emergency fund. I'd have to cut back on my travel budget for the month, pay off the car I bought my parents (50k loan in Sep 2022, 28k left to go, my dad and I pay it together), and ensure that lifestyle doesn't change as rapidly. I understand that I'd probably only get my dream home when I'm 50, and that major things like changing budgets, children, health will impact this timeline, but it seems like a low risk real estate method, that will have a similar enough payoff due the fact that I'm fortunate to be making a good salary.

Apologies to anyone reading this thinking I'm trying to brag in anyway. We all come from different walks of life and I'm incredibly fortunate/grateful to have hard working parents that were able to get me to this position. And I respect those of you who aren't as fortunate and have had to work hard to claw their way up to where you are today, that definitely is and always will be a bigger achievement then where I may end up. Just looking for the advice of those hard workers if they could start over in my position. Thank you all!

[Marcus Auerbach]

The first ten years or so you want to grow your portfolio wide, not deep. The more properties you get earlier in your life, the more you have exposed to the wealth building forces of time: appreciation and principal pay down.

Snowballing is for phase 2. And it's not easy to decide when to start with that. I have never taken money out of my portfolio. Every bit of cash flow went into buying more properties. I am not a fan of hyper leverage, but between 50% and 75% financing is usually healthy. I also think you should look at your job to grow cash flow and not your investing. Nobody invests in the stock market for cash flow (almost nobody).

My market has still a lot of potential. Milwaukee is priced much lower than the US average and from travelling I am always shocked how much people pay for small houses in rough areas in other parts of the country. We also see more people move here, because they want to get away from heat, fires and stroms. Plus the Great Lakes have plenty of fresh water. So, I think I'll keep my foot on the gas for a little while longer, even though it has become really difficult to buy.