Payoff my current properties or keep buying?

Question

Hello

I started my real estate journey 4 years ago, purchased a few properties every year, my current portfolio includes 17 units with a monthly cash flow of $8K, now I am trying to figure out my next step. My initial cash flow goal was $12K to cover our monthly expenses, with inflation its looks like we need $15k.

I have $1.4M in debt and $2.2M equity in my properties and I don't like debt, I am trying to figure out if it makes sense to start to pay off my 9 mortgages and reach my goal of 15K with free and clear properties (I believe I can do it in 6-8 years).

The biggest struggle is to pay 3%-3.5% mortgages... I am sure I will look back 15 years from today and think I did a huge mistake I will love to get opinions from more experienced investors

Thanks

Joe Villeneuve · Answer

I understand not liking debt when that debt is your personal debt.  The source of funds to pay your personal debt is you, which means you are the one paying all of it.  However, debt on your properties isn't the same thing.  The source of funds that pays off that debt is the tenant (rent).  The only cost to the REI is what cash comes out of their pocket.  Personal debt costs you money.  That debt you don't like on your properties makes you money...as long as you have positive CF.

I'm looking at the numbers you gave us:# of Units = 17Property value = $3.6MEQuity = $2.2MCurrent Cash Flow = $8k/monthCF Goal = $15k/month

...and have come to 3 conclusions:1 - You have been losing money for a long time...and don't realize it.  When you bought the property, and paid 20% DP's, the value of what you paid for (cash DP's) = 5 times what you paid for it.  That means your original equity was worth 5 times its face value in PV.  As you've allowed your equity to grow, although to actual dollar amount of that equity has grown, the value of the equity has gone down to only 1.6 times its face value.  That means the buying power of your equity has dramatically gone down.

2 - The same thing holds true for your cash flow.  As long as your equity grows in the same property, it represents what you are paying for the property.  The only cost to the REI is what cash comes out of their pockets...which should be restricted to ONLY the DP.  Any time the REI adds cash out of pocket, for any reason (i.e. principle paydown, rehab, negative cash flow,...etc...) the cost of the property increases for every cash dollar spent.  Profit is made only after all cash is recovered in the form of cash (cash flow).  So, when cash is added, and the cost goes up accordingly, all that does (besides increasing cost) is delay the time to profit, and increases the amount of accumulated CF the REI must recover before profit is made.

3 - You have your desired $15k/month (and a lot more) sitting in your hands right now...and don't realize it.  That equity, although it may look valuable, is losing you money...by the fistfull.  As I said above, when you pay 20% DP, you are buying a property worth 5 times what you paid for it.  To get your desired $25k/month, you have to convert that $2.2M in equity to cash...and redeploy it as a 20% DP.  This should get you a new PV of close to $10M.  Now, if you had a total PV of $10M, and all the properties involved had Positive CF, what could/should that new CF be.

Although you may not like debt, that dislike is what's holding you back from that magical $15k/month CF you want.  Remember, as long as you buy with positive CF, you are not the source of money that's paying that debt.  The source comes from the tenant...not you.

Theresa Harris · Answer

Why not sell one of the properties if you are short on cash to cover expenses?  Look through each property and see who much it is worth, what your expenses are for it and how much rent it brings in.  Are there any that 3-4 years down the road will need a new roof or a large expense?  I have properties that do better than others, some have appreciated a lot (one town) and others haven't (another town).  I already know if I need to sell one which one it will be and it isn't solely based on cash flow.

Inflation is high right now, my gas bill is almost double what it was last month and yet we didn't use any more.  Same with electricity ($50 more).  It won't last.

I also don't like debt, but mortgages to me are different especially for rentals and with low interest rates.  I don't do the BRRRR, I buy, do renos if needed, and hold and pay down my mortgage (or rather my tenants do).  When I retire, a few of my rentals will be paid off and the cash flow will be a lot higher as I don't have the mortgage payments.  But if I wanted, I would sell one at a time and use that money to live off of if needed.

Sheena Drake · Answer

So, Joe or Nathan, do you typically wait until you've established CF=to your initial 20% down payment before you consider doing a refi?  We rehab to the point that if I had to live in one of my rentals I would.  No slums attributable to our names.  But then costs of having renters wear/tear after reaching 20% ROI is possible not worth as much as redeploying the equity at that time?

I very much appreciate the actual numbers on paper that the two of you provide.  My science oriented brain needs this kind of guidance.

Steve Vaughan · Answer

I'm all about paying off riskier or higher rate debt and have.

Resi mortgage debt in the 3s I would not accelerate.  No now what necessary. Self-imposed.

I've conquered debt snowballs before. No way I'm having that restrict and deny and save mindset for 6-8 years for 3%.

Bud Gaffney · Answer

KEEP. BUYING.

Let the tenants pay off your properties. Just be a GREAT landlord.

Payoff my current properties or keep buying?

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