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Updated over 1 year ago, 06/04/2023
Extra $3000/mth, pay down mortgage v SEP IRA v 457 def comp retirement
Hi! Just purchased our 2nd investment rental property. Loan amount $304,000 7.3% interest (house value $600,000). Other rental loan is 3.5% $553,000 (house value $770,000). We can pay an extra $3000/mth. Could pay off the smaller loan higher % loan in 6 years if we use for that. Or pay the $3000/mth into my husband's SEP IRA, or my 457 plan (I newly work for the county).
Our retirement plans are new and empty. We are 47 +48 yrs old. Would like to retire by 58/60...
We own our primary residence with no loan (house value $1.7 million). So the 2 investment properties we could pay off by the time we retire and that income is our retirement (current total gross rent $7300/mth), although we now have the new IRA and 457 plan......
Any advice!? Or who would we speak to about this without them 'selling' us something.. financial advisor? tax advisor?
#4 All Forums Contributor
- Plymouth, MI
Taking your money to pay down the mortgage on a rental property is just adding to your cost of the property. Your tenant is already paying it for you. You're already getting those payments made for you for free,...why would you want to start subbing your cash for the tenant's?
Before you bring up the "savings" on the interest, I want you to read the statement I just made above until you say "oooooh".
Joe,
As always, straight to the point.
I would mostly agree with Joe. The other side of it is how well can you and your husband sleep at night in the current condition. Do you want to retire earlier by expanding your REI? If you are comfortable currently and already have that retirement age in mind, AND are on the path to achieving it, just put your money in 457. Its tax-deferred and you can borrow from it, up to 50K or 1/2 its value, whichever is less. Now is the best time to do it because stocks are in a slump and will continue to drop a bit more.
However, if you want to retire earlier and get out of the rat race, then may be dig deeper into REI and make some moves with the extra cash.
I was about 40 yrs old when I hit a similar spot in life. For a split moment, I was going to pay down the few properties I had and planned to retire around 50 years old. I chose the latter. I absorbed as much as I could and hustled. Just over 1 year later, I hit my Financial Independence #. Another year after that, I had the cushion to leave my W2 and just do whatever I want. In fact, my wife can leave her job as well, but she likes going to work and socializing with her friends. I respect that. She has a school schedule, therefore has Weekends, Holidays, Winter Break and Summer Break. So we just travel with the kids when she is off contract.
Do what makes you two feel happiest.
You bring up a great question. I just purchased my 4th rental property and I've been considering paying down one of the mortgages vs. continuing to expand my portfolio. From my non-investor friends, they are horrified that I bought a 4th property - "you have so many mortgages and debt, you should have paid cash for that 4th property (I considered that but got a 6.99% interest rate conventional loan), stop buying property and put your money into a CD".
I'm trying to figure out how many more properties I would need to buy to replace my W2 income. I'm not at my financial freedom number yet to quit/retire early from W2 job (could work part-time or independent contract work, just don't want to have to work full time), which I like to do in about 3 to 5 years (3 years is very ambitious)
Sam, you were able to dig deep into REI and quit/retire early from your W2 in 2 years? Amazing. How many more properties did you wind up buying?
#4 All Forums Contributor
- Plymouth, MI
Quote from @Sam Yin:
Joe,
As always, straight to the point.
I would mostly agree with Joe. The other side of it is how well can you and your husband sleep at night in the current condition. Do you want to retire earlier by expanding your REI? If you are comfortable currently and already have that retirement age in mind, AND are on the path to achieving it, just put your money in 457. Its tax-deferred and you can borrow from it, up to 50K or 1/2 its value, whichever is less. Now is the best time to do it because stocks are in a slump and will continue to drop a bit more.
However, if you want to retire earlier and get out of the rat race, then may be dig deeper into REI and make some moves with the extra cash.
I was about 40 yrs old when I hit a similar spot in life. For a split moment, I was going to pay down the few properties I had and planned to retire around 50 years old. I chose the latter. I absorbed as much as I could and hustled. Just over 1 year later, I hit my Financial Independence #. Another year after that, I had the cushion to leave my W2 and just do whatever I want. In fact, my wife can leave her job as well, but she likes going to work and socializing with her friends. I respect that. She has a school schedule, therefore has Weekends, Holidays, Winter Break and Summer Break. So we just travel with the kids when she is off contract.
Do what makes you two feel happiest.
Much like a ground ball in baseball. The more bounces it takes, the lower the chances of getting the batter, and the higher the chances for a bad hop, so don't lay back on it...charge it all the time...just don't charge it so fast you run right past it...and force yourself to make an off balance throw, as in out of control.
Quote from @Sam Yin:
Joe,
As always, straight to the point.
I would mostly agree with Joe. The other side of it is how well can you and your husband sleep at night in the current condition. Do you want to retire earlier by expanding your REI? If you are comfortable currently and already have that retirement age in mind, AND are on the path to achieving it, just put your money in 457. Its tax-deferred and you can borrow from it, up to 50K or 1/2 its value, whichever is less. Now is the best time to do it because stocks are in a slump and will continue to drop a bit more.
However, if you want to retire earlier and get out of the rat race, then may be dig deeper into REI and make some moves with the extra cash.
I was about 40 yrs old when I hit a similar spot in life. For a split moment, I was going to pay down the few properties I had and planned to retire around 50 years old. I chose the latter. I absorbed as much as I could and hustled. Just over 1 year later, I hit my Financial Independence #. Another year after that, I had the cushion to leave my W2 and just do whatever I want. In fact, my wife can leave her job as well, but she likes going to work and socializing with her friends. I respect that. She has a school schedule, therefore has Weekends, Holidays, Winter Break and Summer Break. So we just travel with the kids when she is off contract.
Do what makes you two feel happiest.
I'd happily retire now at 48 lol. I think we want to time it so we pay off the 2 investment property loans around the time we retire and our income drops, so there's less tax paid on the rental income we'd get.. We don't want more properties, even renting out this 2nd one has become a pain and we decided to pay into an IRA for my husband and pay down the home loans so they'll be paid off in 10-15 yrs.. and then we will enjoy life lol (any extra beyond that I'll pay more into my County job retirement perhaps (I only just started that job and retirement plan).. !
Quote from @Becca F.:
You bring up a great question. I just purchased my 4th rental property and I've been considering paying down one of the mortgages vs. continuing to expand my portfolio. From my non-investor friends, they are horrified that I bought a 4th property - "you have so many mortgages and debt, you should have paid cash for that 4th property (I considered that but got a 6.99% interest rate conventional loan), stop buying property and put your money into a CD".
I'm trying to figure out how many more properties I would need to buy to replace my W2 income. I'm not at my financial freedom number yet to quit/retire early from W2 job (could work part-time or independent contract work, just don't want to have to work full time), which I like to do in about 3 to 5 years (3 years is very ambitious)
Sam, you were able to dig deep into REI and quit/retire early from your W2 in 2 years? Amazing. How many more properties did you wind up buying?
To get to FI, I exchanged 3 single-family rentals for 3 multifamily rentals that totaled 28 units. Those 3 SFRs were pushing out about 10K in cash flow per year, at best. With the 3 MFRs cranking out roughly 100K in cash flow per year. After seeing the stark difference, I went ahead and exchange my 3 remaining properties into 1 MFR that had 19 units. I did not use all the funds, so I was left with about 100K in hand. Because I realize the profitability of MFRs and I was focused on my timeline, I immediately exchange one of the early MFR and took it from a 10 unit to a 16 unit with a better unit mix. Those moves doubled my cash flow immediately. With rent raises and a fixed debt, I was able to increase the cash flow even further. From there, I was able to acquire smaller MFRs just from the cash flow and continue to grow the portfolio.
Mind you, I live meagerly and my wife spends liberally. She spends every penny she makes from her job, and a little of what I make as well. Overall, taking that into consideration, I needed to bring home at least 50K/year to cover all our living expenses and anything over 60K would be comfortable living. I factored another 30K for health insurance in case I ever needed to pay for it. Tack on another 20K for family travels/vacations and we end up with about 100K as my FI number. Thus, I think about 20 to 25 strong rental units can take most people to a comfortable FI. Any more is just a bonus and a personal choice/goal.
Those numbers factored in maintenance, reserves, capex, and a team of 4 managers that I have on salary. That bought me my time back and took me to RE, fulfilling FIRE. But because it freed my time up so much and my wife still wants to work, I still dabble to grow the portfolio. Im in the process of acquiring another 10 units. As you can see, it becomes increasingly easier to acquire more as the cash flow grows. The salaries eat up about 15% of potential profits, but it allows me to travel all summer with the family and take holiday trips. I also give those managers a free unit to live in too!
Three times a year, I issue rent raises to about 1/3 of the units, catching all of them each year. Those rent raises are straight cash flow because the debt is fixed. Additionally, they COMPOUND!! For example, if each group is raised a total of 30K per year, and there are 3 groups, that is almost 100K in cash flow added per year. The following year can get even more due to the nature of compound interest... or you can choose to raise less depending on the economy. Additionally, if you delay some gratification and use the excess to grow the portfolio, then there is even more cash flow to unlock after each acquisition.
I do plan to hit the breaks as soon as my wife fully retires... probably in 5 to 7 years, and the kids are all adults. between now and then, maybe pick up another 100 or so units slowly and concentrate on building a solid succession plan for future generations not to dissolve it all. The truth is that I may not want to acquire much more than that because it does take up time, and add to liabilities. At some point, I might just want to cash out a large portion of the portfolio and move to a different investment class... may be 1/3 in real estate, 1/3 in the money market, and 1/3 in precious metals????
Quote from @Sarah Jukes:
I'd happily retire now at 48 lol. I think we want to time it so we pay off the 2 investment property loans around the time we retire and our income drops, so there's less tax paid on the rental income we'd get.. We don't want more properties, even renting out this 2nd one has become a pain and we decided to pay into an IRA for my husband and pay down the home loans so they'll be paid off in 10-15 yrs.. and then we will enjoy life lol (any extra beyond that I'll pay more into my County job retirement perhaps (I only just started that job and retirement plan).. !
There is not any exact science to this. The only thing you should weigh the heaviest is your personal satisfaction/livelihood. Find that balance that keeps you happy, low-stress, and feel a sense of accomplishment. If that is 4 rentals, 40 rentals, or 400 rentals, it doesn't matter... only you and your loved ones matter. That could mean a move away from real estate and concentrating more on retirement plans offered by your W2. This is especially in your case since you work for the county and have a strong benefits package. Get your tenure in and vest it into that retirement plan. If you have the energy, then keep plugging along on the side with real estate. you might find other avenues to explore like private lending using your 401K, etc...
Quote from @Joe Villeneuve:
Quote from @Sam Yin:
Joe,
As always, straight to the point.
I would mostly agree with Joe. The other side of it is how well can you and your husband sleep at night in the current condition. Do you want to retire earlier by expanding your REI? If you are comfortable currently and already have that retirement age in mind, AND are on the path to achieving it, just put your money in 457. Its tax-deferred and you can borrow from it, up to 50K or 1/2 its value, whichever is less. Now is the best time to do it because stocks are in a slump and will continue to drop a bit more.
However, if you want to retire earlier and get out of the rat race, then may be dig deeper into REI and make some moves with the extra cash.
I was about 40 yrs old when I hit a similar spot in life. For a split moment, I was going to pay down the few properties I had and planned to retire around 50 years old. I chose the latter. I absorbed as much as I could and hustled. Just over 1 year later, I hit my Financial Independence #. Another year after that, I had the cushion to leave my W2 and just do whatever I want. In fact, my wife can leave her job as well, but she likes going to work and socializing with her friends. I respect that. She has a school schedule, therefore has Weekends, Holidays, Winter Break and Summer Break. So we just travel with the kids when she is off contract.
Do what makes you two feel happiest.
Much like a ground ball in baseball. The more bounces it takes, the lower the chances of getting the batter, and the higher the chances for a bad hop, so don't lay back on it...charge it all the time...just don't charge it so fast you run right past it...and force yourself to make an off balance throw, as in out of control.
Hi Joe,
You know I respect you very much and your system is a solid one. From our phone conversations in the past, I feel that your statement is true and your system is very efficient. Thank you.
If my situation was a bit different, I would have definitely gone under your tutelage. I chose the path I did due to the situation I was in... wife and 3 young kids... a wife that was barely tolerating what I wanted to do in REI. These days, she has given me full reign since she has seen the outcome of the hustle. Because I went down that path, I wanted to stick with what I felt I knew and get good at that one thing first. I think I have a good sense of my local market and have built a good team to extract value from it.
You always put out the most clear and direct posts/replies. I think you bring great value to this forum and I wish more people would follow and dig into your mindset, especially the newer investors that have not yet found a clear strategy.
#4 All Forums Contributor
- Plymouth, MI
Quote from @Sam Yin:
Quote from @Joe Villeneuve:
Quote from @Sam Yin:
Joe,
As always, straight to the point.
I would mostly agree with Joe. The other side of it is how well can you and your husband sleep at night in the current condition. Do you want to retire earlier by expanding your REI? If you are comfortable currently and already have that retirement age in mind, AND are on the path to achieving it, just put your money in 457. Its tax-deferred and you can borrow from it, up to 50K or 1/2 its value, whichever is less. Now is the best time to do it because stocks are in a slump and will continue to drop a bit more.
However, if you want to retire earlier and get out of the rat race, then may be dig deeper into REI and make some moves with the extra cash.
I was about 40 yrs old when I hit a similar spot in life. For a split moment, I was going to pay down the few properties I had and planned to retire around 50 years old. I chose the latter. I absorbed as much as I could and hustled. Just over 1 year later, I hit my Financial Independence #. Another year after that, I had the cushion to leave my W2 and just do whatever I want. In fact, my wife can leave her job as well, but she likes going to work and socializing with her friends. I respect that. She has a school schedule, therefore has Weekends, Holidays, Winter Break and Summer Break. So we just travel with the kids when she is off contract.
Do what makes you two feel happiest.
Much like a ground ball in baseball. The more bounces it takes, the lower the chances of getting the batter, and the higher the chances for a bad hop, so don't lay back on it...charge it all the time...just don't charge it so fast you run right past it...and force yourself to make an off balance throw, as in out of control.
Hi Joe,
You know I respect you very much and your system is a solid one. From our phone conversations in the past, I feel that your statement is true and your system is very efficient. Thank you.
If my situation was a bit different, I would have definitely gone under your tutelage. I chose the path I did due to the situation I was in... wife and 3 young kids... a wife that was barely tolerating what I wanted to do in REI. These days, she has given me full reign since she has seen the outcome of the hustle. Because I went down that path, I wanted to stick with what I felt I knew and get good at that one thing first. I think I have a good sense of my local market and have built a good team to extract value from it.
You always put out the most clear and direct posts/replies. I think you bring great value to this forum and I wish more people would follow and dig into your mindset, especially the newer investors that have not yet found a clear strategy.
Quote from @Sam Yin:
Quote from @Becca F.:
You bring up a great question. I just purchased my 4th rental property and I've been considering paying down one of the mortgages vs. continuing to expand my portfolio. From my non-investor friends, they are horrified that I bought a 4th property - "you have so many mortgages and debt, you should have paid cash for that 4th property (I considered that but got a 6.99% interest rate conventional loan), stop buying property and put your money into a CD".
I'm trying to figure out how many more properties I would need to buy to replace my W2 income. I'm not at my financial freedom number yet to quit/retire early from W2 job (could work part-time or independent contract work, just don't want to have to work full time), which I like to do in about 3 to 5 years (3 years is very ambitious)
Sam, you were able to dig deep into REI and quit/retire early from your W2 in 2 years? Amazing. How many more properties did you wind up buying?
To get to FI, I exchanged 3 single-family rentals for 3 multifamily rentals that totaled 28 units. Those 3 SFRs were pushing out about 10K in cash flow per year, at best. With the 3 MFRs cranking out roughly 100K in cash flow per year. After seeing the stark difference, I went ahead and exchange my 3 remaining properties into 1 MFR that had 19 units. I did not use all the funds, so I was left with about 100K in hand. Because I realize the profitability of MFRs and I was focused on my timeline, I immediately exchange one of the early MFR and took it from a 10 unit to a 16 unit with a better unit mix. Those moves doubled my cash flow immediately. With rent raises and a fixed debt, I was able to increase the cash flow even further. From there, I was able to acquire smaller MFRs just from the cash flow and continue to grow the portfolio.
Mind you, I live meagerly and my wife spends liberally. She spends every penny she makes from her job, and a little of what I make as well. Overall, taking that into consideration, I needed to bring home at least 50K/year to cover all our living expenses and anything over 60K would be comfortable living. I factored another 30K for health insurance in case I ever needed to pay for it. Tack on another 20K for family travels/vacations and we end up with about 100K as my FI number. Thus, I think about 20 to 25 strong rental units can take most people to a comfortable FI. Any more is just a bonus and a personal choice/goal.
Those numbers factored in maintenance, reserves, capex, and a team of 4 managers that I have on salary. That bought me my time back and took me to RE, fulfilling FIRE. But because it freed my time up so much and my wife still wants to work, I still dabble to grow the portfolio. Im in the process of acquiring another 10 units. As you can see, it becomes increasingly easier to acquire more as the cash flow grows. The salaries eat up about 15% of potential profits, but it allows me to travel all summer with the family and take holiday trips. I also give those managers a free unit to live in too!
Three times a year, I issue rent raises to about 1/3 of the units, catching all of them each year. Those rent raises are straight cash flow because the debt is fixed. Additionally, they COMPOUND!! For example, if each group is raised a total of 30K per year, and there are 3 groups, that is almost 100K in cash flow added per year. The following year can get even more due to the nature of compound interest... or you can choose to raise less depending on the economy. Additionally, if you delay some gratification and use the excess to grow the portfolio, then there is even more cash flow to unlock after each acquisition.
I do plan to hit the breaks as soon as my wife fully retires... probably in 5 to 7 years, and the kids are all adults. between now and then, maybe pick up another 100 or so units slowly and concentrate on building a solid succession plan for future generations not to dissolve it all. The truth is that I may not want to acquire much more than that because it does take up time, and add to liabilities. At some point, I might just want to cash out a large portion of the portfolio and move to a different investment class... may be 1/3 in real estate, 1/3 in the money market, and 1/3 in precious metals????
$100,000 cash flow is really impressive! Are most of your MFs mortgage free? I'm not able to buy multi-family on my own definitely not in California, maybe the Midwest but I'm talking more about 2 to 5 units not commercial like an apartment building. I co-own an apartment building (mortgage free) in the Bay Area with family members and it's cash flowing the most. The other 3 properties are SFH, one in the Bay Area, two in Indiana (1 Class A and 1 Class C moving up to B). The SFH in the Bay Area has the potential to cash flow at least a $1200 to $1500 a month (long story but I need to get roommates in for current tenants).
One person suggested that I do 1031 exchange the Bay Area SFH and buy out of state, either multiple SFHs or multi-unit. The problem is that there is no Proposition 13 in other states, like in California. My Indiana SFH#1 property taxes have gone up dramatically due to increase in home values in the last 3 years but I'm still in a positive cash flow. I'm not going to give up a California property to buy in other states, especially Class C properties in the Midwest. Property taxes have increased significantly with the higher home values. I'd be exchanging one property for multiple properties if I did the 1031 with more roofs to replace, higher taxes, more tenants to deal with etc.
I'm pretty far off from 20 to 25 rental units. If you count my share of the apartment building, that would be maybe 2 units. So I'm at 5 units (with the current 3 SFHs). I don't think I need to buy 50 or 100 units like the real estate gurus tell people. I don't have millions in capital to buy multi-family buildings. My other thought was to leave California when I quit/retire early from W2 job but the other states (Nevada or Arizona) I would move to have high home prices and their property taxes go up with almost no limit while we have 2% cap each year with Prop. 13. What do people who don't have millions in extra funds to buy real estate do to scale and retire early?
Quote from @Joe Villeneuve:
Taking your money to pay down the mortgage on a rental property is just adding to your cost of the property. Your tenant is already paying it for you. You're already getting those payments made for you for free,...why would you want to start subbing your cash for the tenant's?
Before you bring up the "savings" on the interest, I want you to read the statement I just made above until you say "oooooh".
Omg...I just made two extra principal payments on my two SFHs with the highest interest rates, 6.75% (this was a cash out refi to pay for renovations so the house could be rented it) and 6.99% (this SFH bought recently in March 2023). The other rental has 3.875% mortgage so I'm not paying down principal on that one. Everyone, mostly my non-real estate investor friends, are horrified that I have multiple mortgages and am paying all this interest. My financial advisor cringes every time I talk about doing another deal - he said I should buy bonds and I need to diversify and I have too much in RE.
If you pay down the rental property to where it's mortgage free or very low, isn't your cash flow going to go way up? So I shouldn't be paying down those rental property mortgages?
#4 All Forums Contributor
- Plymouth, MI
Quote from @Becca F.:
Quote from @Joe Villeneuve:
Taking your money to pay down the mortgage on a rental property is just adding to your cost of the property. Your tenant is already paying it for you. You're already getting those payments made for you for free,...why would you want to start subbing your cash for the tenant's?
Before you bring up the "savings" on the interest, I want you to read the statement I just made above until you say "oooooh".
Omg...I just made two extra principal payments on my two SFHs with the highest interest rates, 6.75% (this was a cash out refi to pay for renovations so the house could be rented it) and 6.99% (this SFH bought recently in March 2023). The other rental has 3.875% mortgage so I'm not paying down principal on that one. Everyone, mostly my non-real estate investor friends, are horrified that I have multiple mortgages and am paying all this interest. My financial advisor cringes every time I talk about doing another deal - he said I should buy bonds and I need to diversify and I have too much in RE.
If you pay down the rental property to where it's mortgage free or very low, isn't your cash flow going to go way up? So I shouldn't be paying down those rental property mortgages?
You're not gaining any cash flow, you're losing it every month you make that extra payment.
If you have negative CF, you're also not gaining any cash flow, and you're not converting negative to positive. All you're doing is paying that negative CF upfront.
Quote from @Joe Villeneuve:
Quote from @Becca F.:
Quote from @Joe Villeneuve:
Taking your money to pay down the mortgage on a rental property is just adding to your cost of the property. Your tenant is already paying it for you. You're already getting those payments made for you for free,...why would you want to start subbing your cash for the tenant's?
Before you bring up the "savings" on the interest, I want you to read the statement I just made above until you say "oooooh".
Omg...I just made two extra principal payments on my two SFHs with the highest interest rates, 6.75% (this was a cash out refi to pay for renovations so the house could be rented it) and 6.99% (this SFH bought recently in March 2023). The other rental has 3.875% mortgage so I'm not paying down principal on that one. Everyone, mostly my non-real estate investor friends, are horrified that I have multiple mortgages and am paying all this interest. My financial advisor cringes every time I talk about doing another deal - he said I should buy bonds and I need to diversify and I have too much in RE.
If you pay down the rental property to where it's mortgage free or very low, isn't your cash flow going to go way up? So I shouldn't be paying down those rental property mortgages?
You're not gaining any cash flow, you're losing it every month you make that extra payment.
If you have negative CF, you're also not gaining any cash flow, and you're not converting negative to positive. All you're doing is paying that negative CF upfront.
I will concur with Joe. Anytime you take cash from your pocket to add to the property, it will cost you. If you are trying to pay it off and keep it, You are BUYING equity rather than building.
However, if you put cash in to improve it with the intent to force equity and extract it, that's different. For example, I put in remodels, roofs, paint, etc. But I 1031x it as soon as its completed. Often, putting in 30k results in an extra 100k to 300k in forced equity based on appraisal.
I do not pay extra money into the mortgage. The income covers it and the operating expenses. The remaining is my cash flow. I continue to grow the portfolio. As rents increase, I purchase more/more frequent.
I got to 100k cash flow roughly 1 year into the MFR journey. But that was just the projection on paper as the properties were purchased months apart. I continue to grow the portfolio and doubled thf cash flow in year 2... on paper, but verified by actual money coming in and additional benefits after filing taxes. This is year 3 and will triple year 1. This is due to portfolio growth, rent raises, and tax benefits.
The cash flow allowed me to invest in other people start up companies. I tossed 200k into an internet personality because I believe in him. I hope it pans out well. I should find out in 5 to 7 years. But I don't think about it because it was money that was created from REI, and it was over what my living expenses were. If it fails... oh well. That's the power of reaching FI.
To get here, there were many 1031x. I did not pay down the debt, but rather increased it. I am now close to 10M in debt. Thus, it would be silly to pay down the debt above and beyond the scheduled mortgage payments.
But then again, this is just one of many methods/strategies out there. Pick one and go for it. I still believe in CA and I invest here. Dont listen to the nay sayers. Set a goal. Reach it. Then set the bar higher and then higher. And before you know it, you will achieve something great.
#4 All Forums Contributor
- Plymouth, MI
Quote from @Sam Yin:
Quote from @Joe Villeneuve:
Quote from @Becca F.:
Quote from @Joe Villeneuve:
Taking your money to pay down the mortgage on a rental property is just adding to your cost of the property. Your tenant is already paying it for you. You're already getting those payments made for you for free,...why would you want to start subbing your cash for the tenant's?
Before you bring up the "savings" on the interest, I want you to read the statement I just made above until you say "oooooh".
Omg...I just made two extra principal payments on my two SFHs with the highest interest rates, 6.75% (this was a cash out refi to pay for renovations so the house could be rented it) and 6.99% (this SFH bought recently in March 2023). The other rental has 3.875% mortgage so I'm not paying down principal on that one. Everyone, mostly my non-real estate investor friends, are horrified that I have multiple mortgages and am paying all this interest. My financial advisor cringes every time I talk about doing another deal - he said I should buy bonds and I need to diversify and I have too much in RE.
If you pay down the rental property to where it's mortgage free or very low, isn't your cash flow going to go way up? So I shouldn't be paying down those rental property mortgages?
You're not gaining any cash flow, you're losing it every month you make that extra payment.
If you have negative CF, you're also not gaining any cash flow, and you're not converting negative to positive. All you're doing is paying that negative CF upfront.
I will concur with Joe. Anytime you take cash from your pocket to add to the property, it will cost you. If you are trying to pay it off and keep it, You are BUYING equity rather than building.
However, if you put cash in to improve it with the intent to force equity and extract it, that's different. For example, I put in remodels, roofs, paint, etc. But I 1031x it as soon as its completed. Often, putting in 30k results in an extra 100k to 300k in forced equity based on appraisal.
I do not pay extra money into the mortgage. The income covers it and the operating expenses. The remaining is my cash flow. I continue to grow the portfolio. As rents increase, I purchase more/more frequent.
I got to 100k cash flow roughly 1 year into the MFR journey. But that was just the projection on paper as the properties were purchased months apart. I continue to grow the portfolio and doubled thf cash flow in year 2... on paper, but verified by actual money coming in and additional benefits after filing taxes. This is year 3 and will triple year 1. This is due to portfolio growth, rent raises, and tax benefits.
The cash flow allowed me to invest in other people start up companies. I tossed 200k into an internet personality because I believe in him. I hope it pans out well. I should find out in 5 to 7 years. But I don't think about it because it was money that was created from REI, and it was over what my living expenses were. If it fails... oh well. That's the power of reaching FI.
To get here, there were many 1031x. I did not pay down the debt, but rather increased it. I am now close to 10M in debt. Thus, it would be silly to pay down the debt above and beyond the scheduled mortgage payments.
But then again, this is just one of many methods/strategies out there. Pick one and go for it. I still believe in CA and I invest here. Dont listen to the nay sayers. Set a goal. Reach it. Then set the bar higher and then higher. And before you know it, you will achieve something great.
Thanks for sharing. My mortgages total $1 million (including primary residence). I thought that was high but in the context of 2 California properties, it's not that bad. I was getting discouraged from the naysayers who told me I should pay down my rental mortgages with the highest interest rates. I'm brainstorming strategies to scale so I can reach my Financial Independence number sooner.
Going to play devil's advocate here: with all these mortgages, what if you become incapacitated/disabled and can't work anymore? Or make decisions regarding your investment properties? Now my kids are stuck making these decisions - I've had enough talks with them to advise them not to sell off the properties and take the cash (which is many non-investor's thoughts) and to keep renting them out if I were to pass away (or 1031 to buy a more profitable property). In my case my W2 job makes up most of my income and having a California relatively high salary enables me to qualify for conventional mortgages to buy properties. The lender does look at at rental comps, with my last SFH purchase. They count my rental income from my other properties to factor in getting the mortgage.
Great points. I talked to another investor recently who pays cash for all his properties. I was really shocked since he's not using any leverage. This is what several Bay Area investors have done to avoid the very negative cash flow situation with rent and mortgage payments. Example: I looked at a SFH house that needed lots of work in a suburb of San Francisco, list price $649,000. The agent told me there was already a cash offer. Bidding war with investors, sold for $680,000. That investor renovated it (don't know the cost). House rented out on Zillow for $3600 a month (lowered from $3995). That is a terrible return.
Quote from @Becca F.:
Thanks for sharing. My mortgages total $1 million (including primary residence). I thought that was high but in the context of 2 California properties, it's not that bad. I was getting discouraged from the naysayers who told me I should pay down my rental mortgages with the highest interest rates. I'm brainstorming strategies to scale so I can reach my Financial Independence number sooner.
Going to play devil's advocate here: with all these mortgages, what if you become incapacitated/disabled and can't work anymore? Or make decisions regarding your investment properties? Now my kids are stuck making these decisions - I've had enough talks with them to advise them not to sell off the properties and take the cash (which is many non-investor's thoughts) and to keep renting them out if I were to pass away (or 1031 to buy a more profitable property). In my case my W2 job makes up most of my income and having a California relatively high salary enables me to qualify for conventional mortgages to buy properties. The lender does look at at rental comps, with my last SFH purchase. They count my rental income from my other properties to factor in getting the mortgage.
There is no single right or wrong answer, just the right answer for you. Your challenge is to find that right answer for you. No one here on this forum, or on earth, will have the perfect answer because they are not in your shoes. They do not have your tolerance, fears, and ambitions. They do not make your money or do not worry about what troubles you.
At the beginning of my REI journey, my W2 was my primary income. To leave my W2, I had to guarantee I can generate the same income and compensation package, or darn close to it, but rather, even more. The trade off is the release from those golden handcuffs and the freedom of choice in all that you do. Think about it, do you not factor in your employer when you are about to make some personal choices? Your employer and your salary is always in the back of your mind. Thus, you are not making a truly free choice. And for those that claim to make the exact same decisions regardless, then you either live the life of the employer's policies/goals or you are lying to yourself. If it's the former, then you are the lucky one that have a job you love... and it's not a job, because you love it and would do it for free. Get my drift??
To your question about playing devils advocate, that can be played in every possible scenario put forth. Because their is always that what if. Somethings we mitigate using what we know and trust, others we either keep worrying about of forget about.
For me, I established a family trust with 3 sub trusts. Within it are rules for the successors and beneficiaries. The assets accumulated in my lifetime is a bonus to the beneficiaries, not a guarantee. At the same token, if I am incapacitated, it really does not matter, but I get it, some people cannot accept that. Therefore, the rules within the trust has dictated what I believe to be the best method of asset preservation since I believe there has been enough created to take care of my bloodline for many generations to come. This is as long as they follow those established protocols.
The parameters include regular drug testing, incentives for education, business and entrepreneurship, as well as producing heirs. Full distribution occurs when they are 40 yrs old, when I believe most people mature. The heirs also have an obligation to continue to deposit into the trust to increase the pot for capital investments, etc... this happens to be my way of preservation and growth. You have to figure what works for you and your goals.
This take effect if I'm incapacitated. But then again, if it didn't, it would not matter. But that's the person I am. I am a refugee from Cambodia that survived mass genocide of millions in a few short years. America was my land of opportunity and I seized it. I have been down to zero more than once and crawled back up. Your upbringing, morals and ethics will have the most influence on your fears and anxieties.
Food for thought: I had a great government job with a guaranteed 6figure pension, and I found I'm better off without it. I was only a few years away from maxing my pension but I chose to walk away. Many at work say I'm crazy. But I think I did the right thing.
Quote from @Becca F.:
Great points. I talked to another investor recently who pays cash for all his properties. I was really shocked since he's not using any leverage. This is what several Bay Area investors have done to avoid the very negative cash flow situation with rent and mortgage payments. Example: I looked at a SFH house that needed lots of work in a suburb of San Francisco, list price $649,000. The agent told me there was already a cash offer. Bidding war with investors, sold for $680,000. That investor renovated it (don't know the cost). House rented out on Zillow for $3600 a month (lowered from $3995). That is a terrible return.
I have found that a lot of the wealthiest folks who park their money into real estate often do not use any leverage at all. Mind you, I'm referring to folks who are truly wealthy and generally got their money from outside of real estate. I face a similar problem competing against cash buyers here in SoCal...though I'm sure the situations is much more extreme up in the Bay Area.
However, for ordinary folks like me who have to plan and work hard to gain FI at a reasonable age, @Joe Villeneuve's system is very effective and definitely makes the most use of the capital we have.
Regarding the OP's question (@Sarah Jukes), I think speaking to a tax or financial adviser will really be hit or miss. They may or may not understand your situation as their training is more along the lines of mainstream planning. And as for running the numbers, I feel that you might do a better job than they would. I think it would be much more effective speaking to folks who have goals similar to yourself. I think some of the responses you received in this thread have been excellent.
I'm in a similar situation as you (no mortgage on primary, approx. $2M in rental debt, very small 401k/IRA). We struggle with the same question ourselves. If we work hard and pay off all debt on our rentals in the next 5 or so years, we would have a very comfortable retirement with very little to worry about. Ultimately we decided not to try and pay things off early. We acquired these properties well before the recent rate hikes and so it would be difficult to justify it from a NPV perspective. Instead, we are working to build up our public REIT portfolio for now which is relatively liquid while providing nice cash-flow as well as flexibility for us down the line. Our plan is to see what the market is like 5-10 years down the line and then decide what to do with our REITs.
Quote from @Sam Yin:
Quote from @Becca F.:
Thanks for sharing. My mortgages total $1 million (including primary residence). I thought that was high but in the context of 2 California properties, it's not that bad. I was getting discouraged from the naysayers who told me I should pay down my rental mortgages with the highest interest rates. I'm brainstorming strategies to scale so I can reach my Financial Independence number sooner.
Going to play devil's advocate here: with all these mortgages, what if you become incapacitated/disabled and can't work anymore? Or make decisions regarding your investment properties? Now my kids are stuck making these decisions - I've had enough talks with them to advise them not to sell off the properties and take the cash (which is many non-investor's thoughts) and to keep renting them out if I were to pass away (or 1031 to buy a more profitable property). In my case my W2 job makes up most of my income and having a California relatively high salary enables me to qualify for conventional mortgages to buy properties. The lender does look at at rental comps, with my last SFH purchase. They count my rental income from my other properties to factor in getting the mortgage.
There is no single right or wrong answer, just the right answer for you. Your challenge is to find that right answer for you. No one here on this forum, or on earth, will have the perfect answer because they are not in your shoes. They do not have your tolerance, fears, and ambitions. They do not make your money or do not worry about what troubles you.
At the beginning of my REI journey, my W2 was my primary income. To leave my W2, I had to guarantee I can generate the same income and compensation package, or darn close to it, but rather, even more. The trade off is the release from those golden handcuffs and the freedom of choice in all that you do. Think about it, do you not factor in your employer when you are about to make some personal choices? Your employer and your salary is always in the back of your mind. Thus, you are not making a truly free choice. And for those that claim to make the exact same decisions regardless, then you either live the life of the employer's policies/goals or you are lying to yourself. If it's the former, then you are the lucky one that have a job you love... and it's not a job, because you love it and would do it for free. Get my drift??
To your question about playing devils advocate, that can be played in every possible scenario put forth. Because their is always that what if. Somethings we mitigate using what we know and trust, others we either keep worrying about of forget about.
For me, I established a family trust with 3 sub trusts. Within it are rules for the successors and beneficiaries. The assets accumulated in my lifetime is a bonus to the beneficiaries, not a guarantee. At the same token, if I am incapacitated, it really does not matter, but I get it, some people cannot accept that. Therefore, the rules within the trust has dictated what I believe to be the best method of asset preservation since I believe there has been enough created to take care of my bloodline for many generations to come. This is as long as they follow those established protocols.
The parameters include regular drug testing, incentives for education, business and entrepreneurship, as well as producing heirs. Full distribution occurs when they are 40 yrs old, when I believe most people mature. The heirs also have an obligation to continue to deposit into the trust to increase the pot for capital investments, etc... this happens to be my way of preservation and growth. You have to figure what works for you and your goals.
This take effect if I'm incapacitated. But then again, if it didn't, it would not matter. But that's the person I am. I am a refugee from Cambodia that survived mass genocide of millions in a few short years. America was my land of opportunity and I seized it. I have been down to zero more than once and crawled back up. Your upbringing, morals and ethics will have the most influence on your fears and anxieties.
Food for thought: I had a great government job with a guaranteed 6figure pension, and I found I'm better off without it. I was only a few years away from maxing my pension but I chose to walk away. Many at work say I'm crazy. But I think I did the right thing.
Thanks for sharing Sam. Great advice about the asset protection. I have a trust but didn't go into specifics about drug testing etc. I don't have nearly the amount of properties you have (3 SFH rentals solely owned and 1 multi-unit co-owned so far). I have talked to my kids many times to continue renting out the properties "don't sell the properties and blow it on an expensive vacation or buy Ferraris" but If I'm dead, and they spend it all, I can't help them then. Non-investor RE mind set is to sell and take the cash or put it into the stock market (which you have no control over the value unlike real estate where you can value add or leverage).
That's true. Someone might be in the same situation as me with a similar number properties and equity in the properties and make a different decision. I guess it goes back to the original poster and her question. Some people have 2 or 4 properties and that works for them and some people have 50 properties and want to keep scaling. Appreciate all the advice.
Quote from @Tony Kim:
Quote from @Becca F.:
Great points. I talked to another investor recently who pays cash for all his properties. I was really shocked since he's not using any leverage. This is what several Bay Area investors have done to avoid the very negative cash flow situation with rent and mortgage payments. Example: I looked at a SFH house that needed lots of work in a suburb of San Francisco, list price $649,000. The agent told me there was already a cash offer. Bidding war with investors, sold for $680,000. That investor renovated it (don't know the cost). House rented out on Zillow for $3600 a month (lowered from $3995). That is a terrible return.
I have found that a lot of the wealthiest folks who park their money into real estate often do not use any leverage at all. Mind you, I'm referring to folks who are truly wealthy and generally got their money from outside of real estate. I face a similar problem competing against cash buyers here in SoCal...though I'm sure the situations is much more extreme up in the Bay Area.
However, for ordinary folks like me who have to plan and work hard to gain FI at a reasonable age, @Joe Villeneuve's system is very effective and definitely makes the most use of the capital we have.
Regarding the OP's question (@Sarah Jukes), I think speaking to a tax or financial adviser will really be hit or miss. They may or may not understand your situation as their training is more along the lines of mainstream planning. And as for running the numbers, I feel that you might do a better job than they would. I think it would be much more effective speaking to folks who have goals similar to yourself. I think some of the responses you received in this thread have been excellent.
I'm in a similar situation as you (no mortgage on primary, approx. $2M in rental debt, very small 401k/IRA). We struggle with the same question ourselves. If we work hard and pay off all debt on our rentals in the next 5 or so years, we would have a very comfortable retirement with very little to worry about. Ultimately we decided not to try and pay things off early. We acquired these properties well before the recent rate hikes and so it would be difficult to justify it from a NPV perspective. Instead, we are working to build up our public REIT portfolio for now which is relatively liquid while providing nice cash-flow as well as flexibility for us down the line. Our plan is to see what the market is like 5-10 years down the line and then decide what to do with our REITs.
Thanks for your feedback Tony. I did buy a REIT, wish I had bought more a few months ago when prices were lower. I found that financial advisors kind of helpful - he did get me set up a premium savings account earning 4.8% interest but he feels that I have too much in real estate and REITs aren't advisable. I don't pay him a fee or commission since I haven't bought a fund with him. He works at my bank so I guess he is just advising me to be helpful.
I also don't think paying off my mortgages early is the best use of my money now. I'm trying to build capital or get a huge cash infusion, which is why I was considering fix and flip in Indianapolis metro area (where my 2 SFHs area). Then there's capital gains tax on a flip. Exit strategy to hold as a long term rental if I couldn't sell it. I wouldn't flip in the Bay Area. If I couldn't sell the house now I'm stuck with a huge mortgage payment and trying to rent it out at negative cash flow.