Pay off early or save cash to buy more property?

Question

Hi all, I'm new to this forum and the landlord gig. I've been at it since last 
	June and have had pretty good luck thus far. I'm 24 and have a lot to learn. I bought 5 properties in a 6 month span last year. 3 of which I managed to finance 0% down which many say is unheard of. Keep in mind I live in rural America so rental property around here sells from $15k to $30k all day. Right now I am currently just building a cash surplus and hunting for my next bargain. I am debating on whether I should focus on paying off the houses early or just continue adding property? I set my properties up on 10 year notes at 5% interest. Thanks all!

Bill S. · Answer

Conventional wisdom is what you have seen above. Early on lots of debt, long term and the more the merrier.

The challenge is you must decide what works best for you. If you don't like debt, then the slow and pay as you go approach may suit you best. Sure in the end you might not end up with as much but with the start you have, it won't make too much difference. You might be independently wealthy sooner with leverage but if you don't sleep and have health problems from stress, it's not worth it.

The other thing is you are young, that's good and bad. Young people tend to have lots of energy and optimism, that can burn you by leaving you over extended with time and resources. People say keep building on what you have, but that fails to consider the resources needed to do that. I'm not just talking money but primarily time and energy.

I say slow down and see what you have. Where you are, isn't changing rapidly so your not likely going to miss too much if you watch for a year or so. Save some cash and maybe even pay one of them off and see what you feel like at that point.

Account Closed · Answer

Make that money baby, keep on buying and use that leverage!

David Krulac · Answer

Particularly when starting out or near the beginning of your real estate investment path, I say borrow as much as you can for as long as you can.  Wouldn't be the same answer if you are 65, retiring and windong down.

Ali Boone · Answer

Keep buying properties!!!!

John Casper · Answer

I am also looking for all types of valuation methods to cram into my excel spreadsheet, this way I can spit out as many numbers and angles as possible (easily) while evaluating. If anyone would give me some feedback on my sheet I would appreciate it. PM for my MAT (master analysis template =] )

Kyle Rowe · Answer

What method do you guys use for calculating ROI on rental property? I've been searching around but, almost every method gives me a different rate of return and some use future sales of the property in the equation which in my opinion is not a factor at my age. Along with the method, what is an ideal ROI? And does that factor in for inflation, etc?

Kyle Rowe · Answer

My boss and I both are doing rentals. We are separate but, we discuss them quite often. He is big on using as much leverage as possible. Pretty much exactly what you said Justin on the 80% rule. I just am not a fan of debt but, I do understand commercial debt is entirely different than personal. I have zero personal debt for that reason.

0% down was great! I knew my local banker and he was able to personally appraise the properties last year and since they were bought so far under what he felt market value was I was able to do so. I have not bought a house this calendar year yet, but I was told the in-house appraising is now no longer allowed which will most likely mean back to 20% down. Time will tell.

Go big or go home right?

James Wise · Answer

0% down? Keep buying.

Justin B. · Answer

This is purely opinion but I'd always use leverage.  For example, with $100k you can buy a house that cash flows $800/month free and clear.  Or you can buy $500k worth of houses (let's assume 20% down) that cash flow $300/month a piece.  That same $100k can get you either $800/month or $1,500/month.  *AND* you'd most likely pay less taxes on the $1,500/month than you would on the $800/month.  Which one would you rather have?

At least that's the way I see it.  Of course there are other factors.  For those people that stress out about any debt (even good debt), they may much prefer the $800/month method free and clear.  All things being equal, I'll do whatever gets me the highest cash flow.

Just look at what you've bought so far.  Could you be where you are with the cash flow you have now if you would have bought what you could free and clear?  If not, why stop at 5 houses and pay them off?  Why not do 5 more houses, then 5 more, then 5 more, etc.  Leverage is what grows a portfolio in my opinion.  Everyone often has their thoughts around how much leverage to carry. 100% leverage would scare a lot of people here.  Not me if the cash flow is right.  For me, I typically like to carry between 60-80% leverage.  Once I drop to 60%, I refinance and bring it back up to 80% (or higher if the cash flow is right and the bank will let me).

Pay off early or save cash to buy more property?

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