@Michael Chewning Welcome.This is a debate we often have in my home. In short, I believe it's a matter of preference. Here's a good quote from Burton Malkiel's: A Random Walk Down Wall St.:J.P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, 'What should I do about my stocks?' Morgan replied, 'Sell down to your sleeping point' Every investor must decide the trade-off he or she is willing to make between eating well and sleeping well. High investment rewards can only be achieved at the cost of substantial risk-taking. So what is your sleeping point? Finding the answer to this question is one of the most important investment steps you must take.When it comes to loans, I believe in the same 'sleeping point.' Depending on your comfort level, it may be 1, 2, 10. It may also be good to do an analysis on what properties may be sold for gain, or are just costing too much for what they provide. Getting a loan off the books may be as simple as eliminating the weakest of the 4 properties.

The better question to be asked is what are the local market conditions doing and how I can I add to (and protect) my wealth creation. Without your city information, this answer is hard to come by.Interest rates are about as low as they are expected to be through 2020 at least. With that said, anytime you can leverage someone else's capital to improve upon your own capital growth is a good thing (Good debt vs Bad debt). If you can reinvest your capital into more Real Estate (or other assets that make you money), then 8/10 times the better off you will be. There may come a time when you simply want everything paid off and ride that retirement train, but 3 houses won't cut it IMHO.Depending on your location, you may want to start considering Multi-Family properties, Office Buildings or re-purpose some Retail space based on your location's City Plan. If those don't tickle your fancy, then your game plan may look something like getting 20 SFR, rehab/stabilize and sell off 10 of those in 2020 and, if purchased correctly to start with, then pay off the remaining 10 and ride the income wave. This plan though depends on your ability to acquire below today's market values, add value to them, be in a market of slow/moderate, yet steady, upward appreciation and location. Once you get above the 5 house mark, you can then ask your local Banker to give you a Commercial Blanket Mortgage with partial releases so you can exceed your conventional limit and continue on. So long as those properties are producing a DSCR of 1.25+, are stabilized and you don't owe more than 75% of their values, this may be a good option for you. Since you should be doing your ventures in a Business anyway, that's another way of keeping your Stellar Credit in tact, leveraging OPM and ultimate Wealth Creation. Even your SDRA should be a Business which I'm sure it is.Today through 2020, at least, will provide the savvy Investor with plenty of opportunities to grow their Net Worth so long as that Investor is "In-Tune" with the Market and related Generational Preferences.Don't put all your eggs into one basket, grow to at least a 10-door income stream./Happy Investing!

I say pay down the Debt! There is no such thing as good debt. Your rental properties are cash flowing today (good debt) but if something happen (you get sick and unexpected increase in vacancies) the good debt turns into bad debt. Paying down debt is all about being safe, so you want to slowly but aggressively pay down any debt, not just the debt that are associated with your rental properties. You would want to set aside 6-12 months of your monthly expenses as reserve. You don't want to pay $10k toward some debt and then use your credit card to replace a furnace. Setup automatic payments of $100, or $200, or $300 above your normal payment amounts ( whatever you can afford). You want to get in habit of paying more. I pay 15% more on my personal home, all principal reduction. Start with the the debt with the highest interest rates. You don't want to go broke paying down the debt and safe. Question: A person with 10 houses with that make $60k a year and have $10k in expenses a years and a second person with 30 house that make $100k a year and have $60k in expenses. Which person would you want to be?

Buy more.I'm 31 and at 11 SFR currently... There have been MANY sleepless nights. I had to get a mouth guard to wear at night cause I was grinding my teeth due to stress. If it were easy and stress free everyone would do it. Keep pushing and you'll get more comfortable therefor relieving the stress. Your young and can allow for more risk. I'd look at multi-family or commercial down the road. I won't be buying anymore SFR but looking at going commercial soon.Don't just buy anything though. It has to make sense and most importantly make money. Re-think the house of yours that isn't cash flowing. This is a business. Upping rents $25-$50 most of the time won't push a happy tenant out.Best of luck.

A popular piece of advice given in the stock and bond market world is that however old you are, you should keep (your age)% of your portfolio in bonds and (1 - (your age))% in stocks. The idea is that you can afford to take on more risk while you are younger in stocks, and as you get closer to retirement, you want more steady income.I think you can follow similar advice when thinking about paying down mortgage vs. reinvesting. When you are young, I would dump a majority of the money into more properties. As you get closer to retirement, I would dump the majority of the money into paying off the mortgage. And remember, you don't have to do one or the other.... I think a bit of both is healthy.

What happens if one of your tenants gets laid off and stops paying rent? then you pay to evict them and they trash the house on the way out. the mortgage company is not going to care, they want their monthly check. Do you have the resources to cover that, as well as pay down your other loans and student debt? Consider the worst case scenario and make sure you have it covered via reserves or free cash flow etc. There will be another recession at some point so be ready before it happens.

Knowlege and experience help you sleep at night, paying down debt doesn't.After I bought my first rental property (a duplex in West Wilwaukee) I could not sleep at night. I always had the feeling that I had to go there and check if everything was ok. I woke up in the middle of the night and was worried it could be on fire or under water. I would worry about the tenants moving out or the sewer line break, but mostly I did worry about what I did not know. I was clearly above my sleeping point (I like that quote a lot @Trevor Ewen ). And it had nothing to do with debt. My PITI was just $690 on a 30 year fixed mortage and 2x$750 in rent. Even totally vacant I was making good money at my corporate job having to pay $490 a month out of pocket would not have been an issue at all. Yet I was worried and it was not the debt that worried me, I think it was just the new responsibility.So the duplex never burnt down and with more experience and more rental properties under my belt I had no issues sleeping. It is a little bit counter intuitive: when you are at the starting point everything is very new, exciting and also concernining. It seems that with more properties these feelings must intensify. But in fact the more experience you have and the more you know you will worry less and plan more. Vacancies become a percentage and are reserved for, the same for repairs and desaster type of incidents (flooded basement etc).@Michael Henry is absolutley right about reserves; most conservative banks want you to have at least 6 months reserves. But I have to disagree with him on the question if there is good debt. Being underleveraged is a bad thing in the corporate world, analysts and shareholders will punish a company for not beeing leveraged properly. Good debt comes with prudent business practices and conservative planning. The best definition I have ever heard is self eliminating debt. If an investment generates consistently enough money to pay down the financing and eliminates it over time while growing your equity I would definitley call that a good thing. Having too much equity in a rental property will cause some KPI's to go down, most obviously return on investment (or return on equity). Even a 2% rule rental property will not produce very good ROI if financed 100%. Do the math. Building a rental business requires initially funds from another source like a W2 income. Once the business grows and cash flows it becomes self funding. At some point the next aquisition can be funded partially (down payment) from the free cash flow. At that point contribution from your W2 income is no longer necessary, although it will grow the equity position of the business and support healthy growth.Dept pay down will accelerate over time and start to pick up after about 5 years on a 30 year note. At the same time you have a good chance for some appreciation and increased rental income. The equity position will start to grow faster at that point and selling off some assets will allow to pay down debt on the remaining properties. But this process takes time, at elast five to ten years. One can either hold a portfolio and simply give it time and wait or continue to ad properties over time to accelerate the process. That's a matter of personal preference I think.

The answer depends on your dreams, goals, prediction of future interes rates, and risk tolerance. Interest rates are going to rise, so that's +1 for holding fixed rate long term loans right now. Need a bit more info on the other variables I cited to make any recommendation. We are in a similar situation. We decided to lock up as much long-term fixed rate loans as possible. And stop buying/start paying down when the projected income of the paid off properties is enough passive income to support our lifestyle.

@Michael Chewning - It depends on your goals... when my husband and I first started investing our plan was to buy four triplexes and then pay then down as fast as possible so in about 12 years we would own them free and clear and be able to live off the income. Then we changed our minds and decided to grow as fast as possible so we could live off the rental income with a mortgage and retire sooner, which requires a much higher volume and leveraging everything possible.

A lot of us change opinion about this as we season. I used to be all about growing and leveraging. Now I passed on exchanging into a nice quad after a tri sale because I didn't want to deal with banks anymore. I'm paying everything off. It's an easier decision with older mortgages at higher rates, but I enjoy the peace nonetheless. Hard to justify aggressively paying down something in the 3% range. I'll still keep some around in case a good one falls in my lap.I can always go refinance 'em if I hate being debt free, right? Not scrambling to chase down that next deal is awesome. Good discussion @Michael Chewning!

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Updated about 9 years ago, 01/03/2016

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Michael ChewningPoster

Muskego, WI

General Landlording & Rental Properties

Buy more or pay off?

Michael ChewningPoster

Muskego, WI

Posted January 23, 2015 06:05

Hello

New to hear so perhaps this is one thats been answered a lot.

We will be closing on our 3rd rental property in a few weeks.

- 1 SFH that was our original primary that the mortgage is underwater on so we kept and rented, Still underwater 4 years later but same Tenants

- 1 SFH which I own free and clear through an Self Directed IRA (these funds are locked up since it a retirement account, cannot combine them with personal funds, lots of fun legal rules), owned 1.5 years, same tenant. Was meant to be a flip but was just taking to long to sell and began running into financing issues. Seems to be going pretty good now though after some rough mistakes.

- New Rental SFH - Being purchased with 20% down conventional investor loan

We also have our primary home which is a conventional loan. We have pretty stellar credit so the mortgage companies/broker are happy to deal with us. My wife and I are both in our early thirties so plenty of time to retirement. We would like to keep our rental portfolio growing but we debate quite a bit back and forth if we are better off focusing on paying down the 3 loans or finding another property when we have the down payment.

Any help, guidance, suggestions, recommended readings or tips would be appreciated.

Thanks,

Mike

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