Pros/Cons to paying off rental property early
Redwood City, CA · Member since 2018 · 11 posts · 11 votes
Pros/Cons to paying off rental property early
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesOriginally posted by @Chris Meunier:
Hi Everyone! I have a rental property with the following details:
- 210k loan balance
- $2500/month rent
- $6000/yr in income after PITI and costs today
If I pay off the remaining balance on the loan, I will have over 10% cash on cash return which sounds amazing. It is already cash flow positive today, around ~$600/month. My overall investment goals right now are to create passive income, so this would fit in with that. Is there anything I am missing with my considerations? Of course there is the option to invest the 210k in other real estate opportunities, but I may be hard-pressed to find something above 10% return. Thanks in advance for your thoughts.
If you pay off your mortgage, with cash I assume, you are not getting 10% CoCR. If you pay off the mortgage (a - $210k) and only make $6k CF + what ever the original mortgage payment was (I'm guessing a bout $15k/year), that gives you a return of only $21k...and an outgo of $210k. That's a net negative CoCR of 90%.
Right now you have the tenant paying off your mortgage for you, with an extra $6000/year in income. Why in the world would you go backwards $210k? Invest that $210k in something that will also let the tenant pay you money to live there.
94 Replies
- Napa, CA · Member since 2017 · 57 posts · 27 votes8y
@Chris Meunier Another option for more passive income is note investing. I just listened to @Dave Van Horn's podcast and got info from @Jay Hinrichs for a note investing program. It seems the returns are about 9-10%.
I've been following this thread with interest because I'm in an unusual situation of having cash to invest due to divorce proceedings, but finding it tough to get a fixed loan because I'm in the home my kids grew up in, which is expensive, and Fannie/Freddy lending looks 3 years out. Based on my current financial snapshot, my income will reduce due to reduced alimony, making my debt ratio unfavorable. I'm in process of ramping up my design business, but that's irrelevant for getting a loan today. (and no, I'm not going to downgrade the family home until my twins graduate high school in two years.)
I've been told by lenders that income trumps cash on hand, so I'm crunching numbers to see if I can "cash purchase" my way into bridging the income gap between my mortgage and required income via the automatic cash flow it would produce. I'm weighing the pros and cons of a cash purchase vrs other strategies that don't require lending such as note investing or syndications.
- Rental Property Investor · York, PA · Member since 2017 · 377 posts · 315 votes8y
@Robert M. - you had me until the last sentence.
There's a good argument to be made for both strategies - it all comes down to personal goals and preferences. Mathematically, one option is slower growth (which you agree to). The other option is safer and slower.
In answer to what went wrong - a lot of people didn't expect a crash, so they didn't keep reserves saved to protect themselves or their investments. This is why a lot of investors on here (if not all) will say that you should save 8% (or more) as a vacancy savings, 10% for CapEx, and 10% for Maintenance. Could there be another crash? Yes. Will my mortgage payments or expenses change? No. Will my income change? Maybe - but people need to continue living, and I would guess that my rental rates will stay similar to what they are now. I have no data to back that up, so now I'll have to go do some research as to what rent rates did during the 2008 crash. I personally don't seem to recall a drop in my own rental payments that I was making at the time, but I wasn't really paying attention.
If I assume that rent rates will stay the same, then I'm fine even if I have debt on fixed interest. If nothing else, I'll end up purchasing more properties for cheap and will love it.
The key is to have reserves, and I recall reading that the issue in 2008 was that investors were grabbing hand-over-fist and didn't bother to keep reserves. Because of that, they lost a lot.
Neither approach makes you dumb at math. One approach makes a lot of sense mathematically speaking, while another makes a lot of sense for ease of mind if you're inclined that way. Neither approach makes someone an idiot - it's just that some seasoned investors feel strongly that missed opportunities are a waste.
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes8y
You want to pay it down, but real estate works well with modest leverage. Many of us have low interest rate loans that may never happen again in a few years. No hurry to pay those off..
Originally posted by @Ben Wilkins:
@Robert M. - you had me until the last sentence.
There's a good argument to be made for both strategies - it all comes down to personal goals and preferences. Mathematically, one option is slower growth (which you agree to). The other option is safer and slower.
In answer to what went wrong - a lot of people didn't expect a crash, so they didn't keep reserves saved to protect themselves or their investments. This is why a lot of investors on here (if not all) will say that you should save 8% (or more) as a vacancy savings, 10% for CapEx, and 10% for Maintenance. Could there be another crash? Yes. Will my mortgage payments or expenses change? No. Will my income change? Maybe - but people need to continue living, and I would guess that my rental rates will stay similar to what they are now. I have no data to back that up, so now I'll have to go do some research as to what rent rates did during the 2008 crash. I personally don't seem to recall a drop in my own rental payments that I was making at the time, but I wasn't really paying attention.
If I assume that rent rates will stay the same, then I'm fine even if I have debt on fixed interest. If nothing else, I'll end up purchasing more properties for cheap and will love it.
The key is to have reserves, and I recall reading that the issue in 2008 was that investors were grabbing hand-over-fist and didn't bother to keep reserves. Because of that, they lost a lot.
Neither approach makes you dumb at math. One approach makes a lot of sense mathematically speaking, while another makes a lot of sense for ease of mind if you're inclined that way. Neither approach makes someone an idiot - it's just that some seasoned investors feel strongly that missed opportunities are a waste.
Good points Ben. It's my opinion that most investors have little to no reserves, still. There are so many new investors right now, due in part to cheap money and demand. Too many big hats with no cattle. Let's hope there isn't any economic correction any time soon. I hate sounding like a chicken little, but damn it, I'm going to have all my clothes on once the tide goes out.
- Specialist · Las Vegas, NV · Member since 2018 · 2 posts · 1 vote8y
If you decide to keep it at least look into getting the PMI removed...if you had it to begin with.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Robert M.:
Ask any investor who went broke in the 2008 crash. What went wrong? Oh, and there was a LOT of them, most of which will never recover. Debt = liability. I personally hate liability and want to pay my self the 5% mortgage interest over the years, rather than the bank. I can come up with deductions other than mortgage interest. Once the properties are paid off I can owner finance to keep the income stream in my golden years or continue to collect rent without paying the bank first. If I wanted to be a BIG investor my strategy would be different. I just want about 5 paid for properties, that's all I need, the Roths will do the rest. Besides, about 5 paid for rentals is so much less work and stress than say 40 or 50. I guess im a dumb a$$ at math.
Lost equity in a rental isn't a loss until you sell the property. If you don't need to sell the property, you didn't lose anything...yet. I had rentals in 2008. They dropped in value to the point I was upside down. I didn't lose anything because I kept the property. The equity I recovered, and sold the property at a profit some years later...and continued to cash flow the entire time.
When you pay down the debt using your cash, you are buying money at a cost much higher than the money you bought. If I let the tenant pay off my debt, instead of me, I'm ahead. If I come out of pocket to pay off my debt, then the cash flow I'm getting, even if it's double what I was getting before I paid off the debt, is just "catching me up"...not making me money.
Basic math:
Spend $16k on a down payment (20%) with a $700/month cash flow ($8400/yr) means I start making a profit in the 24th month.
Spend $90k cash on a property (100% payoff) with $1075/m ($12,900/yr) means it will take 7 years before I break even and make a profit. During those 7 years, you can count on having to replace the roof, and other misc items like the floors, appliances, etc... This means more out of pocket cash you need to catch up to before you make a profit.
The bottom line is this. Any and all cash you spend, is negative. Income is positive. If you spend more cash than you get back in profit...you are losing money.
In addition, you are losing the compounding effect of what you could get in added profits by investing with those funds you are spending by paying off the mortgage.
- 8yZach CumminsPro MemberReal Estate Agent · Carlsbad, CA · Member since 2017 · 53 posts · 68 votes
@Stephen Flynt thanks Stephen that's actually exactly what I needed to hear. Something to set the baseline so I can go out and find the next deal that can generate an over 6% ROI. My thought is multifamily... We are in SoCal...
- Rental Property Investor · Westport, CT · Member since 2017 · 176 posts · 183 votes8y
I don’t believe the biggest risk going forward is a drop in property values but rather an increase in interest rates. If you have adjustable rate mortgages you could see your expenses spike in the next few years.
On a $250,000 mortgage your annual payments will be $12,650 if you have a 3% interest rate and 30 year amortization. If rates rise to 6%, those annual payments will rise to $18,000.
For this reason I keep a balanced view on leverage. I tend to run at 40-45% equity in my properties. This keeps me safe and also gets me cheaper interest rates. I’ve also locked in as long as I can on my properties (although because they are commercial multis it’s difficult finding loans that lock in for more than 10 years).
For me, these are an investment not a job. I hire property managers and basically sit back and collect the checks. If I were more involved with my properties I might be willing to take more risk, but at this point I need to focus on my day job.
- Real Estate Agent · Vienna, VA · Member since 2016 · 289 posts · 253 votes8y
@Chris Meunier, what are your goals and where at you now vs. where you want real estate help you be.
Paying down a mortgage may make sense, or not, depending on where you are and where you are going. Here’s what I would do in any of the following scenarios:
1. Growth stage (you want to continue buying properties): don't pay down your mortgage. In this stage you need cash for down payments, cash purchases, rehabs, etc. Once you pay your bank, that money is gone. If you need it again, well, you'll have to ask them (refi, HELOC, etc.) and you'll have to qualify again and it will cost you money. You are better off by placing your money in a readily available option with low risk like an index fund, CD, money market account, etc.
2. Stabilization stage (you got your number of properties, or almost, but still need to make some tweaks to make sure you run your portfolio efficiently): You can pay some of your worse loans (high interest rates, ballon payments, etc.), but keep som cash is hand since you may need it for repairs, vacancies as you look for better tenants, etc.
3. Passive stage (you don’t want more properties, your portfolio runs at peak efficiency and it is managed by someone else): pay your loans, or most of them. Maybe keep the best ones. Invest also in other passive options that may yield a better return and use those returns to pay your mortgages. The goal here is to reduce risk, protect what you’ve worked for (make sure you are properly insured and review your asset protection strategy!), and maximize cash flow. You can easily double your CF without adding more properties and tenants by just paying your loans. Yes, you are buying your CF and most likely can get better returns somewhere else, but if debt makes you nervous, who cares, you’ve made it!!
Originally posted by @Joe Villeneuve:
Originally posted by @Robert M.:
Ask any investor who went broke in the 2008 crash. What went wrong? Oh, and there was a LOT of them, most of which will never recover. Debt = liability. I personally hate liability and want to pay my self the 5% mortgage interest over the years, rather than the bank. I can come up with deductions other than mortgage interest. Once the properties are paid off I can owner finance to keep the income stream in my golden years or continue to collect rent without paying the bank first. If I wanted to be a BIG investor my strategy would be different. I just want about 5 paid for properties, that's all I need, the Roths will do the rest. Besides, about 5 paid for rentals is so much less work and stress than say 40 or 50. I guess im a dumb a$$ at math.
Lost equity in a rental isn't a loss until you sell the property. If you don't need to sell the property, you didn't lose anything...yet. I had rentals in 2008. They dropped in value to the point I was upside down. I didn't lose anything because I kept the property. The equity I recovered, and sold the property at a profit some years later...and continued to cash flow the entire time.
When you pay down the debt using your cash, you are buying money at a cost much higher than the money you bought. If I let the tenant pay off my debt, instead of me, I'm ahead. If I come out of pocket to pay off my debt, then the cash flow I'm getting, even if it's double what I was getting before I paid off the debt, is just "catching me up"...not making me money.
Basic math:
Spend $16k on a down payment (20%) with a $700/month cash flow ($8400/yr) means I start making a profit in the 24th month.
Spend $90k cash on a property (100% payoff) with $1075/m ($12,900/yr) means it will take 7 years before I break even and make a profit. During those 7 years, you can count on having to replace the roof, and other misc items like the floors, appliances, etc... This means more out of pocket cash you need to catch up to before you make a profit.
The bottom line is this. Any and all cash you spend, is negative. Income is positive. If you spend more cash than you get back in profit...you are losing money.
In addition, you are losing the compounding effect of what you could get in added profits by investing with those funds you are spending by paying off the mortgage.
I'm not going to disagree with your post, I have the spreadsheets that back it up. With that being said, it's not the way I want to invest in real estate, nor would I recommend to the original poster of this thread. I love paid for assets, it gives me true freedom. I don't want to wait 20 or 30 years for a paid for asset. Too much could go wrong in life and being leveraged only makes it more dangerous. At the end of the day, it is my dept and my responsibility, not my tenants. Inevitably I will get all my money back plus a handsome bonus.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes8y
OP:
If you are aiming for the highest ROI possible, then you need to be leveraged as highly as possible. You can achieve a return of infinity depending on the property, i.e. all of 'your' money was refinanced back out, meaning that you own a property with some equity left behind (market increased, you rehabbed it, whatever) and rent it out for positive cash flow. In cases like that, someone is just coming and handing you a check for your signature (the mortgage is your liability).
The flip side of maximum ROI is maximum risk exposure. If you own a property free & clear, as long as you can pay the taxes on it you will never lose it. If you aim for maximum risk, you need to aim for pretty heavy cash reserves/access to cash as a buffer against risk.
A side issue is that real estate is work to some extent. You can minimize it with property management, etc, but it is not the same thing as looking at returns from your index fund. More leverage = more work to achieve the same amount of cash flow. Keep in mind that ROI and cash flow are not the same thing. You can have great cash flow and crappy returns.
At the end of the day it depends on your goals and your needs. Most of the time there's a trajectory that starts out (hopefully when you're young) with high leverage and great returns, low cash flow, and evolves into low leverage, lousy returns but great cash flow as you get older. Since you're probably not immortal, time is working against you, and thus the shift from high risk/high return to low risk/low return with age.
Also, you must know yourself. I personally accept lower levels of return for less leverage because I'm pretty financially conservative, nearer the end of my working career than the beginning, and don't want to work that hard at the end of the day. I know full leverage would net me better returns, but I still have to deploy that money somewhere, and constantly harvesting and redeploying capital is also work. So, for me, I prefer my portfolio of mostly paid-for houses and a few that are conservatively leveraged. I'm aiming for a specific cash flow amount and corresponding rate of effort.
There's no right answer on what YOU should do. But math is math, and you have to determine your level of comfort with risk and reward, and the chips you have to play with.
Skyline Properties - Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes8y
I am sure I lived through the same financial crisis as the rest of you. The downfall of many was not that they were leveraged, it was that they were over leveraged.
Property values were going up and they believed they would never stop, so many Tom, Dick and Harriet's were buying up properties with loans they never should have qualified for and they bought properties that would never cash flow. They believed they could break even/ take a loss for a couple of years and then turn around and sell the properties for 50-100% of their value. *
Please do not think for a second that being leveraged in a financial/housing crisis puts you at anymore risk than someone else if you invest wisely. As was already mentioned, if your properties are cash flowing then they will continue to do so.
To the extent that some believe that your "personal wealth" will change because you real estate holdings are worth less, this is an illusion that may matter if you want to be on the Forbes list but otherwise is meaningless.
- Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes8y
If you have millions to play with pay them off. If not, sooner or later you run out of money to grow. If you choose to pay off early, but can pull it back out when needed, that is not a bad idea. I am sitting at roughly 15% LTV, but can pull cash as needed if another deal arises.
- Alpharetta, GA · Member since 2015 · 44 posts · 23 votes8y
Originally posted by @Robert M.:
Originally posted by @Joe Villeneuve:
Originally posted by @Robert M.:
Ask any investor who went broke in the 2008 crash. What went wrong? Oh, and there was a LOT of them, most of which will never recover. Debt = liability. I personally hate liability and want to pay my self the 5% mortgage interest over the years, rather than the bank. I can come up with deductions other than mortgage interest. Once the properties are paid off I can owner finance to keep the income stream in my golden years or continue to collect rent without paying the bank first. If I wanted to be a BIG investor my strategy would be different. I just want about 5 paid for properties, that's all I need, the Roths will do the rest. Besides, about 5 paid for rentals is so much less work and stress than say 40 or 50. I guess im a dumb a$$ at math.
Lost equity in a rental isn't a loss until you sell the property. If you don't need to sell the property, you didn't lose anything...yet. I had rentals in 2008. They dropped in value to the point I was upside down. I didn't lose anything because I kept the property. The equity I recovered, and sold the property at a profit some years later...and continued to cash flow the entire time.
When you pay down the debt using your cash, you are buying money at a cost much higher than the money you bought. If I let the tenant pay off my debt, instead of me, I'm ahead. If I come out of pocket to pay off my debt, then the cash flow I'm getting, even if it's double what I was getting before I paid off the debt, is just "catching me up"...not making me money.
Basic math:
Spend $16k on a down payment (20%) with a $700/month cash flow ($8400/yr) means I start making a profit in the 24th month.
Spend $90k cash on a property (100% payoff) with $1075/m ($12,900/yr) means it will take 7 years before I break even and make a profit. During those 7 years, you can count on having to replace the roof, and other misc items like the floors, appliances, etc... This means more out of pocket cash you need to catch up to before you make a profit.
The bottom line is this. Any and all cash you spend, is negative. Income is positive. If you spend more cash than you get back in profit...you are losing money.
In addition, you are losing the compounding effect of what you could get in added profits by investing with those funds you are spending by paying off the mortgage.
I'm not going to disagree with your post, I have the spreadsheets that back it up. With that being said, it's not the way I want to invest in real estate, nor would I recommend to the original poster of this thread. I love paid for assets, it gives me true freedom. I don't want to wait 20 or 30 years for a paid for asset. Too much could go wrong in life and being leveraged only makes it more dangerous. At the end of the day, it is my dept and my responsibility, not my tenants. Inevitably I will get all my money back plus a handsome bonus.
Robert, all investing involves personal preferences and your personal comfort level with the risk / reward potential. We are all different, and approach things differently. The thing I try to urge everyone to do (so not really just directing this at you) is to make the effort to calculate the return on your investment. Then ask yourself, was it worth it? Most of the time, a paid for investment property (either paid for because it was bought with all cash to begin with or the loan has been repaid) is going to show an ROI of < 10%. There are exceptions of course, posters here on BP who buy very cheaply with all cash and are true local experts in their sub-market who may do better, and market appreciation may help you do better as well, but I suspect the vast majority of investors with paid for properties are earning < 10%. Take a simple example, a paid off house is worth $100K, you collect $1000 per month rent, perhaps your net income over a year is around $7000 long term (some years it will be higher, in other years when you replace a roof, or HVAC, it will be much lower), so that is a 7% ROI ($7,000 / $100,000). If the house appreciates 3% in the year, okay great now you're at 10% ROI. But you've put a lot of effort into that 10% ROI. Over the long term, investing in something like Vanguard's S&P 500 Index Fund VFINX will return 11% (that's what it's returned on average every year since its inception on 8/31/1976), and if you invested in it you did nothing but push a few buttons on your laptop. :-) So this is just food for thought, and to each his own, but when I look back at the work I've put into my investment properties over the years I now look for a minimum 20% ROI on every addition to my portfolio. In my market, this requires some leverage.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes8yChris Meunier I think part of your issue is your mortgage balance is so large. At 210k, that buys you a lot of rentals and your return is much lower. In the case of Derrick E. And somewhat to a lesser extent myself, since we deal in cheaper properties, paying it off doesn’t necessarily throw the returns out of balance. I have one property currently I plan to pay off in the next two years or so. It’s so cheap I can’t really refinance nor would I want to and I can’t really do a heloc. So I’ll likely just pay off the ~25k mortgage I have on it. That ups my cash flow by 250 a month up to about 450 AND I can drop my insurance costs by about half per month. So in one year, I’ll spend 25k to pay it off and earn 450*12 plus 40*12 on return. This equates to a 23 percent return in one year. Then for every year after that it returns me 12-13 percent. That’s good enough for me. Everyone is different.
- Yonkers, NY · Member since 2017 · 3 posts · 0 votes8y
Hi everyone i'm just starting out in the Real Estate Investing field. I have a question for @joe villeneuve can you elaborate on net negative CoCR of 90%?
- Realtor · Charleston, SC · Member since 2016 · 229 posts · 159 votes8y
One sentence: You cant go broke if you dont owe anybody money.
Thats my take on it regardless of others opinion it works for me and my goals. I am not trying to build a 100 million dollar empire so. there it is. Just a cool couple hundred thousand per year and were all good. Always consider your end game before answering that question.
- Lakeville, MN · Member since 2018 · 30 posts · 17 votes8y
I just want to say as a newbie I've absolutely loved every single aspect of this entire thread. So many great opinions and view points. LOVE IT.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Patrick M.:
I am sure I lived through the same financial crisis as the rest of you. The downfall of many was not that they were leveraged, it was that they were over leveraged.
Property values were going up and they believed they would never stop, so many Tom, Dick and Harriet's were buying up properties with loans they never should have qualified for and they bought properties that would never cash flow. They believed they could break even/ take a loss for a couple of years and then turn around and sell the properties for 50-100% of their value. *
Please do not think for a second that being leveraged in a financial/housing crisis puts you at anymore risk than someone else if you invest wisely. As was already mentioned, if your properties are cash flowing then they will continue to do so.
To the extent that some believe that your "personal wealth" will change because you real estate holdings are worth less, this is an illusion that may matter if you want to be on the Forbes list but otherwise is meaningless.
We have a winner:
"...and they bought properties that would never cash flow. They believed they could break even/ take a loss for a couple of years and then turn around and sell the properties for 50-100% of their value"
This is the #1 reason for failure...not the leverage, it was the leverage coupled with no Cash Flow. The idea of betting on future events you have no control of isn't investing...it's speculating...and trouble waiting to happen.
Cash flow, positive cash flow, is the risk control that makes an upside down property almost irrelevant...until you sell. So don't sell. You bought the property for cash flow...and it won't matter how high the interest rate goes (unless you got a variable rate), or how low the property value gets (you can always reduce your property taxes), the cash flow stays the same.
Wait until the market recovers...then sell...and keep making short term profits (cash flow) while you wait.
Most of you are replying are in your property acquisition phase. If you already own all of the properties you plan to buy, and have good cash flow, I would have no problem to pay off the loan. If you change your mind in the future, you can cash-out refinance then.
I plan to pay off two of my properties in about 10-12 years. Hope to sell the third one. We are already living off the cash flow.
So many of the responses in this thread seem to be "more more more more more more". I'm going to express a different viewpoint and say that if you've reached "enough", you'll know it. If the cash is just sitting around, it's a fine idea to pay off your loan if you'd rather not invest it elsewhere, and it'd make enough for you in this property. Now, it's a totally different story if you plan on buying more properties.
I'll say it again. You can always cash-out refinance in the future if you change your mind.
@Lane Kawaoka....Id love to see your spreadsheet :)....you can PM me and I'll send you my email...thx
- Take you $210k and use it for down payments on a few other properties. Your spending your cash by paying off one mortgage. Let your tenants work to make you money. Paying off one house vs buying a few more....no contest. Buy smart and that incoming you are reaching for on the one will come from several with the added benefit that when you lose a tenant in one house, it’s no as big of a hit. Lose a tenant in your only house and you sweating until you find your next tenant which will likely lead to a poor decision.
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Michael Masters:
I don’t believe the biggest risk going forward is a drop in property values but rather an increase in interest rates. If you have adjustable rate mortgages you could see your expenses spike in the next few years.
On a $250,000 mortgage your annual payments will be $12,650 if you have a 3% interest rate and 30 year amortization. If rates rise to 6%, those annual payments will rise to $18,000.
For this reason I keep a balanced view on leverage. I tend to run at 40-45% equity in my properties. This keeps me safe and also gets me cheaper interest rates. I’ve also locked in as long as I can on my properties (although because they are commercial multis it’s difficult finding loans that lock in for more than 10 years).
For me, these are an investment not a job. I hire property managers and basically sit back and collect the checks. If I were more involved with my properties I might be willing to take more risk, but at this point I need to focus on my day job.
"I don’t believe the biggest risk going forward is a drop in property values but rather an increase in interest rates. If you have adjustable rate mortgages you could see your expenses spike in the next few years"
Why would you have an adjustable rate in the first place. That's a very definite example of risk. If you have a fixed rate mortgage, as you should, an increase in interest rate has no impact on anything with a hold property.
"I tend to run at 40-45% equity in my properties..."
You mean you tend to "buy" 40-45% equity in your properties.
"...This keeps me safe..."
Keeps you safe from what?
"...and also gets me cheaper interest rates."
...and in the end you are "spending a dollar to save a dime".
- 8yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Tanya F.:
Most of you are replying are in your property acquisition phase. If you already own all of the properties you plan to buy, and have good cash flow, I would have no problem to pay off the loan. If you change your mind in the future, you can cash-out refinance then.
I plan to pay off two of my properties in about 10-12 years. Hope to sell the third one. We are already living off the cash flow.
So many of the responses in this thread seem to be "more more more more more more". I'm going to express a different viewpoint and say that if you've reached "enough", you'll know it. If the cash is just sitting around, it's a fine idea to pay off your loan if you'd rather not invest it elsewhere, and it'd make enough for you in this property. Now, it's a totally different story if you plan on buying more properties.
I'll say it again. You can always cash-out refinance in the future if you change your mind.
So you're saying that if you already owned all of your properties, it's OK to buy equity now (pay down mortgage with your own money), and then pay for it again later with interest (refi)?
It's all ok. That's the cost of changing your mind.
Interest now versus interest later- that's a wash to me.
Buying equity is like investing anything anywhere. If the return is enough, that's where you put your money.
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