With so much debt involved - when do rentals finally pay off?

[Mo Farraj]

Hello BP Community,

I've been listening to podcasts, and reading all about rentals for the last 6 months. Now I had a quick question from all of my readings. What tells you a deal is worth your time? Looks like most of the community is after MFH. But what makes a deal worthwhile in your eyes? What scares me is how large a mortgage or money borrowed is as compared to the rent you charge for a property. For example, lets say I found a SFH that costs 200k after all renos, and I can rent it out for 1k/month. If I put 20% down and get a 160k loan, it would take me (160k/1k) 160 months or 13 years to pay off this loan. Now even with appreciation and increased rent inflow - it would still take above 10 years to pay off the loan/interest expenses. This does not seem ideal. Do you refinance all of your properties to increase cash flow? If you do not refinance, do you take on massive amount of debt and just collect the small difference between your investment property expenses and income until you fully pay off the loan? Do you have a certain criteria you looks for in regards to rent vs cost of home? Why wait 10 years for 1k per month as opposed to flipping a home and possibly making 20x?

 I appreciate your help!!!

[Nik Moushon]

Firstly, its all about the numbers. You cant just pick any property to buy and rent. I has to make sense both in terms of cash flow and CoC.

Secondly, unless you find an absolute steal most rentals are not cash flowing like crazy. (Sticking with the idea of a traditional mortgage of course. Full cash buys are different.) On BP the trending minimum is $100/door. Obviously even if you scale up in doors its not getting you much fast. So most MF buyers are in it for the long haul. They are comfortable with the extra bit of side cash so that by the time they retire they will have it paid off and then truly have a good steady income. All the while working a normal W2. This is the method that is most promoted here on BP, but definitely not the only one out there. 

Thirdly, to put it simply, TAXES. Flipping a house counts a short term capital gains so if you make $20k profit on that flip you really are only bringing home $10-12k. Not that that is bad, just that you pay a LOT more in taxes. Flipping is also a full time job...or a second full time job. 

Fourthly, there are lots of ways to structure debt to your advantage. Its not just get a loan and wait to pay it off after 30 years. There are a dozen ways to work debt to your advantage and to make sure that its "safe" debt. Some people like to use debt to limit their liability while other like to eliminate debt as quickly as possible to insure as little money as possible gets paid out in interest. There are pros and cons to both sides and it really comes down to personal preference IMO. 

I hope this helps clear things up a bit. Just remember theres no one way to do REI.