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.
