Poll

How long do you plan to take to pay off your rental property mortgage?

I am happy to have a mortgage to infinity.  More tax deductions.
8 (19%)
Slow & steady but between 20-30 years.
10 (23.8%)
Speed up the payments & be done between 10-20 years
7 (16.7%)
Pay it off in under 10 years.
9 (21.4%)
No mortgage or LoC I only pay cash on my income properties.
6 (14.3%)
Other... I am no survey expert so I may have missed something.
2 (4.8%)

Total Members Voted: 40

Author Topic: Mortgage payoff, or not, on an income property.  (Read 5247 times)

K-ice

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Mortgage payoff, or not, on an income property.
« on: December 09, 2015, 11:49:16 PM »
I am just trying to get a feel for what MMM landlords do & why.

The pay off vs invest debate is huge but I am not sure if things change when it is a rental property.

I know an MMM type, now 60 but retired at 40, who is in the pay off fast in under 10y group.

I am thinking I would rather go slow 20-30 then invest the extra cash in Vanguard to diversify.

But the thought of having no mortgage sooner rather than later is tempting.

Thanks for sharing your strategy.

arebelspy

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Re: Mortgage payoff, or not, on an income property.
« Reply #1 on: December 10, 2015, 12:39:06 AM »
It--of course--depends entirely on your circumstances, the details of the loan, etc.

I have low rate, fixed 30-year mortgages, and plan on keeping them the entire time.

If there's ever an opportunity to refi at such low rates in the future (10, 20, or 30 years from now), I'll cash out refi and invest the money.

Inflation is the number one enemy of the early retirees, and fixed-rate mortgages are just about the best inflation hedge you can have.

The idea of paying them off makes me feel icky. Like it'd be selfish--sub-optimal, just to own them "free and clear" or whatever.  And if I paid them off, far too much of my net worth would be in real estate. I'd much rather diversify.

YMMV. Paying them off, of course, is not a bad strategy at all. And it's essential for certain types of appreciation plays that are only cash flow neutral (and will have a very low rate of return, paid off, but one is anticipating high amounts of appreciation). It entirely depends on the details, just sharing my perspective on mine. :)
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Drifterrider

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Re: Mortgage payoff, or not, on an income property.
« Reply #2 on: December 10, 2015, 01:09:22 PM »
I would say it depends on your cash on hand.  I bought for cash and renovated for cash.  I own the house and based on the current market, even have an increase in value of @25%.

I'm into the house for 75,000.  It rents for 800 per month.  Less management fee, taxes and insurance I get $550 per month.  $6,600 per month return on an investment of $75,000 is about 8.8%.  I don't want to share any of that with the bank.

Yes it is taxable but so would be interest on savings.  Yes I carry some risk but the reward is better as well. 

I could, conceivably, take an equity mortgage and invest in another house but.....   I haven't found another in the area and price range I like.

In my opinion, if you have the money to spend (without cutting into your emergency fund), why take on debt?

Others would rather leverage.

Absolute worst case:  I lose my job before retirement - I move into my paid for rental and live off my savings :)

arebelspy

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Re: Mortgage payoff, or not, on an income property.
« Reply #3 on: December 10, 2015, 01:28:02 PM »

I agreed with everything in your post except this one sentence:
I don't want to share any of that with the bank.

It should be irrelevant what they make, if it nets you more.

If they offered you a loan at 0.001% interest, so you paid them 75 cents interest per year, and invested the rest in a savings account, of course you should do that. Sharing with the bank is irrelevant, only your net is (and quality of life, and diversity, and risk, and other factors.. But for comparing sharing with the bank, that's just another number in the net calculation comparison).

The rest..spot on. :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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david51

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Re: Mortgage payoff, or not, on an income property.
« Reply #4 on: December 10, 2015, 09:16:48 PM »
I paid off 3 So Cal mortgages as quickly as possible.  I know some smart people who prefer to hold the mortgages, but not much is sweeter than bicycling up and collecting thousands in rent to live off of every month with minimal bills. 

monarda

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Re: Mortgage payoff, or not, on an income property.
« Reply #5 on: December 10, 2015, 10:18:55 PM »
I checked the 10-20 year box, but I think I'm planning to pay off at normal speed. Our loans are 15 and 20 year terms, with 12 and 20 yrs remaining. Here's the numbers for these two houses that we plan to hold long term.

One house currently has $29K annual net rent income without counting mortgage (and is under market rent- we'll do something about that),  house is valued conservatively around $320K- so annual cash on cash will be ~9-10% annually after loan payoff. Of course rent and house value in 15 years will only maybe increase with inflation.
Another house currently has $18K per year net income, house valued at $240K now, so around 7% after loan payoff?

(We've owned these properties 15 years and they cash flow really well in the long view - in detailed calculations considering 40-50% average expenses over long term)

We might buy another property.

We can always opt to cash-out refi, but just that $47K+ net rental income from those two mortgage-free will probably be enough for us to live on, as our primary res. will be paid off by then, too.  And that doesn't count tapping into our cash investments.


escolegrove

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Re: Mortgage payoff, or not, on an income property.
« Reply #6 on: December 10, 2015, 11:48:11 PM »
My husband and I are shooting for early retirement in 14 years. We have had this debate over the past couple of years. We currently have 7 houses, with #8 and #9 under contract. When we ran the numbers we could with pay of these 9 houses or have a total of 27 houses (at current net profits) to meet or desired rental retirement income. In the end we decided to continue leveraging our money as long as it the real estate market makes sense. It does not make sense to pay of  3.25-4.85% mortgages when we can still invest the earning into 15% cash on cash returns. When the market changes, we will reevaluate and invest our earning where they work the hardest. In my mind debt can be a great tool, if used as such. So that is our plan, to use leverage as long as it is an asset and not a liability to our early retirement goal.

zephyr911

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Re: Mortgage payoff, or not, on an income property.
« Reply #7 on: December 11, 2015, 11:52:30 AM »
I am just trying to get a feel for what MMM landlords do & why.

The pay off vs invest debate is huge but I am not sure if things change when it is a rental property.

I know an MMM type, now 60 but retired at 40, who is in the pay off fast in under 10y group.

I am thinking I would rather go slow 20-30 then invest the extra cash in Vanguard to diversify.

But the thought of having no mortgage sooner rather than later is tempting.

Thanks for sharing your strategy.
I answered "mortgage to infinity" but it chafed me, because my motivation has nothing to do with "deductions", and anyone who wants to pay a dollar to get a fraction of a dollar in deductions - absent any other benefits in exchange for that dollar - is stupid. It's all about leverage.

As long as I'm invested in strong cash-flow properties, and the financing environment means the APR I pay is half the cap rate on my investments, I will stay leveraged to the max. Profits are for new properties, and paying down low-interest debt actually reduces return on capital.

When I get tired of buying new properties, and want to really Retire with a capital R, I'll probably let them amortize on schedule.

arebelspy

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Re: Mortgage payoff, or not, on an income property.
« Reply #8 on: December 11, 2015, 12:26:48 PM »
I answered "mortgage to infinity" but it's highly dependent on rates.

3-4%?  Yes, forever.

But I don't think they'll stay low forever.  But in today's situation, I think paying down early is silly.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

K-ice

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Re: Mortgage payoff, or not, on an income property.
« Reply #9 on: December 11, 2015, 01:18:23 PM »
Thanks for the advice.

Money wise it shouldn't really matter, but would you agree that people are more emotional about paying off their primary residence? 

For my income property I answered 20-30y but I agree that is dependent on rates.  I may actually fall into the 30-infinity group.

Here is my situation:

I have 15y left on a property and it is time to renew (Welcome to Canada where we have to think about this about every 5 years.)

If I kept at the 15y rate it will be paid off in 25y total.  If I keep on track the payments will be $2200.  If I renew for 25y again the payments will be $1500.  Either way it is cash flow positive.  The rate I can get locked for the next 5 years is about 2.7% regardless of the amortization.

I think I am going to take the extra $700 per month. I just need to be sure to invest it wisely. :)

But the bank will get:
$71,000 in interest with the 15y plan
$125,000 in interest with the 25y plan

(Side note, why is my bank being such an ass in trying to renew? They want me to sign a bad rate, cookie cutter, 15y renew. I want the best rate, stretch it out and access to a HELOC too. Either way they will get lots of interest out of me.)

OK back to what I will do with the extra money.

$700 = $8400 per year.  Invested at 5% for 15 years = $190,000 so that should more than cover the extra interest.  But 5% is not a sure thing....

I just became a "Vanguardian" and this year is not working out for me so well yet.







chasingthegoodlife

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Re: Mortgage payoff, or not, on an income property.
« Reply #10 on: December 11, 2015, 01:38:53 PM »
In Australia there is no tax deduction for mortgage interest on your primary residence. So it is most tax efficient to pay off your home first before paying any extra onto an investment property.

I have an interest only loan on my IP and plan to leave it that way for the foreseeable future. When I am closer to retirement I will assess whether I will be selling property for capital gain or keeping for income and where interest rates are at that time. We can't fix rates for the life of the loan here (5 year max usually) so that can really change things over time.

Also, having the leverage on IP makes it easier to diversify rather than having bulk of money in property.

Great points above.


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Bobberth

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Re: Mortgage payoff, or not, on an income property.
« Reply #11 on: December 13, 2015, 04:51:06 PM »
When we ran the numbers we could with pay of these 9 houses or have a total of 27 houses (at current net profits) to meet or desired rental retirement income.

Since the OP asked for different opinions, I'd like to point out that the amount of work with 27 rentals is a lot more than the work involved with 9. Some may want to focus on the fewest properties needed and pay them off as fast as possible to keep things simple. Having 27 mortgaged properties that cash flow as much as 9 paid off properties will ultimately make more money as you have 3x more loans paying off and 3x more appreciation; but there is something to be said for having 1/3 the number of tenants and other issues to deal with.

Drifterrider

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Re: Mortgage payoff, or not, on an income property.
« Reply #12 on: December 14, 2015, 07:07:40 AM »

I agreed with everything in your post except this one sentence:
I don't want to share any of that with the bank.

It should be irrelevant what they make, if it nets you more.

If they offered you a loan at 0.001% interest, so you paid them 75 cents interest per year, and invested the rest in a savings account, of course you should do that. Sharing with the bank is irrelevant, only your net is (and quality of life, and diversity, and risk, and other factors.. But for comparing sharing with the bank, that's just another number in the net calculation comparison).

The rest..spot on. :)

Well, if you can find me a loan at 1/10 of 1%, I'll share :)

The best rate I can find now is 5% (less profit to me) and I don't have anywhere else I'd rather put the money right now (8% return is pretty good).

Now, If I can find another bargain house to make a rental, I would probably leverage my existing rental but, I've been looking since I bought my last one (over a year) and in the market where my rental is, prices have rebounded (great for sellers, not so much for buyers).

I'm very much a "bird in the hand" kind of guy.

zephyr911

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Re: Mortgage payoff, or not, on an income property.
« Reply #13 on: December 14, 2015, 09:59:15 AM »
Well, if you can find me a loan at 1/10 of 1%, I'll share :)

The best rate I can find now is 5% (less profit to me) and I don't have anywhere else I'd rather put the money right now (8% return is pretty good).

Now, If I can find another bargain house to make a rental, I would probably leverage my existing rental but, I've been looking since I bought my last one (over a year) and in the market where my rental is, prices have rebounded (great for sellers, not so much for buyers).

I'm very much a "bird in the hand" kind of guy.
Shop other markets?
After leverage - and this is even with shitty commercial financing around 6% - our next buy will probably have a leveraged cap rate of 20% or more. Our goal is more like 30%. That's turnkey, professionally managed and maintained, etc.

Drifterrider

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Re: Mortgage payoff, or not, on an income property.
« Reply #14 on: December 14, 2015, 12:06:39 PM »
Not really interested in other markets.  The only reasons I bought where I bought is:  1.  I have family in the area.  2. My family has property (rentals) there and have had since 1956.  I know that market. 

I keep an eye out for more property there and if something pops up, I might leverage to get into another house.  BUT, why do that when I can just borrow to buy something else also?  I do think I want my next renovation to be a TV renovation.



 

hoping2retire35

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Re: Mortgage payoff, or not, on an income property.
« Reply #15 on: December 14, 2015, 12:36:38 PM »
When we ran the numbers we could with pay of these 9 houses or have a total of 27 houses (at current net profits) to meet or desired rental retirement income.

Since the OP asked for different opinions, I'd like to point out that the amount of work with 27 rentals is a lot more than the work involved with 9. Some may want to focus on the fewest properties needed and pay them off as fast as possible to keep things simple. Having 27 mortgaged properties that cash flow as much as 9 paid off properties will ultimately make more money as you have 3x more loans paying off and 3x more appreciation; but there is something to be said for having 1/3 the number of tenants and other issues to deal with.

+1, that is why I would stay leveraged then pay down mortgage right before fire so I increase take home pay.

I also was the only one(first) that said "other" because that is what I had in mind. Ideally have several properties highly leveraged then just a few years before Fire pay down some or all units so that you have some (more)security.
« Last Edit: December 14, 2015, 12:38:11 PM by hoping2retire35 »

CashFlowDiaries

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Re: Mortgage payoff, or not, on an income property.
« Reply #16 on: December 22, 2015, 03:34:56 PM »
It--of course--depends entirely on your circumstances, the details of the loan, etc.

I have low rate, fixed 30-year mortgages, and plan on keeping them the entire time.

If there's ever an opportunity to refi at such low rates in the future (10, 20, or 30 years from now), I'll cash out refi and invest the money.

Inflation is the number one enemy of the early retirees, and fixed-rate mortgages are just about the best inflation hedge you can have.

The idea of paying them off makes me feel icky. Like it'd be selfish--sub-optimal, just to own them "free and clear" or whatever.  And if I paid them off, far too much of my net worth would be in real estate. I'd much rather diversify.

YMMV. Paying them off, of course, is not a bad strategy at all. And it's essential for certain types of appreciation plays that are only cash flow neutral (and will have a very low rate of return, paid off, but one is anticipating high amounts of appreciation). It entirely depends on the details, just sharing my perspective on mine. :)

What he said!  :)

zephyr911

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Re: Mortgage payoff, or not, on an income property.
« Reply #17 on: December 24, 2015, 07:44:13 AM »
+1, that is why I would stay leveraged then pay down mortgage right before fire so I increase take home pay.

I also was the only one(first) that said "other" because that is what I had in mind. Ideally have several properties highly leveraged then just a few years before Fire pay down some or all units so that you have some (more)security.
This is similar to the primary residence approach favored by many. Keep all funds invested at highest rates of return possible, but deleverage prior to FIRE to cut risk by reducing debt service.

SwordGuy

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Re: Mortgage payoff, or not, on an income property.
« Reply #18 on: December 24, 2015, 08:26:31 AM »
$700 = $8400 per year.  Invested at 5% for 15 years = $190,000 so that should more than cover the extra interest.  But 5% is not a sure thing....

I just became a "Vanguardian" and this year is not working out for me so well yet.

That last is only a true statement if you sold your stocks at a loss.

If you are continuing to buy, it's working out for your VERY well, because prices are going down, so your next purchase gets you more shares of stock for the same dollars.  That way, when you want to sell them in the future when the price is good, you will have more shares to sell.