Posted by Rich-CA on September 04, 2007 at 21:14:20:
When you pay off the loan, the income flips from debt service to cash. If you plan on living off your rentals, then this is the best way to make sure there is enough money with a minimum number of properties. Many properties don’t bring in much when the loan is still being paid down.
Why Pay It Off? - Posted by Jen
Posted by Jen on September 04, 2007 at 20:37:30:
A post from below reguarding the term of a mortgage got me to thinking. Why should you be in a hurry to pay down a mortgage on investment property. Most rental property carries a reasonable rate of interest on money borrowed certainly compared to HML and credit cards. Let’s say that I had a interest rate of 8% on a rental property but was intent on paying that loan off quickly using double payments and shorter loan terms. That means that the cash flow I am forgoing in order to paydown as quickly as possible is paying me only 8%. I could certainly do better with that in the stock market or by being a HML or note buyer.
Also in this day of the lawsuit happy society we live in, realestate is the first thing the lawyers focus on. Would you rather lose a property hocked to the max, or paid in full? I think that an investor if offered a good interest rate on a mortgage should take the longest term possible and continue to refi when suffcient equity exists. Let’s face it, if we are not confident we can earn more of a percentage return than the current mortgage rate, then we need to turn in our invesor title and just buy cd’s.
Re: Why Pay It Off? - Posted by ron
Posted by ron on September 05, 2007 at 21:52:17:
well one angle to look at for paying it down quickly is www.floatinterest.com it will give you 1 perspective, the book missed fortune will give you the other perspective.
Re: Why Pay It Off? - Posted by BTI
Posted by BTI on September 05, 2007 at 10:16:16:
Jen
Historically CD’s return depreciated dollars when cashed in and real estate returns appreciated dollars when cashed in, I like the latter.
BTI
Leverage, leverage and more leverage… - Posted by David Alexander
Posted by David Alexander on September 05, 2007 at 10:11:20:
That’s what you do when you get started… In most cases you have to…
you have to create the equity to start building that empire…
You have to create the equity to start throwing off the cashflow…
But, once you done that you need to get back to cash…
Why… So, that you can reinvest and so that you can payoff things like your personal mortgage and/or your personal assets…
Doing that lays the solid foundation for leveraging yet again… in another business… something other than those personal assets… and your own space…
So, you leverage first to get out of the rat race…
Then you cash out to to secure your place out of the rat race and get better returns on the equity you created…
You secure your place by then deleveraging and paying off your mortgage and those assets that secure your lifestyle…
Now you have a foundation… Most people don’t want to do this part… They would rather have the illusion of leverage, leverage and more leverage… and when things go bad… from all the leverage… they fall down all the rungs of the ladder…
If you work on that base foundation… and continually add to it… you can only fall so far…
After that Go out and do it again…
Leverage to build again… separate from personal assets…
Add to you foundation…
Rinse and repeat…
Re: Why Pay It Off? - Posted by Bill Jacobsen
Posted by Bill Jacobsen on September 05, 2007 at 10:03:37:
I feel like I am piling on here but felt I had to respond. First, you can’t compare rates of return without considering the relative risk. I believe this was pointed out by dealmaker. I only will use debt when my return will exceed the cost of debt by at least 10 percentage points. Then, I only do them on subject2 deals. All others are done with cash which makes me a strong buyer with fast closings.
Also, I would rather manage 5 fully paid off rentals than the 15 to 20 purchased with debt to produce the same cash flow.
I currently am involved in purchasing 5 foreclosure properties from a former investor. He is a former investor because of using little or no cash in his investments. I am finding more foreclosures from investors these days.
My vote is to pay cash.
Bill
Re: Why Pay It Off? - Posted by Mark (SDCA)
Posted by Mark (SDCA) on September 05, 2007 at 07:24:38:
What Dave T said. Cash flow. Also it’s one less worry.
Re: Why Pay It Off? - Posted by Kenneth Hocking
Posted by Kenneth Hocking on September 05, 2007 at 06:21:41:
Ric Edelman the New Rules of Money author would agree with you… Keep everything Hocked and Invest the other somewhere else…
Problem is that many Consume the cash difference instead of re-investing…
Yes lawsuits are a fear that Many have but placed into an LLC the property can be paid off without funds being withdrawn or profits taking even if sued… the winning party has to pay taxes on the LLC if they win the lawsuit but they have no control over when distridutions are taken and thus they tend to like to settle for cash instead of paying taxes and waiting… Please verify with your attorney in your state…
You could always Place a lien from one LLC onto a Free and Clear property and unless you name it XYZ llc and XYZ 2 LLC it will be hard to prove it is not hocked… up to its ears Please check with your attorney in your state…
the biggest reason in my book to PAY OFF the home is that when a property is OWNED free and clear you OWN it… your net worth and cashflow picture changes dramatically and you begin to be welcomed at the Local banks for Business versus looked upon as an overleveraged wannabe…
I spent years pulling out the equity… but wealth Building and Bank relationships go Hand in Hand… you MUST show equity build up as a Strategy in the LOCAL banks eyes…
right now Investors are finding it harder and harder to prove that the NExt property will support itself…
they Show on their tax returns Losses…( both paper (depreciation)and real from neg cash flow)… the want to maximize leverage and not “Invest” much cash into their asset… While there are many pluses to these strategies… the Mortgage Magic that has allowed this to be a FACT for almost 10 Years has all but Ceased entirely… STATED INCOME LOANS are priced well out of the Cash-flow market for Investors if you can even get one at 90% LTV… so you better be buying very deep to make it work to cover the rates…
THERE ARE DEEP DEALS out there…so yes you can still invest with STATED INCOME… but it is expensive so your should buy accordingly…
ALSO There are plenty of programs and great cashflowing properties for those that can put 10-20% down in CASH and Prove their income and the rates are still in the low 7% as of yestrerday i closed a SALE of a Duplex I Built here in Houston and the rate was 7.35…
A paid off property may be the Asset used to get a LINE of Credit from a Local Bank and begin to establish another Fianncing tool that is not available to those that have over leveraged through the Mortgage Magic of the last 10 Years…
It takes a very disciplined investor to keep a property hocked and INVEST the cash difference versus consume the cash difference…
Good luck and some really good points to consider GOOD POST…
Re: Why Pay It Off? - Posted by dealmaker
Posted by dealmaker on September 05, 2007 at 06:18:32:
First, forget about the “lawsuit happy” society rant. That’s a myth propagated by politicians to scare you (their secondary job). Do things correctly, keep yourself well insured, including a couple of $MM umbrella (or enough to cover your net worth a couple of times over) and you’ll be OK.
That 8% is a GUARANTEED return, and while that slightly lags the stock market return it is a steady income stream.
I’ve been debt free on everything since '96, including 16 middle and uppper end rentals.
Having the cash to make (generally accepted) real cheap, ALL CASH, 7 DAY CLOSING offers generally guarantees me 45% on my flips and about 14% on the first mortgages I’m carrying when I sell them. And those numbers beat the pants off CDs, and the stock market.
dealmaker
Re: Why Pay It Off? - Posted by Dave T
Posted by Dave T on September 05, 2007 at 05:58:14:
I agree with you if the investor is in wealth accumulation mode and has other sources of income to support his/her lifestyle.
If the investor is in or approaching retirement and needs to live off the income generated by the investments, then the investor’s first focus is most likely a free and clear primary residence, followed by as many free and clear investment properties as needed to generate the needed income.
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