Should You Pay Off Your Rental Properties Quickly?

Should You Pay Off Your Rental Properties Quickly?



should you pay off your investment properties quickly or drag them out for the next 30 years that's today's show let's dive into it hey everyone I'm Clayton Morris I'm Natalie more and we are husband and wife and you are across the country right now what are you doing out there by the way can you please share and why are you not home I'm in Idaho I'm visiting my sister she bought a new house in the suburb of Boise and you know what I realize when we come here it's not pronounced Boise it's pronounced boise boise boise thank you now you learned something I did learn something all right Boise me you wanted a yeah Boise last argument where my mom said I think someone told me it's boy day long was that therapy it's not boys no that's just a man pulling her chain I think so but everyone I talk to me report said oh welcome to Boise Boise good night there you go yeah all right so yeah this is the show where we talk all about building passive income and we the vehicle that we use to create passive income is buy and hold real estate if you're a longtime listener of the show you download the podcast you know we've walked through a whole manner of things on how to how to become a millionaire property management do's and don'ts how to reach your financial freedom and independence day so all of those things we talked about but when we acquire rental properties sometimes we think that we have to carry debt for a long time or we'd like to try to pay them off quickly the two schools of thought and we thought because we've gotten this question from investors into the office how can we pay off our investment properties quickly but I think it's important to maybe start with the question before we ever go there is should you pay off your rental properties early why would we why would we ask that should question well because there is no one-size-fits-all when it comes to rental real estate or owning real estate as an investment there's so many factors that come in Sonny because we've been thinking about this a lot lately you and I because we get emails where people say well should we you know partner as husband and wife image LLC or should we you know put this bank account in this name or should we have this bank account like we get all these questions and there just is no one-size-fits-all answer for anything so yes it sounds awesome to have debt free cash flow but there are also reasons to leverage and reasons to have debt service on your investments so we figure we talk about it because we are not financial advisors there is no right or wrong way for any one person it's just you know the financial investing is like a buffet you have all of these options and you just want to make the best choices right so let's we're going to walk through four kind of key areas and key reasons why you know are asking yourself these questions should you pay off your rental properties early you know typically with a rental property you can get a 15 or even a 30-year mortgage or if you're working with a private lender it might be as small as five years which is a different scenario but we're going to work off of the premise of a 15 or a 30-year note I think for this podcast so a sort of a typical Fannie Freddie FHA style loan right 15 or 30-year mortgage note well first of all before we do that what do you think of the benefits of the 15 versus 30 or 30 versus 15 well obviously you want to accelerate your debt you want to make sure that you pay the littlest amount of money or money and so you're evaluating these products based on what tolerance you have for debt service how much you want to pay in the long term for interest and how quickly you want to own that debt free so that all of that cash flow belongs to you so I mean it really comes down to just making a spreadsheet and making the columns how much am I going to pay for the life of this loan and interest how much am I going to pay per month in interest and what's my tolerance for that will I have money left over to then cash flow a little i pocket oh I have money left over to pay the taxes and payment property manager and pay for a light bulb if I need to or what have you so you're evaluating those based on your tolerance for risk we have a portfolio loan for instance that's a 30-year portfolio the loan is on eight properties as a package and it's Ashville is quite a bit because the debt service is relatively low less than half of what we cashflow for that property we are trying really hard to accelerate that and pay down principal so that we don't have to pay a ton of money and interest but we chose that because we knew that and if we had those package of eight they cash were a little over five thousand dollars a month our debt service is about twenty five hundred dollars a month so we say that awesome we'll keep half of that and so that's why we chose that product right and so the question comes down to deciding whether or not you want to start funneling money back into the balance of your mortgage right for Natalie and I we're not huge fans of paying interest so we you and I wrote a whole book on how to pay off your in your your your mortgage using a home equity line of credit by the way go to our go to Amazon and find it so on Amazon how to how to pay off your your mortgage in five years using the system that the banks don't want you to know about so we're not big fans of interest I think it's safe to say knowing you what I married you we you Rose it that's just high interest rate why would we do that so I quickly kind of learn like to have a lower tolerance for for interest or a lower tolerance for interest than I used to back in my college days when I had credit cards with an 18% interest rate so you know most mortgage payments right now most interest payments on a mortgage or three four five percent so you have to ask yourself this question every month that I'm taking that extra money to pay it back on principal balance I'm putting money into a five I'm putting that money into a five percent interest rate right but if you can make if you can get a great investment property that's going to bring in twelve percent interest as a return on investment then you're sort of trading 12% for 5% with 7% in between so you have to ask yourself is it make sense for me to funnel money to this mortgage balance because I'm paying 5% interest but I could make 12% if I took that money and ran with it across town and bought another rental property right right so you're thinking about the trade-off between making I mean I think I want to emphasize this point the most important appointment that you're in you're in an investment now you're making money right so you've taken your money out of some of our investment vehicle and now you have partial ownership of a rental investment and then the part that you don't own you're thinking about do I want to pay down this debt service or use the money that I'm cash flowing to own something else I've been reading this book based on this interview that you did with Garrett Garrett Sutton called loophole hole of real estate and he talks about how you know there are so many advantages of leverage because let's say you own a hundred thousand dollar asset we'll call it a property right but you only put say ten or twenty percent in two of your own money into that asset now the bank owns 80% let's just pretend it's 80 percent so you are in it for cash flow right for 20 percent but the depreciation and the the you know the amount of ownership and the deductions all of those benefits you get 100 percent of it the bank doesn't take depreciation the bank doesn't take you know the taxable the tax cuts on it the bank only owns the debt service but the other all the other advantages belong to you so it's pretty awesome right when you think I just won't never that way I've never thought of it that way either right you're basically getting all of these benefits for your taxes mitigating your other income with this investment property the only thing you're on the hook for is that mortgage note for that set appreciation on the $100,000 value right but you don't know a hundred thousand dollars of it you own twenty thousand dollars of it but you're taking full advantage of that asset the government makes it that way because they want us to be investing in real estate space so this is just kind of an awesome way to think about it so that's the point of your end right once you're in you own but in this scenario twenty percent now you're thinking okay based on what I'm making and based on the whatever else I have saved do I want to pay down that debt or do I want to then own something else and I think you know what we like to do is like own as much as we can right and then say we're getting kind of pain an acceptable amount of money for that money so I'm okay with holding that and then I'm going to go over here and buy something else so let's look at it this way so step one in this process is well do you have other investment opportunities so the reason you would pay down your mortgage quickly is because you don't right you might not have other investment opportunities you're kind of fine with where you're at right now so if you do have other investment opportunities you may want to take the cash flow from that tenant and run across town and buy something else so let me give you some hard and fast numbers so let's say if you're looking for more deals and let's say in an example of where you're bringing in about $1,200 a month net per month from your rental properties right that's about $15,000 a year or about $30,000 in two years so in two years you could have that additional cash flow which would enable you to go and buy another property or put that as a down payment on another property or you can take that 15 or $30,000 over the two years and funnel it right back towards the principal balance so on the one hand you could pay it down but if you have another investment opportunity you could go across town and buy another property with that cash flow so that's that's 0.1 the second one is your tolerance for day really wait um are you saying that you could go across town and buy another property cash or you could get another debt service on another copper well what I said was you could use that if you found a product like our properties are in like the $40,000 range right so for us it'd be like maybe two and a half years it would take us to get the cash from that tenant to buy another one so you could buy a cash or maybe you're buying an $80,000 property which we don't do or $100,000 property which you and I don't do but you could and then that would be that 20 or 30 25 thousand would be the down payment on another Debt Service property so you can't get another mortgage now you have the down payment for that hundred thousand dollar home that you're buying so either way you know either you're paying cash if you if you can find the deals or you're going to pay a more expensive home and you get debt service so one of two ways I guess right yeah I mean there are million ways if even funky talks a lot about partnering with other people like you find five people and you get a you know $80,000 you know quad Plex is nothing right well yeah but like it you know that would be an equity partner so you might even come to the table with nothing out of your own pocket you found the deal and your equity partner is going to put up a hundred percent of the money I mean there's so many different ways to do it I'm just talking in the general sense of we've got a mortgage for fifteen years or thirty years and you want to decide whether or not to pay that back quickly or go across town and buy another property so the second point in this it's the second one that takes creativity you know the word let's be able to get a traditional bank loan so I don't one the banks probably not going to take on a second own if they just don't usually do several you know so then you're either going to have to get like a hard money lender and then and then it's a different scenario or you're going to have to get it you know it so we're talking about either you use your cash or you get one debt service and then use your cash right because we have to think about this not just like I'm gonna get the bank to help me here and then I'm going to get the bank to help me here and that becomes the bank will only get you so far and then you're going to have to make work creatively that's sort of a bad bar mo anyway we're going where yeah well I'm saying is I'm not a big fan of debt to begin with so but under the under federal law you can only have up to ten mortgages I think in your own name anyway or your LLC's name so well in your own name so you can't you know you're gonna have to be creative to begin with they're only allowing you to buy ten federally backed loans anyway so you know ten you've got one you could get two but you can only go up to ten so the second point on this lip okay look at you one thing about the law I didn't know that actually that you did oh yeah well okay but yeah right now the law is ten but you could we we this is all part of the dodd-frank stuff and we could see some frat we're seeing some significant fracturing of the dodd-frank law and we're seeing that the Trump administration may be increasing that 10 to 20 under your own name so we may see some movement there which would be great for investors because I really think you know investors I typically going to be the smarter ones right there I hope they are anyway that they're investing smart and and the back is going to put that money up so anyway I'm trying to get to the second point which is your tolerance to debt so that was kind of the you know the first one is do you have other investment opportunities that you'd want to pay it down quickly to use that cash for it number two is your tolerance for debt so you and I don't have a high tolerance for debt at least I don't think we do I don't know if we've ever really discuss this but I get the sense that we don't because if we look at our portfolio and we look at our debt to income ratio our debt to asset ratio it's we've got a we've got lower debt than we do assets right well we have a we have a low tolerance for bad debt and we evaluate debt well based on so on the point I'm making is that some buy and hold investors only buy property with cash while others prefer financing and because each has their own benefits so you might be fine having five thousand dollars in debt for an apartment complex while others would say no way Jose I want to have I don't want any debt I want that property to cash flow free and clear so this is again your tolerance to debt and it's a totally opinionated second point it's not a totally subjective second point there's no one way right I mean if you listen to Dave Ramsey he'll tell you all debt is bad you listen to Robert Kiyosaki if you listen to Robert Kiyosaki then he'll say you know there is a difference between good debt and bad debt and those that get rich understand the value of leveraging debt so it's kind of you know it's it's up to you I mean most people who build a financial portfolio we're okay with debt when when it comes to real estate you know very few people just have the cash like monopoly and just buy everything up and then you know what it'd be awesome if monopoly let you leveraged in and then monopoly you have to build up the cash to buy the real estate right right yeah you can't well it wasn't there did you ever play like where you could borrow money from your the person playing next to you give a paddle that way but that's how to play what's up no but that's how we'll teach our children to play right I'm gonna borrow them and they're going to be massively in debt yeah well right but it's the right place to learn it on the Monopoly board oh all right Jesus I don't like this remote session we've got going because you're texting me that I'm rolling my eyes at you I'm not I'm looking at my notes on my screen so I can know because you're going on these long diatribe like monologue soliloquies and i try and break in and then i see you roll your eyes thank you it's not rolling my eyes the podcast when I try and make a point he's like oh she's talking you know wear sunglasses and I could stop rolling your eyes on me pretty much feelings there how's this look is Hotel juggling I can see all right so we talked about other investment opportunities number two was tolerance for debt and number three is your time horizon so this could really be arguably maybe the second most important point because why did you point those about all right I'm taking the sunglasses off now I get to roll my eyes again listen the time horizon is important because if you're 30 years old it's going to be totally different than if you're 65 years old I talk to investors all the time on the phone that say you know I wish I would have started when I'm 30 but guess what I just nearing retirement but my wife and I want to travel and enjoy the rest of our life and we don't have any real estate and we haven't saved anything up we don't have any cash flow and I know I'm tired of working I've got some good savings I've got an IRA that I can leverage I've got a 401k that I can use so financially they're in a better situation they might be able to put more of a downpayment but how quickly do they want these properties to cash flow when you're in your retirement age you want the cash flow you know you're not really you don't want to be sitting on a lot of debt where you're not enjoying being able to travel and have this cash flow coming in to support your lifestyle right right and so in that case you want to accelerate your debt as quickly as possible or it you know again if you're renting is a matter of attitude you could say okay I'm cash flowing $500 but the debt service is 200 I'm going to pretend that that 200 doesn't work and enjoy my life on the 500 right well that's yeah perhaps but that's really point number 4 which is required income so do you need that money so point 4 is how much money do you need to live and that's where our freedom number cheat sheet came in when you and I you know we kind of had that epiphany many years ago on coming up with that right how much money you need to live every month like what is your monthly expenses look like and if if it's $5,000 a month well if you're only cash flowing the amount that you need to live you know then that's financial freedom but if you are carrying a lot of debt and you're not experiencing that cash flow yet then maybe you want to try to accelerate that so that you can enjoy and actually pay for your required income so for some people to like you know I don't want to work anymore and I'm literally right at the dollar amount like I'm this rental property is going to get me I'm going to be able to eight and I can eat yeah like if it literally covers me down to the penny I know some people that go through that I mean we went through that so it is the required immuno how much are you or do you require to live on you know there's a difference between being fine and being free right like you're fine meaning you can you know buy gas and groceries but you're free meaning you travel the world and do what you want to get to the man right so obviously if you need your cash flow to pay your bills then paying it down your mortgage down more quickly is probably not an option right if you're if you're kind of walking away with five dollars at the end of the month then that's maybe not an option and that's where maybe using like a HELOC strategy a home equity line of credit strategy that we write about in the book would be an option because now you could may even if you've got a few well we walk through it very clearly in our book but even if you've got like an extra five bucks a month or ten bucks a month or a few hundred dollars a month that can be used by using the power of a home equity line of credit to pay down your mortgages and accelerate it at a way that you might not be able to because you're right there on the on the line every month or how much you need to live on right and then you know the ancillary benefit is that every dollar you don't spend is another form of saving right so you're you're incentivizing your cells to trim the fat out of your monthly budget as much as you possibly can right so four key areas let's review so if you have other investment opportunities that you're looking at maybe you're not done yet right you bought this one property that's not all you want to do you want to get to ten properties well in that situation you definitely want to think about how quickly you can use some of that cash flow to buy other properties maybe as a down payment so you're not terribly concerned about paying down the property number two your tolerance for debt do you have a high tolerance or you don't really care in which case if you're okay with leverage then there's no real need to accelerate your payment your payoff as long as your cash flow is good and your ROI is strong so that's really the caveat to all of these points you've got to make sure that your property's cash flowing and that you actually have you know you actually have a high return on investment right because otherwise this whole thing falls apart you know your whole house of cards is going to collapse number three is time horizon you know how quickly do you want to get there are you young or you older nearing retirement and number four how much required income do you need if you need this cash flow from the tenant to live off of to pay your kids school and groceries and gas then obviously paying down the mortgage is probably not going to be an option for you in which case and you should look at the HELOC strategy which i think is probably a better way to go now we've talked many times about the virtues of leveraging debt to build your portfolio because it's necessary if you want a large portfolio but we've talked many times about the beauty of having debt free cash flow so in both things are virtues and you want to sort of balance them you don't want to be over leveraged and have this huge portfolio but if you own everything cash you're under leveraged I mean you could have so much more if you had some tolerance to debt so the reason we're discussing this in this way is so that you can sort of figure it out for yourself and figure out okay what's my strategy because you know again there's there's just no one answer for everyone and I think all of us all of us want to have – flow as much as possible that we can actually enjoy instead of cash flow that we then funneled back into the debt service absolutely so hey if you want to go out there and download the book go to Amazon right now it's in the business section we're super excited about it we took quite a few months of working on this book on how to pay off your mortgage in five years using a strategy the banks don't want you to know about by Clayton and Natalie Morris we're super excited about it so go download it pre-order it it's available on July 11th so if you're just listening to this it is available on July 11th pre-orders starting right now yeah all right at one one way any final thoughts any final words make in our arsenal I didn't have something saying but then you were rolling your eyes and I forgot I was not rolling my eyes you have I have notes all over my screen and I've got a very large iMac so when my eyes are moving I'm keeping the show moving it's not going to roll in my eyes this is my role in my eyes I'm looking up to the ceiling I haven't looked at the ceiling once see look you're looking in exasperation likely be working over I've got a lot of notes here I want to want to keep the Train on the tracks dodging em6 climb chances sexing isn't work like what it works both I think I know I know I think I to get picked on more than you by me are you know I did have something to say and I thought it was good and I'm going to remember the next next podcast I'm sure but you know I'm working my way through this book with poets of real estate and there's a little good nuggets in there so hopefully I'll have something more to share next week about it because he talks a lot about evaluating your debt service and making sure you've got your ducks in a row and figuring out what your financial situation is in order to make a plan and if you know all the stuff that we count here on this podcast but some kind of new ways to think about it so I'm excited to share that blue book report yeah that's Garrett Sutton his interview would be coming up in August which I'm excited about because we are going to have Robert Kiyosaki here on the show we're gonna have Garrett Sutton who is his legal adviser on the show we've got a whole panel of the rich debt advisors coming up I'm super excited about this Darrow was a great interview so I can't wait to share it with everyone so all right folks that's going to do it for today's show thank you so much for dialing us up subscribing and watching all of my wife's eye rolls at me we'll be back here with another episode of the investing in real estate show get home safe my love I love you say hi to the people of Boise Idaho for me I know all right all right everyone go out there take action and become a real estate investor we'll see you next time everyone bye I