The big key to Growing your rental property business is to use leverage and OPM which is other people’s money.
Not all of us have millions of dollars to go out and buy investment property so we need to borrow money in order to buy our next rental property.
Now you may get to the point where you start to ask yourself whether or not you should pay off some of the mortgages that you currently have on all your properties.
The answer depends on a number of factors and comes with each person’s own situation.
Here is a music video by Dee-1 who wrote about bad debt in the form of a car note.
You can find him on instagram here: https://www.instagram.com/dee1music/
In today’s session, we are going to talk all about the mortgages you have on your rental properties and whether or not you should pay them off sooner by paying extra or with a lump sum of cash.
Good Debt vs. Bad Debt
Good debt puts money in your pocket every single month and bad debt takes money out of your pocket every single month.
Remember, mortgages you have on rental properties are helping you make money every single month.
When I first started, I had many mortgages. Those mortgages were being paid by my tenants every month and I was making at least $250 a month on every single one.
I Ain’t Got No Car Note
I still drive a 2007 Honda Odyssey minivan, and it is 2018 right now. I’ve owned it for about seven or eight years.
There are many different reasons for I drive an older van, but for one, I have four kids who are young and they destroy vehicles.
However, the biggest reason I drive a 2007 minivan is because I don’t need anything else.
If you think of your car as a luxury status, then go out and buy a new, 2018 Escalade that is going to make you look good. I, personally, don’t really care.
I just want to be able to not have a job and not work my tail off to pay a car payment. I don’t want to have that debt over my head every month.
I just want a car that is reliable and gets me from Point A to Point B.
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The downside is that there is more maintenance with an older car. Recently, I was driving from Phoenix to Fresno on a long trip to see family.
I was 100 miles out of Phoenix and my radiator started leaking.
It was 110 degrees and all of a sudden my air conditioner turned off and my temperature gauge spiked. I pulled off the road, opened up the hood, and saw that my radiator was spraying fluid.
Thankfully I had water in the car and was able to fill it up and get to the next gas station to get more water and antifreeze. I turned around and drove 100 miles back home with the heater on and the windows open.
Fast forward, the radiator is fixed and 1,600 miles later my engine locked up because my head gasket cracked. It happens!
I hate having bad debt that takes money out of my pocket every month. Even though I had to pay a lot of money to get my van fixed, I don’t have a car note.
I have enough cash to buy a new car, but I don’t want to. My car gets me where I need to go. Even though there have been maintenance costs, I don’t have to pay interest. Bad debt is bad!
Should You Pay Off the Mortgage On Your Properties?
My wife and I are now at the point where we had maybe four or five different mortgages on properties that we have been able to pay off in cash.
We do have three mortgages left on thirty plus properties, but that isn’t bad. We have a lot of passive income coming in, and we utilized that cash to pay off the debt.
Each investor has a different situation. There are many scenarios where it makes sense to pay of the mortgages and many where it does not, especially if it allows you to keep investing.
Here are the things you should think through to help you answer your questions…
Are You Still Building Your Business?
When I first got started, I put down $17,000 cash on a property. After about six or eight months, I refinanced the property and took the money out of it and bought another property with that money.
After another six months, I refinanced the second property and used that money to buy a third and fourth. I did this over and over again, because I like to recycle my money.
I bought a $150,000 property in Texas, and after I fixed it up and had it rented, I pulled that money out and bought four more properties in Akron, Ohio.
The beautiful thing is that my tenants are paying off the mortgages on each property. I am just recycling the money over and over again.
I love having leverage and debt on my properties, because they help me build my business bigger, stronger, and faster. On top of that, my tenants are paying off my mortgages!
They are paying off all of the fees and expenses.
Let’s say you buy a house for $100,000 and you put 3.5 percent down on an FHA loan, which is $3,500. After you live in it for a year and you get a tenant in there to live in it for 15, 20, or 30 years, the tenant pays the rest of the $96,500!
This would normally come out of your pocket, plus the interest, which is roughly another $100,000. It is brilliant to be able to use other people’s money!
When I was building my business, before I quit my job, I wanted to make sure that all of the money got reinvested back into the business.
Have You Quit Your Job?
Is your business big enough for you to quit your job and live a dream life?
If you haven’t already quit your job, maybe think about not paying off those mortgages and saving your cash so you can buy more properties and make more passive income.
It may be worth not putting extra money toward the mortgages so you can buy another property and make another $250 a month.
If you’ve already quit your job and you don’t need that money, and you aren’t looking at continuing to build your business, look at possibly paying off some of those notes.
What Is The Opportunity Cost Of Your Money?
Opportunity cost basically says, if you use your money to pay off a mortgage, that money could have been used to buy another property.
The opportunity cost is all of the income you could have made from another property that you could have bought with that money.
If you pay off a mortgage, you are decreasing the amount of expenses, but what if instead of paying it off, you bought another property with that money, and that other property brought in another $250?
What other opportunities are out there for your money, so you can make more money.
What Are The Other Investment Opportunities?
Let’s say you have $30,000 in cash and you want to pay off one note that has a balance of $28,000. You could do that, but what other investment opportunities are out there?
If there is a property where you could make $100 in passive income a month, it might be better to just use the $30,000 to pay off your mortgage.
However, what if you found a great opportunity that would bring you $300 a month in passive income?
That might be worthwhile.
You need to look at your other investment opportunities.
Right now, the way the market and the economy is going, it is really a seller’s market. People are getting top dollar for properties, but I don’t pay top dollar when I buy —I get top dollar when I sell.
Currently, I am not seeing many investments I want to buy, so I am staying on the sidelines waiting for opportunities to come up.
At the beginning of this year, in February, I bought three single-family homes and a duplex off an investor. I bought, because it was a good deal.
I am not out there forcing deals, I am waiting for opportunities to come.
I can do this, because I’ve already quit my job and I am not continuing to build my business right now, because of how high the market is and how expensive everything is for real estate.
What Is Your Risk And Debt Tolerance?
How well can you tolerate risk and debt on each property? My wife is much less gung ho than I am. I am a doer, but she is more of somebody who wants to stay grounded.
From the very beginning, she was very conscious of making sure we were not over extending ourselves and getting way out ahead.
She has helped me stay grounded. Her risk tolerance is much lower than mine. If there was a risk tolerance scale, I would be at an eight or nine and she would be at a one or two.
I look at both of our strengths and weaknesses and she helps me look at the risks in a negative light and I help her look at the risks in a positive light and we work together.
If you have too much debt and get over leveraged, banks might not loan to you. If you find a fantastic deal where you will be making $600 a month in passive income, you might not be able to buy it.
Make sure you understand the big picture of how many mortgages you can have.
Federal law says the maximum is ten mortgages in your personal name, however banks don’t like to lend more than four.
Of course, you could have ten in your name and ten in your spouse’s name.
What Is The Return On Investment For Your Money?
How much can you get for the money you have saved or invested in a stock or mutual fund?
I don’t recommend investing in stocks or mutual funds, but instead I recommend investing in real estate properties.
I currently keep my money in a CapitalOne 360 money market account, and you will get $25, if you sign up using this link. This account pays me 1.7 percent every single month.
That’s great, but why hold the money for 1.7 percent interest, when I can pay off a mortgage that is at 6 percent?
That would save me almost 4.5 percent every month! What if you used the same money and bought a rental property that would bring in $250 or $300 a month?
That’s where you are actually making more money and the tenant is paying off the debt.
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Do You Need The Cash Flow To Live Every Month?
Let’s say you are paying an extra $500 a month to pay off a note on a property.
If you pay off that note, that’s $500 a month that you are not spending anymore, which increases the amount of money that is in your pocket every single month.
What Are The Interest Rates On Your Current Mortgages?
If you have a note for $100,000 at three percent interest, you are better off keeping that one, because if you pay it off and buy another property at four or five percent interest you are just wasting your money.
What Are The Interest Rates Going To Be Like In The Future?
What are the interest rates doing? Are they going up? If so, you are better off keeping your low-interest rate loans.
Do You Have An Emergency Fund Saved Up For Future Expenses?
As investors, we need to have emergency funds. This also acts as a capital account where any money goes in and out, but the balance must be positive.
If a furnace goes out, it could cost $5,000.
If you don’t have that much in your account, then you will need to pay for it with a credit card and that is not something you want to do. You need an emergency account for when bad things happen.
With my car, I had to pay $2,500 to fix my radiator. I had the money saved in an emergency fund and I didn’t need to put that on a credit card and incur bad debt.
How Many Mortgages Do You Have In Your Name?
If you need to pay off a mortgage to free up another slot, you may need to do that. Remember, you are only allowed to have ten mortgages in your name.
Look at your current notes and what you have and make sure you can continue to grow your business with the mortgages that you have.
Do You Need to Get Another Mortgage in the Future?
In my book, Successfully Unemployed, I documented how I quit my job and all of the lessons I learned. One thing I learned is that I couldn’t quit my job until I got my last mortgage.
I was getting a blanket loan over four different properties, to pull out the money to buy more properties. Even though it was my goal I didn’t want to quit my job, because banks don’t like when you quit your job in the middle of the loan process.
I stayed at my job a little longer, even though I didn’t want to, because I knew it would be much harder to get mortgages after I quit.
When you are thinking about paying off your mortgages on your rental properties, keep all of these things in mind. After I quit my job, I paid off three or four mortgages, because I could.
Now I am waiting on the sidelines for the deals to come to me when the market corrects itself. There is no reason prices are back up to the amount they were before the market crashed in 2008.
Remember back then when there was a huge run up of prices and then a huge crash?
Well, prices are right back up to where they were then. In my opinion there is no reason for that, other than the same reason they were up back then.
I am being careful, because I don’t want to buy bad deals. There are still good deals out there, but you need to be careful.
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If you want to start investing in real estate, or if you are even curious about it, I have a free course for you.
To sign up, go to www.masterpassiveincome.com/freecourse.
This course will get you started learning all about real estate. I want to help you quit your job and change your life, so you can live the dream life with passive income.
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