I love the returns rental properties provide me and because of those returns, I am buying as many rentals as I can. In a perfect world, I would not pay off my mortgages, I would buy as many properties as possible. The problem with buying a lot of rentals, is many banks will not finance more than four mortgages. I have a great portfolio lender who will finance as many rentals as I want, but I don’t know how long their policies will last. To be on the safe side, I take all of my cash flow and pay off one mortgage at a time as quickly as possible. This allows me to have less mortgages in my name and my cash flow increases once I eliminate a mortgage payment. This process is commonly known as the “snowball strategy” by investors.
This is a key strategy to my overall investing model. I discuss other strategies including how find properties, pay for properties and I give detailed numbers on my current rentals in my complete guide to investing in long-term rentals. Why you should pay off your mortgage on rental property?
Banks don’t like to lend on more than four properties
One of the biggest reasons I pay off one mortgage at a time, is because I want to limit the number of mortgages in my name. It is more and more difficult for investors to buy properties and get mortgages. Many lenders will only allow an investor to have four financed properties, while some lenders may allow up to 10 financed properties if an investor meets certain criteria. There are banks who will lend on more than 10 properties, but they are very hard to find. The fewer financed properties I have the better chance I have obtaining a mortgage on a new property.
My current bank is a portfolio lender and they will lend on as many rentals as I want, if I can qualify for them. It is tough to find a bank who will finance as many properties as I want, but I do not know if this will last forever. If my bank happens to change their policies, I want to be in a flexible position where I can change strategies quickly. Having houses paid off will give me that flexibility.
I increase my cash flow every time I pay off a loan
The faster I pay off a loan, the quicker I can stop making payments to the bank. I can then take that extra money and apply it to paying off the next mortgage. The more properties I own and the more properties I have free and clear and the faster I can pay off the next mortgages. This snowball effect greatly increases returns, because I am realizing returns sooner than I would if I paid off the mortgages in equal amounts.
Having houses paid off give me more options
Having houses paid off free and clear gives you so many options. It is much easier to get a line of credit on the equity in your properties if you have a home paid off. Lines of credit are as good as cash and give you much more buying power. You can use a line of credit to purchase properties with cash terms, use it for repairs or down payments on more properties. If you can buy properties on cash terms, you have a huge advantage on certain types of sales and can negotiate a lower price or possibly beat out a higher financed offer.
I use ARMs to finance my properties
My portfolio lender does not offer a 30 year fixed loan product. I use ARMs to finance all of my properties because that is the best product available from my lender. I have to pay off my properties quickly in order to avoid a large interest increase in the future. By paying off one mortgage at a time, it allows me to pay off mortgages fast and avoid the increased interest rate of an ARM.
It feels really good to have a house paid off free and clear! If I ever get in a bind in the future, I know I can sell one of my rentals that is free and clear or refinance it to get cash. In a perfect world, where I knew I could get unlimited 30 year fixed loans, I would not use the snowball strategy. However, we are in a time where the lending industry is constantly changing and I need to be able to react quickly to changes.
If I could by as many rental properties as I wanted with 30 year, fixed rate loans I would not pay anything extra towards my mortgage payments. However, this is not a perfect world and it is not easy to finance multiple properties and that is why you should pay off your mortgages one at a time. For more information on financing rental properties please check out my new Ebook: How to Get Financing on Multiple Investment Properties.