My First Rental Property is Paid Off Three Years After I Bought It!

07 Feb
My First Rental Property is Paid Off Three Years After I Bought It!

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rental property #1It took me just over three years to pay off the first rental property I purchased!  I bought the property in December of 2010 and thanks to using the snowball method to pay off mortgage, I made my last payment this week (Feb 2014)!  My plan to purchase 100 properties is progressing nicely and paying off this home fits in perfectly with my payoff schedule.

It was a great feeling paying off my first rental property

I was really looking forward to writing out a check for the full amount owed and mailing it to the bank.  However, when I called my mortgage company to get the payoff, they told me I had to use a bank wire or a certified check to pay off the loan.  I chose the bank wire since it would be easier and faster for me, but it wasn’t as satisfying as writing a check.  Two years ago it seemed ridiculous that I would be able to pay off the property so soon, but I did it.  Setting goals and making plan was a huge part of paying off this home so quickly.

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The details on my first rental property

My first rental has been a great investment and the details are here.  I bought the single family home for $96,000 and put 25% down when I bought it.  The home was rented for $1,050 when I bought it and then $1,100 a month one year later; it is now rented for $1,300 a month.  I have had four renters and no vacancies since I first rented the home.  I have been able to rent it before the tenants moved, because the tenants kept the home in great shape and let us show the home.

My payment was about $500 a month including taxes and insurance, which left $500 a month in cash flow.  I have not had many repairs to do, unless you count a new roof and new siding which was covered by my insurance.  We had a huge storm come through with massive hail that destroyed the roof on this house and as well as most of the siding.  I have had to replace the water heater and do a few other minor maintenance items as well.

How was I able to pay off my first rental so quickly?

There is no way I could pay off this property so quickly if I only used $500 a month as extra principle reduction.  I used the cash flow to pay off the loan on this house and I also used cash flow from my other rental properties to pay off this loan.  I was able to take the cash flow from 8 rental properties to pay off this property.  I was hoping to pay off the home before the end of 2013, but it took a little longer because some of my tenants got behind on their rent and my insurance company was slow paying me all of my claims money.  In January, the two tenants who were behind paid me large chunks of money once I posted eviction notices.  Funny how that works!  I also received one of the insurance checks I was expecting so I was able to easily pay the pay off amount this month.

What are the benefits of paying off one loan quickly versus all your loans at the same time?

There are many benefits to paying off one loan very quickly over paying down all my loans at the same time.

  • More cash flow when I pay off a loan: I have almost four hundred dollars a month more in cash flow, because I don’t have to make payments on the loan anymore!
  • My debt to income ratio went way down by paying off the loan: Whether I owe $5,000 or $150,000 on a loan, the payment still shows up on my credit as debt.  The more payments and debt you have the harder it is to qualify for a mortgage.  Once the loan is paid off, that payment disappears and my credit and my financial position looks much better to lenders.
  • I have one less mortgage in my name: Most banks will not finance investors with more than four mortgages in their name.  The less mortgages I have the better, because I can buy more rental properties.  Even though I have a portfolio lender who will loan on as many properties as I want right now; I don’t know if they will do that forever.
  • With this house paid off I can get a line of credit easier: Even though I paid off this home, I can still leverage it by getting a line of credit.  The great thing about a line of credit is I don’t have to take out all the money at once like I do with a refinance.  I can let the line sit their unused until I need more money for down payments or to buy a fix and flip.
  • With a mortgage paid off I can pay off another house faster: I can use my cash flow to pay off another rental property.  I will use the same cash flow I used to pay off rental property number 1 to pay off another rental property!  I think I will pay off rental property number 4 next because it is actually the next ARM that will adjust the soonest since I refinanced rental property number 2 and rental property number 3.

The next part of my plan to pay off my rental properties

As I mentioned I will apply my cash flow to rental property number four, which has about $87,000 left on the mortgage.  I should be able to come very close to paying that property off in 2014 or early 2015 thanks to buying more properties in 2015 and increasing my cash flow with each purchase.  I want to buy six more rentals in 2104 and that increased cash flow should help out tremendously.  For more information on my investing please check out my complete guide to investing in long-term rental properties.

Update: I have not been paying off rental property number four with the extra cash flow.  I have saved that cash flow to help finance my fix and flip business which has taken off in 2014.  

Related Articles

Rental Property number 9 is under contract

My second rental property

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27 Comments
  • Neil
    Posted at 18:42h, 07 February Reply

    I like the snowball approach to paying down mortgages, but does it slow down your acquisition rate if you were planning on using the income to get new places?

    How are you balancing paying off the mortgages and using the money for new acquisitions? Right now we are wrapping up our Fannie Mae slots and ready to look at other ways of getting leverage.

    • investfourmore
      Posted at 21:10h, 09 February Reply

      Hi Neil, Right now I have a harder time finding great deals than I do paying for them. Thanks to my real estate business I have enough capital to purchase new properties, but if I did not I probably would not pay them down so aggressively.

  • Michelle
    Posted at 23:31h, 10 February Reply

    Awesome, congratulations Mark!!

  • Anna
    Posted at 00:03h, 11 February Reply

    Mark, who is the lender you are referring to? Thanks!

  • Gerald K.
    Posted at 10:03h, 12 February Reply

    Congratulations Mark. It’s nice to see your plan coming together!

  • Elliott Garber
    Posted at 21:40h, 13 March Reply

    Congrats, that’s an exciting step! I just closed on my second rental property today, and I’m exploring the idea of continuing to expand.

  • Ravi
    Posted at 16:27h, 14 April Reply

    I’ve got one property and it’s paid off now. Net cash flows (after a maintenance reserve I set aside monthly) is around $550.

    I’d love to get another property, but have not been able to find many good deals lately. Market prices are close to fully valued. I wish I would have leveraged more in 2010-2012.

    • Mark Ferguson
      Posted at 20:04h, 14 April Reply

      Ravi, Our prices are doing the same thing here, but I find a deal here and there still.

  • landlordinvestor
    Posted at 19:21h, 09 May Reply

    Mark, I also accelerate payments to pay our properties off quickly as well. At this point we have several paid off properties are only using LOC against those properties for new acquisitions. We are not planning to purchase 100 properties, so we dont even bother converting to conventional mortgages.. Just pay off the lines then buy another one. Much slower growth rate, but we just need a handful more to call it an early semi-retirement.

    Good blog..enjoying the content…

    • Mark Ferguson
      Posted at 21:57h, 09 May Reply

      Hi, thank you for the comment! That strategy works great for many people.

  • Jeannie
    Posted at 14:35h, 16 May Reply

    Hi Mark, great articles! I purchased my first rental home with my parent’s help in 2012 and have never looked back. The extra income on top of my normal income is such a big help each month. I’m currently helping my brother invest in a rental home as well.

    My question today is: would you mind expanding more about the “snowballing” method you used to pay off your first rental house? I’m not sure how that process would work in combination with making other big payments. I’m currently using my extra income from my rental home as well as income from my day job to pay off my undergraduate loans and my graduate school tuition. However, I would love to have more purchasing power and be able to extend my equity line even further. I’m just worried that at this stage in my life (being bogged down my school loans, having one mortgage already and taking on another hefty one) is going to set me back several years in being able to purchase any rental homes in the near future.

    Any advice/input would be greatly appreciated.

    • Mark Ferguson
      Posted at 17:00h, 16 May Reply

      Thank you Jeannie,
      If you don’t have the money to use the snowball method, don’t do it. Use that money to buy more properties like you want to.

  • BS alert
    Posted at 21:21h, 29 October Reply

    who are the DOPES who are renting at double the cost of a mortgage for the same property?

    • Mark Ferguson
      Posted at 16:18h, 03 November Reply

      Hi, That is market rent in our area. It is like that in many areas. Many people rent for many reasons. Some want to move out of the area soon, have bad credit or don’t want the expense of owning a home.

  • Pat Sanchez
    Posted at 11:54h, 07 December Reply

    Great article. You are very educated and a go giver with your knowledge. Really enjoy your content. Very engaging website.

  • Lev
    Posted at 02:44h, 19 February Reply

    Hey Mark! Just came across your article and it is inspiring! I am 21 years old and looking forward to investing in my first rental property shortly with the goal of adding many more properties afterwards. What would your advice be for someone in my position starting off in real estate investing?

    A little background on myself: I have a full time job and have a little more than $15,000 saved and looking to save much more within the following months. I have already spoke with an overseas mortgage advisor because I will be investing where my father lives (not where I reside obviously, hence overseas) and have almost all the requirements (4 Accounts showing 12 months worth of payments, a good credit score (737-741 since January 2015), and proof of employment as well as a few other things. Right now, it’s just a matter of saving a little more capital.

    • Mark Ferguson
      Posted at 20:10h, 19 February Reply

      Hi Lev, I would research the market where you want to invest like crazy. make sure there is good cash flow there.

      • Lev
        Posted at 03:04h, 20 February Reply

        Would you recommend a specific way of researching the market or just the traditional way?

        • Mark Ferguson
          Posted at 16:19h, 23 February Reply

          That all depends on what your goals are and what you are trying to figure out.

  • Oscar
    Posted at 13:25h, 07 May Reply

    Hi Mark,

    Did you buy these homes under a LLC, and did you use a management company to manage rent/ upkeep?

    Oscar

    • Mark Ferguson
      Posted at 14:31h, 07 May Reply

      I buy under my personal name and then transfer to an LLC. My portfolio lender has no problem with me doing that, but some banks do.
      I have my team manage them and I pay them 8 %

      • Oscar
        Posted at 06:20h, 08 May Reply

        Mark,

        Thank you for the reply, I have one more question. Will I or the LLC be taxed on the income earned on the properties if I use it to pay one of the mortgages?

        Oscar

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