My strategy is to buy as many rentals as I can, and pay off one mortgage at a time, as quickly as possible. I take all my cash flow from every rental I own, and use all of the cash flow to pay down mortgages. 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.
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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.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
Banks don’t like to lend on more than four properties
One of the biggest reasons I pay off one mortgage at a time, instead of all of them at the same pace 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 of obtaining a mortgage on a new property.
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, 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 you 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 (adjustable rate mortgage) 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.
Paying off loans gives me more freedom
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.
This was one of the first articles I ever wrote. I have changed my strategy quite a bit over the years and now I do not pay off my loans early.