InvestFourMore Real-Time Stats (as of 6/20/18)
11 flips currently in progress. 154 flips completed. 19 rentals properties.
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The “snowball” method involves taking all of your cash flow from rental properties and using it to pay off one rental property at a time. I purchased my first rental property in December of 2010 after doing a lot of research and saving. It took me a while to pull the trigger on a long-term rental, but it was the best decision I ever made. I now own 16 rental properties and thanks to the snowball method, I paid off the mortgage on my rental property in just over three years! Paying off a mortgage early feels great and has many advantages.
I really want to retire early, and I have researched many different options for retirement. I decided early on that the conventional retirement model of saving all your life, guessing how long you would live and hoping you don’t run out of money was not for me. I wanted an investment that would provide passive income so I would not have to worry about running out of money. With passive income, I always have monthly checks coming in without eating away at any principle I have invested.
Best choice for retirement is rental property income
I discovered real estate was by far the best choice for passive income, especially since I was already a real estate agent. Rental properties provide cash flow, tax advantages, equity pay down and may even appreciate. I have now purchased 16 rental properties, and each one provides a 20 percent or better cash on cash return in the first year. Because of that cash on cash return, I am paying off one mortgage at a time on my rental properties. For more information on my rental properties and investing strategies, check out my complete guide to purchasing long-term rental properties.
It is not easy to buy many rental properties quickly
I bought my first rental in December of 2010, but I did not buy my second property until October of 2011. I had a lot of things going on in 2010, including moving and getting pregnant with twins (not me). After a slow start to investing, I quickly bought another in December of 2011 and again in January of 2012. I took another long break in 2012 and did not buy my fifth rental until December of 2013, I bought another in March of 2013 and one more in April of 2013. Now I want to purchase 100 rental properties in the next ten years.
My first rental property was paid off with the snowball technique
I bought my first rental with a $72,000 mortgage, and I paid off the mortgage in February of 2014! The reason I was able to pay it down so quickly was because of the snowball technique. The snowball technique pays off one property at a time with my cash flow from my other rentals. Because I have over $500 a month in cash flow from each rental, I am paying off a mortgage very quickly.
The snowball method works great if you buy below market value
The biggest reason I am paying off a mortgage so quickly is because I bought my properties under market value and they have great cash flow. The second reason is that I use the snowball effect to pay off one mortgage at a time. Once a mortgage is paid off, I will bring in more cash flow because I have one less mortgage payment. That extra cash flow is applied to the next mortgage and it is paid off even faster. Once I have purchased enough properties, I will be paying off one property a year, then two and so on.
Why not invest extra cash flow into buying more properties?
Many people ask me why I use the snowball method and do not buy more properties with the extra cash flow. There are a few reasons why I am paying off a mortgage early.
- Many banks limit how many loans you can have. Some banks won’t loan on more than four properties, and some on more than ten. I am lucky I have a portfolio lender who will loan on as many properties as I want. However, I do not know if my portfolio lender will continue to loan on unlimited properties, so I want as few mortgages in my name as possible.
- Having cash available is a huge advantage in the real estate business. Banks love to give lines of credit on houses that are completely paid off. A line of credit is as good as cash in the real estate world. If I pay of the mortgage early, it gives me a huge advantage when dealing with banks.
- My portfolio lender only offers ARMs or 15 year loans for my rental properties. I choose a 5 year ARM to finance my rentals, so I want to pay those off before the rate adjusts. By using the snowball method to pay off the mortgage early, I can pay off my houses before the interest rate goes up.
If you are short on cash, paying off a mortgage early may not be the best choice. I wrote an article on why it might be better to save your cash flow in order to buy more properties if you are just getting started in investing.
Conclusion
In a perfect world where I could have as many 30 year, fixed rate loans as possible on my rental properties, I would not use the snowball method. However, the banking guidelines are constantly changing and the less mortgages in my name, the better chance I have of adapting to new policies. Using the snowball method to pay off rental properties early will give me much more flexibility dealing with banks.
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.
Update:
It is 2016 and I own 16 rentals, and I have stopped paying off my mortgages. I have been focusing on more aggressive growth, by using the cash flow to buy more rentals or flips.
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I bought my first rental this summer.
I am self employed, with high, but uneven income. So it was tough getting a lender to give me a mortgage because of that. I don’t fit neatly into the lending box I guess. I ended up with a local, small bank that decided I was a good risk and will keep the loan in house. I hope to build on that relationship with them and purchase more rentals in the coming years. However, I’m paying 0.5% higher interest than what I could have got had I been a “normal borrower” for lack of a better term. And I had to put down 25%.
I rented out the home within a week of closing. Got my first rental check before I had to make the first mortgage payment, which was nice. Where I live the rental market is extremely tight, which is I went down this route to begin with.
Rent is $1750, PITI is $1200. So far so good in my new adventure….
Nice work!
Hi Mark, where are you located? I’ve been reading through your website and there’s a lot of great info, but it feels like a lot of it doesn’t apply to my local market. I am in Massachusetts north of Boston, and it’s just not possible to buy anything for under 400k. That means that some of your posts, like the Snowball effect, sound great but don’t seem to apply to us here. We aren’t looking at 70-80k loan per property, it’s more like 300-350k per property.
I am in Colorado which has seen huge price increases. Usually rentals work best in lower price ranges. Have you looked at markets close to you with lower prices
great post mark . what are your thoughts about leasehold properties ? And do you own any leasehold properties?
We don’t have leasehold properties in my area for the most part. I do not know that much about them.
Great blog Mark…
I currently have 3 duplex and 5 homes. 2 homes are paid off and one has a home line of credit. None of my properties have more than a 100K loan. 2 of the properties are at about 70K. The housing marker is high in Sarasota, FL and currently I am doing your snowball approach to pay off the homes. Once the housing bubble busts then I will buy another couple homes. In the meantime I will have little to no debt and cash coming in from my job. I really have a couple of goals still and one is to have a condo near / across Siesta Key and then a home on the canal of Sarasota Bay. That will finish my rental dream and start to enjoy Florida Living. Your thoughts?
I would not bet on the bubble bursting for sure. Just because prices are higher, does not mean another bubble is coming.
Hi Mark, I bought my first rental in march of 2017. It has a cash flow of about $180 a month/ $280 after special assessment is over in 2018. Mortgage balance is $51,000. Would love to hear your thoughts on what to do next to maximize potential of retiring early.
That depends on what the property is worth, what you can buy now in your market, etc.
Appraised at $65k. I live in south Florida and this rental is in the Sarasota area/ manatee county. I currently live in Miami and everything is just too expensive here. I bring in roughly 4300/ month and my expenses area about $1500-$2,000 monthly
You inspired me to take the real estate exam for CA. Read your article about what to do when you first start out!
Nice! Good luck
do you by chance have a spreadsheet you can send me or post that shows you what this looks like?
I don’t, I wrote it all out by hand.
After I borrowed against the equity in my home, I have noticed banks are reluctant to lend money against a rental property and when they do it is only for 50-70% of its value. How are you able to keep borrowing against all these properties?
When I refinance one of my rentals it is only for 75 percent of the value at the most.
It seems like you’re basically saying you should pay off one rental so that you can secure financing for the next. But you yourself admit that the lending may dry up in the future. In this case wouldn’t it be better to use your cashflow to save up to buy the next rental with CASH? This way you don’t have to worry about lending being there. If you pay off one rental and then the lending dries up, you will be forced to wait until you can save the full amount back up from the cash flow.
It sounds like you have enough cashflow for the turnaround time to be pretty short, so the spread between mortgage interest and savings interest won’t cost much.
Yes, your ARM’s may adjust, but you were *already* planning on getting a new mortgage anyway at then-prevailing rates, thus were already fully committed to accepting future market rates, right? If this is so, then the adjustment is nothing to worry about, you’d just in effect be financing the old property using the original loan in order to buy the new one.
I have stopped paying off one mortgage at a time, because I think my money is more valuable buying more properties instead. The advantage of paying off mortgages instead of saving cash and paying in cash for new properties is I can choose to pay off the lowest loan balance which is already 20% less than the purchase price and in my market houses I bought a couple years ago were much cheaper. I can pay off that property much sooner than I could save the cash for a new property. But in the end I am choosing to save cash flow and get a loan on new properties.
I have my rental up and running and now want to buy a flip, I own my rental outright but cannot find a bank that will give me a HELOC for the purchase, any advice or knowledge of a bank that will let me borrow against a rental?
Hi John,
Look for a portfolio lender in your area. https://investfourmore.com/2013/05/12/how-to-find-a-portfolio-lender-who-will-finance-multiple-investment-properties/
Great blog Mark! In terms of reducing the number of loans, does a second mortgage “count” as a separate mortgage or just as part of the first mortgage on a property in the banks eyes? So would a single $300K loan count the same as a $200K first and a $100K second? What would be your strategy on a first & second situation? Thanks!
Thanks Steve,
Great question! I am not positive on this and i will have to check with my lender.
In CT they require 30% down for investment properties, taxes in CT are no joke
(4-6k) depending on where. I am just starting in this business and I have a goal of 5 houses but I’m not sure if can can do it with $220k.
correction 25% down
Those taxes are killer! That might not make the deal worth it for me.
I got a loan from the equity in my residence for 220k, which is worth 350k. I bid on a home I will pick up for 150 cash 2 family. I can get $2100 for the rent and it will pay my mortgage. I have to pay taxes $400 insurance $200 and I put $200 away for repairs totaling $800 a month running cost. If i acquire a second home, and borrow $150k that is with taxes and insurance lets round it to $1500 a month, with maintenance water and sewer another $200 I profit $300 or $400? should I save cash for a while and get lower payments with a bigger down payment for house #2? It all seems very tight!
Hi John, How much are you putting down on the 2nd home? The $1500 for mortgage, taxes and insurance seems high.
if you put all the rent money into paying off a house, how are you paying the mortgages on all these houses? you have 10 loans needing to be paid?
Hi John, I do not put all the rent into paying off a mortgage, just the cash flow or profit. I pay the mortgage and all expenses first on each property.
I currently have 5 rental properties and I always thought I wanted to have 10 and then I would be set but now I am thinking I may have underestimated myself! I too have been using equity from one property to buy up another property, then we try to make double payments on the ARM to pay it off before it balloons or we have to readjust the interest rate. So, I understand the snowball method and paying down the mortgages/ARM loan on the properties but then how are you paying yourself now? What percent are you giving yourself now for take home? I currently have another job and that is my total income. . . . I really don’t have any “income” from the rental properties at this point because it all goes toward taxes, insurance, savings for repairs and paying down debt.
Hi Willow,
I don’t pay anything to myself from my rentals. All my extra cash flow goes into paying off the loan on one property. And I am paying off my first rental property this week!
Mark, thanks for the great article. I am familiar with the snowball method for paying off personal debts which I did a few ago after discovering Dave Ramsey. I want to be able to buy a rental property and eventually several more-but I have a long way to go just getting started. What are your suggestions to save towards my first rental? What would be a realistic goal to set regarding cash flow and a future passive income vs. my active income from my job (salaried employee for large medical product company).
Hi Mike, thank you for the comment. Have you looked at my article on how to buy a rental with less down? That would be a great start. Its hard for me to set your goals because I don’t know your market. I would try to figure out how much rental income you want in the long run and work backwards to see how much you will need each house, how many houses you want etc.
Great blog. Thank you for sharing.
Thank you Mike!
Great info Mark !
Thanks for sharing. Quick question for you, do you own these properties in your number or a LLC or anything of that nature ?
Stephen
Each property is in it’s own LLC and I have a separate bank account for each one.
Hi. Did your portfolio lender lend the money in the LLC name or did you obtain the financing in your name first then quit claim the property to the LLC?
I’m having problems finding a lender who will lend to an LLC at all let alone at 80% LTV. Thanks.
Hi Jason, I can do both. I have purchased in my name and quit claimed and then refinanced an LLC as well with them. They only refi at 75% loan to value though.
Forgot to mention congrats on your success and great article 🙂
Thank you
There is a great tool out there called a mortgage payment calculator that can really help with balancing budgets and funds allocation. You can figure timelines, cash flow etc. Another thing that a mortgage payment calculator can help with that I didn’t see discussed was budgeting for emergency repairs in the event an A/C unit or heater or something goes out.
Hi Mark, this is a great blog. I linked over here after I found your HUD blog on Biggerpockets.
I’ve read your other article about your snowball technique and I completely understand your reasoning, but I’m wondering how you balance how quickly to pay off your mortgages vs. how much to set aside for down payments on other properties. I suspect that a big part of this equation has to do with the downpayment that your portfolio lender requires. I’m guessing that maybe you are not paying the 25% that I was required to put down for the 30yr fixed mortgage that I just used on my first investment property.
I just closed and am working on a little rehab to get it rented, but I’m a bit discouraged about how long its going to take me to save up another down payment to buy my next rental. And I’m planning to pay only my minimum mortgage balance and save all my rental income for the next down payment. I’d welcome any advice that you might have. And again, great blog!
Hi Adam,
Thank you for the compliments!
I put 20% down with my portfolio lender and there are a few reasons I snowball, but it is not right for everyone. I have been buying about three houses a year and my issue is not the down payments right now, but finding good deals with our crazy market. I actually wrote an article on exactly your situation If you are struggling to save up enough cash to buy your first couple, I would suggest not paying down the mortgage especially if you have a 30 year fixed. All my mortgages are ARMs.