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.
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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.
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.
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.