I own 15 rental properties and I used to use all my cash flow to pay off one mortgage at a time. I decided to change how I paid off my mortgages to increase returns and buy more properties. If you are just starting out buying rental properties or are very tight on cash, it may make sense to save your cash flow instead of paying off properties. There are many factors that you must consider when deciding whether to pay off loans or save the cash flow. I can buy a rental property for around $100,000, but other areas see starting prices double or even triple what I pay. There is a huge difference between saving up $20,000 for a down payment and saving up $80,000.
I used to use the snowball method to pay off my mortgages early. The snowball method involves taking cash flow from all my rentals and paying down one mortgage at a time. When one mortgage is paid off, I apply the cash flow from all my properties to another mortgage and so on. Using this strategy I paid off my first rental property about three years after I bought it. For some people it may make more sense to save the cash flow from rental properties and not pay off their mortgages early.
For more information on my rental properties and strategies check out my complete guide to purchasing long-term rental properties.
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Why I used snowball method to pay off my rental properties
I used the snowball method because I plan to buy a lot of properties. In fact, I plan to purchase 100 rental properties over the next 9 years. On my rental property purchases, my portfolio lender will give me as many mortgages as I want as long as I qualify for them. My portfolio lender only offers 15 year fixed rate loans or 5 and 7 year ARMs. I choose 5 year ARMs to finance my properties because of the low rate and increased cash flow. I was using the snowball method because I wanted to pay off my loans before they had a chance to adjust to a higher rate. Now I am okay with that higher rate because I can still make much more money buying new rentals, than the higher interest rate I would be paying.
Another reason I used the snowball method is I do not know if my portfolio lender will always finance as many rental properties as I want. It is very difficult to get more than 10 loans with a conventional lender and the less mortgages I have, the more properties I could buy if my portfolio lender changes their policies.
One key to being a successful real estate investor is to have cash available for purchases or repairs. One way to increase your available cash is using a line of credit with banks. Banks like to loan to investors with many properties free and clear and will be happy to give a line of credit on those properties. The more properties an investor has paid off, the more stable they look to banks. I do love having one property free and clear.
Why it is not smart to pay off your mortgage early if you only have one rental property
If you are in a situation where you need more money to buy rental properties, the snowball method might not be the right strategy. The snowball method works best when you have multiple properties and a lot of cash flow coming in. If you are only able to buy one rental property, it will take a long time to pay off that property and buying more rentals will be more profitable. If you can’t save enough money to buy multiple rentals, it may be smarter to save your cash flow, instead of pay off the mortgage.
Why it is not smart to pay off 30 year fixed rate loans?
If you are buying your first rental properties, the chances are good you can get a 30 year fixed mortgage. If you have a 30 year fixed mortgage, you will not have to worry about the interest rate rising in the future. You have your interest rate locked in for 30 years and can use that money to buy more properties. A 30 year fixed rate loan is an awesome loan for rentals, and I would not pay off any 30 year fixed rate loans I have.
An investors goals will determine if they use the snowball method to pay off mortgages
If you are starting to invest in rental properties, you may not be too worried about financing more than ten rentals. Most likely you are focused on buying one, two or three properties. After you buy multiple properties and you decide you like having rental properties, you can think about a larger portfolio. If you only have a few rental properties it could be too early to decide whether paying off mortgages is the right move. If you don’t have to worry about a portfolio lender financing your deals, that eliminates another reason to use the snowball method.
Paying off mortgages early is not a good idea if you are short on cash
The biggest issue most people run into when buying rentals is having enough cash for down payments on properties. It can take a long time to save enough money for your first rental property. If you save your cash flow, it will be easier to buy another rental property by saving your cash flow for future down payments. You also need to have extra cash for emergencies and expenses on your rental properties. It is not wise to use all of your money to buy a rental property. You should always have some extra cash to make it through the tough times.
If you are just starting out investing in rental properties there is no rush to pay off the mortgage early. Saving your cash flow can be a good strategy to help you save cash and buy more properties. If money is tight, then you may need that money for repairs or vacancies on your rentals. That extra money can help you buy properties quicker and increase your cash flow. You may decide you don’t like investing in rental properties and you only want one rental or want to get out of it all together. If you do decide to use the snowball method later on, then it is really easy to take that saved up money and make a large mortgage payment with it.
I have much more information on paying off mortgages and buying rental properties in my Complete Blueprint for Successful Real Estate Investing. The program comes with coaching from me as well as many other features.