When considering conventional financing on your home, for properties 1-4, your down payment is 20%. Properties 5 through 10 would require 25% down. Which brings me to our philosophy on leverage. Just because you can put down 20% on properties 1-4, we highly recommend you putting down 25%. Our philosophy has always been to secure as many fixed rate mortgages as you can, save $1,500 per property for reserves and then begin to attack the principal with the end goal to eventually own a portfolio free and clear of mortgages. We feel the 25% down payment at the lower rate and better equity position is the best pathway to accomplish true financial freedom of your investment portfolio. The difference between 20% and 25% down on a Pro Forma is about 1% and the cash flow on a $70,000 loan is approximately $35 more. If you were to take that additional $35, plus another $65 in cash flow towards the principal amount, that 30-year loan is paid off in 19 years. If you had 9 properties and applied this principal, your 1st property would be paid off in approximately 5 years. I recently paid off my 3rd property and now have a cash flow 25% higher than I did when all 17 properties had a mortgage tied to it. Once you get a couple of these paid off, each subsequent property beings to get paid off quicker, eventually getting to a point where you are paying off 1 a year. I certainly understand that this is ultra conservative strategy and what works for me may not work for you. Besides the higher cash flow and bigger profits, having a paid for portfolio achieves 2 goals that I am looking to accomplish.
Goal 1: Simply my life as I get older
My wife and I started buying our portfolio on 30-year fixed rate mortgages in 2007 at the age of 30. Between 2007 and 2008, we aggressively bought 10 properties, thus maxing out what we were able to purchase on Fannie Mae loans. I certainly do not want to be paying mortgages on these homes in my 50’s and into my 60’s. Rather, I want to be slowing down and enjoying the fruits of what time can do for you in real estate. Today, each month, I get a check somewhere in the ballpark of $15,000 a month to which I have $9,287 in mortgage payments to make. As I get older, I want less risk and the security of a higher monthly cash flow. Do you really want to be paying a bunch of mortgages on your 65th birthday? The other part of simplifying my life has to do with legacy. One day, my wife and I will leave his earth and move on–I do not want to burden our children with mortgage debt for them to manage. My daughters are only 5,9 and 11, thus I have no idea what they will want as they get older, but I can’t assume they want to be in the real estate business. Legacy is important to me and having zero debt on my portfolio, IMO, is very important towards being responsible to my children as I leave this Earth. Sort of morbid, I know.
Goal 2: Higher income in fewer locations with the least amount of effort
As I get older, in the example below, I do not want to be in my mid 50’s and older with a real estate portfolio that nets around $6,000 a month in cash flow. If you want to leverage to you die and you want to create maximum income, then the only solution is to buy more. If I never bought another property again (which I am still actively buying), I would need almost 3x as many properties to create the same income a paid for portfolio can create-which is a lot of work if you are trying to slow down. Well isn’t that was the Property Manager is for? Yes, that is true, but owning a large portfolio of 45 homes or so, even with me owning a property management company will still take up more time that I am interested as I get closer to the back end of my investing career. The most income in the fewest locations is consistent with Goal # 1.
My goals may be much different then your goals, which is fine. There is certainly more then one way to skin a cat. My plan is straightforward and that it the plan that I am working. Whatever you do, just make sure you have a plan and work that plan.