Whether you are buying Land, Single-Family, Multi-Family, Commercial, or any other Real Estate Properties related to investment, multiple strategies exist. Our strategy, from our staff members that own property to the principal owners, is to routinely preach and internally talk about buying as many properties as you can. Put it on a 30 year fixed-rate mortgage and pay down those mortgages with the end goal of either reducing leverage or completely paying off your properties.
Let’s look at two different portfolios to compare:
A 10 property portfolio with average rent of $950 that is paid off, brings in $8,740 each month (after Property Management and other expenses). That same portfolio with a mortgage will be around $3,600 (after Property Mgmt. and other expenses). Doesn’t $8,740 sound better then $3,600?
I just paid off my first property this year and now enjoy an additional $700 a month. What about leaving equity in your property? Valid point, but if your goal is more cash flow, then paid for properties is the way to go. The phrase I routinely use when talking about paying off your portfolio is “simplify life as you get older.” Do you want to be 50-years-old with 20 years of mortgage left to pay or would you rather have significantly higher monthly cash flow with your properties? If you have children, would you rather leave debt to them or a high cash flow producing assets?
It takes discipline and here is a simple blueprint on how to do it:
• Buy as many cash flowing single & multi-family units as you can on a 30 year fixed-rate. Do not over analyze the gross cash flow to the point where it slows you down. Of course, it needs to cash flow, but pay more attention to the area of the home, the renovation (because you will cash flow more on a well rehabbed property) and most important, the Property Manager.
• Save 1 years-worth of income from the cash flow for each property or be okay with the possibility of a capital contribution outside of your rental portfolio income. Personally, I am okay with the latter because I am more aggressive with my pay down and have a few 10-year mortgages mixed in with my portfolio.
• Then start allocating 75% of the cash flow profits of your portfolio to the principal balance of your smallest mortgage. Leaving 25% behind for unexpected expenses, future capex repairs, and vacancy.
• At the end of the year, evaluate your portfolio and make a capital contribution from your cash flow profits to the principal balance of the mortgage you are paying down while still leaving enough for reserves.
• Once property 1 is paid off, start on the next property with the lowest principal balance. Your first property should be paid off around year 3 to 4 after you start paying down the mortgages, assuming 10 properties are under ownership (which is the max that Fannie Mae allows per person).
With each property you pay off, the next property will be paid off more quickly as you now have more cash flow to allocate. The reason I would not put these on a 15-year mortgage is because you will be saving a lot of interest by paying off your loans earlier and the additional cash flow helps build up reserves quicker. Also, the goal of cash flow real estate is for it to sustain on its own. With a 15-year mortgage, you are more likely to make capital contributions from other funds outside your rental portfolio to sustain mortgage payments. The only case for a 15-year mortgage would be for those who may not be disciplined enough to make those additional payments; the 15-year mortgage guarantees that you will be free and clear in 15 years.
I get it, buying real estate for the additional cash flow is why a lot of us get into this business in the first place. But remember, even if you punt your cash flow until your portfolio is being paid off, with an excellent CPA you are still capturing tax breaks. Keeping more of what you make is the #1 one benefit for me at this point in my life as I am working towards being completely debt-free in my portfolio.
For those of you married, think about the income you could produce with 20 paid for properties (assuming 10 in your name and 10 in your spouse’s name). An average yearly income of $140,000 on these properties is not unrealistic and it would only take you 10 to 15-years to accomplish. Imagine starting your Real Estate journey at 30-years-old and having a paid for portfolio and making $140,000 a year by the time you are 45.
Lastly, I will address the questions and comments that I am hearing concerning rising interest rates. With the above strategy, it will extend the length of time it takes to execute the plan above, but once paid off, the interest rate becomes irrelevant. I am still an active buyer pursuing this strategy, thus I can say this emphatically because I feel strongly about this plan and real estate ownership in general–
“THERE IS STILL PLENTY OF BUYING OPPORTUNITIES FOR PURCHASING PROPERTIES THAT CASH FLOW. DO NOT LET WHAT IS HAPPENING IN TODAY’S MARKET EFFECT YOUR INVESTMENT GOALS FOR THE REST OF YOUR LIFE!”