When to pay off a property?

So far all I’ve read is that you should hold onto as much cash as possible, but when do you use it to pay more than your mortgage payment to pay it off early? Moreover, why not avoid any debt at all and just pay cash when possible so you’re not a liability to anyone else and confined to your own debt and so when you earn rental income it goes straight, or more directly towards your pocket?

Do any investors follow that line of thought or similar? The idea of using leverage to gain as many properties as I can within the shortest amount of time seems to me risky managing all that debt.

Isn’t it slower but safer my approach, in the beginning, but down the road start to pick up as you’ve acquired a few good performing properties?


It all depends on your investment strategy and your tolorance for risk? It is going to be different person to person and while your perpensity may be family security another investor may be agressive and have a larger threshold for risk vs reward!

Your personal position also dictates what your strategy should be as if you make a lot of money at your job or own a business providing a sizable monthly / yearly cash flow you may find yourself either leveraged fully or paying off mortgages to safe harbor cash providing a place other than a bank to make good returns while keeping your investment safe!


If you don’t use leverage (debt) your growth is constrained by how much cash you can save up. This is the basic confusion about debt. Debt is not debt. There is different debt. There is consumer debt and business debt. Consumer debt is what you take out to buy things you otherwise could not afford. Business debt is used to leverage your business to allow for growth. The Dave Ramsey’s all debt is bad philosophy works for consumer debt. Going into debt to by a flat screen TV or to take a vacation is bad. But business debt is necessary and desirable to achieve proper returns. For example Donald Trump did not save up $1Billion to buy Trump tower, he borrowed that $1Billion. All business and especially real estate is done using business debt. The good thing about real estate is that it finances itself. If you do it correctly you should have very little of your own money in the properties. Real estate is no better than any other investment except for leverage. You are going to get 7% to 10% or so on any deal you pay cash for, but if you finance it your returns go over 50% really quickly and if you can get all of the property costs financed you can get infinite returns. For example if you buy a house that is worth $120k and you pay $100k cash for it and you get $1000/month rent for it you will be getting $12,000 a year for your $100k invested that is 12% and you own $120k worth of real estate. If you take that same $100k and put 10% down on 10 houses you still have $100k invested but now when you rent those 10 house for $1000/month each and pay the taxes insurance and notes you will end up pretty easily with $300/month per house. That times 10 is $3000/month or $36,000 a year for a 36% return on your money. You also control $1million worth of real estate. If you ever get houses that are paid off you need to refinance them harvest the cash out of them and use that cash to do capital repairs (roof, plumbing, foundations, A/C etc). You should always let the enterprise fund the enterprise. Never go into your own pocket for your property use the money from the property on the property.

About the risk of having debt. There is no additional risk brought into a real estate business because of debt. The debt is paid by the rents you bring in. The only risk exists regardless of you having debt or not. If you let an empty house stay empty you will have problems with the debt but if the house is paid off and you let an empty house stay empty you have the same risk. If the house burns down you have insurance and the debt is serviced by that settlement, still no risk. The biggest risk is the opportunities you will miss out on by not having enough money to do what you want to do because you have not saved up enough cash.

I have seen this question many times over the years, and my answeris always – it depends upon your investment goals.

If you are 30 years from retirement and your goal is to have rental property cash flow replace your salary when you retire, then figure out how many rental properties you will need at retirement to replace your current salary.

If you need $48K per year from your rental properties, that works out to $4K per month. If you can do that with 5 free and clear properties, then set up your investment approach to acquire 5 rental properties and have them paid off by the time you retire. You can do this easily with 30 year financing and have your tenant’s rent buy the properties for you. f you just have 15 years to retirement, then five free and clear properties with 15 year mortgages will be free and clear by the time you retire.

On the other hand, if you get $100 per month cash flow from your financed propoerties, then 40 properties will meet your retirement goal, and you can keep the financing in place as long as you want to.

Bottom line, the answer depends upon your goas, and the plan you choose to implement to accomplish your goal.

You’ve received some great advice here. Right now is a great time to buy properties in many areas around the country, but if you buy too much too quickly you could run into problems. My investing goals sound like what you asked about by getting things free and clear. I personally like small loans taken out for ten years. That’s what works for my strategy. It may not fit what you want to do. Financing several properties at once can work well if you can handle the costs along the way. Sometimes money gets a little tight when we have people working on a few rehabs at once. If you wait to pay all cash or put 50% down on each property, you’ll have a secure feeling but you may find you’re not where you wanted to be a few years down the road because you didn’t buy as many properties as you hoped.

I understand the thought process behind using mortgages but I prefer going the paid off route. I am 69 yrs. old and I am not interested in property appreciation as much as rental income. I just paid 54K for a three bedroom home, put in another 6K upgrade and now collect $700 monthly minus property taxes and ins. The way I figure it, I will recoup my money in under ten years.

I watched a lot of investors with mortages lose their shirts when the housing market collapsed.

Another consideration is property appreciation and resale. If you buy property when the prices are low, your return on your investment is going to be much higher (whether you pay cash or finance). This is both on the rental income side but most of all when you turn around a sell.

Right now, prices are the lowest we have seen in nearly a decade and interest rates are extremely low. These two factors work in the favor of the property investor. Use the low interest rates to buy more properties than possible with all cash purchases. As the market rebounds, you can turn around and sell enough of the properties to pay off all your mortgages on the remaining investments.

For example, lets say you have $60k to invest. You could purchase one house and pay cash and recoup maybe $800 in rent per month with a gross annual income of $9,600. You now have one property appreciating.

Instead, let us say you buy 4 properties and put 25% down on each ($15k x 4 = $60k). You finance the rest at 3.5%. All the properties rent for $800 per month which will give you a gross income of $38,400. Your mortgage payments (at 30 amortization) will total $9,700 per year, leaving a gross profit of $28,700.

Of course, this does not factor in expenses. But 50% expenses on 1 property vs. 50% expenses on 4 properties will give you the same amount of profit per property. Meanwhile, you now own 4 appreciating properties but have spent the same amount of money.

I second to the above posts.

Also, if you wait for waaay too long just to save up the total price of the property, you might find yourself running after the price, especially if the property appreciates big time. Debt isn’t a bad thing, a lot of successful businesses started with a large debt. If you loan and make the property income generating, you win by having ROIs, money to pay off the debt and , if lucky enough not to get a break even, extra profits.

Another big benefit of having debt is being able to write off your interest paid from your profits. At the end of the day if you have $1000 profit a month you will be taxed on that amount, but if you have 1000 and are able to deduct interest, you will be taxed on smaller amount. And as people say (especially Bluemoon06), use the profits to invest in others, that way at the end of the year if you can break even, you don’t pay taxes at all while getting richer. That is if you have another job of course unless the company you have pays you to live.

All legitimate business expenses are deductible; mortgage interest on debt is just another business expense that offsets income and reduces your tax liability. Nothing special here. The implication here is the interest deduction results in some tax benefit. This is a popular misconception. There is no tax “benefit” to having debt. If it costs you $100 in interest payments to save $25 on your taxes, where is the benefit? Your cash flow is still $100 less. The supposed $25 tax benefit is a phantom benefit that did not increase your cash flow.

Debt can be an investor’s friend, but there is no tax “benefit” here.

I say a lot that it really matters what you call things. Real estate investing is not speculation. You don’t lose your shirt on mortgages when housing markets collapse. As long as the rents are sufficient to pay the mortgages the housing market is irrelevant to you being able to pay the mortgage. Paying the mortgages is dependent on jobs. Jobs insure that people don’t move away and make enough to afford the rents. You can lose your shirt if the jobs market collapses. Now the people that lost their shirts on housing markets were not investors but speculators. These are people that are looking for appreciation to pay off the debts. Investors look for profits from their investments to service the debt and yield a profit.

You are correct. The ones that I watched go under took second mortgages (with adjustable rates) as soon as they acquired a house. When the housing dropped, they were forced to come up with money to keep the mortgages at 80% of the value. Ergo, they went under.

My experience here (vegas) of course is the speculation. When you buy at 500k for something that has a GSI of 25k there is absolutely no doubt about what your exit strategy is. But when you pay 110 k for the same 25k GSI now you’ve got something that is great!