Why you should Pay off one Mortgage at a time on Rental Properties

My strategy is to buy as many rentals as I can and pay off one mortgage at a time as quickly as possible.  I take all my cash flow from every rental I own and use all of the cash flow to pay down mortgages.  This allows me to have less mortgages in my name and my cash flow increases once I eliminate a mortgage payment.  This process is commonly known as the “snowball strategy” by investors.

This is a key strategy to my overall investing model.  I discuss other strategies including how find properties, pay for properties and I give detailed numbers on my current rentals in my complete guide to investing in long term rentals.

Banks don’t like to lend on more than four properties

One of the biggest reasons I pay off one mortgage at a time instead of all of them at the same pace is because I want to limit the number of mortgages in my name.  It is more and more difficult for investors to buy properties and get mortgages.  Many lenders will only allow an investor to have four financed properties, while some lenders may allow up to 10 financed properties if an investor meets certain criteria.  There are banks who will lend on more than 10 properties, but they are very hard to find. The fewer financed properties I have the better chance I have obtaining a mortgage on a new property.

I increase my cash flow every time I pay off a loan

The faster I pay off a loan, the quicker I can stop making payments to the bank.  I can then take that extra money and apply it to paying off the next mortgage.  The more properties I own and the more properties I have free and clear and the faster I can pay off the next mortgages.  This snowball effect greatly increases returns, because I am realizing returns sooner than I would if I paid off the mortgages  in equal amounts.

Having houses paid off give you more options

Having houses paid off free and clear gives you so many options.  It is much easier to get a line of credit on the equity in your properties if you have a home paid off.  Lines of credit are as good as cash and give you much more buying power.  You can use a line of credit to purchase properties with cash terms, use it for repairs or down payments on more properties.  If you can buy properties on cash terms you have a huge advantage on certain types of sales and can negotiate a lower pice or possibly beat out a higher financed offer.

I use ARMs to finance my properties

My portfolio lender does not offer a 30 year fixed loan product.  I use ARMs to finance all of my properties because that is the best product available from my lender.  I have to pay off my properties quickly in order to avoid a large interest increase in the future.

Freedom

It feels really good to have a house paid off free and clear! If I ever get in a bind in the future, I know I can sell one of my rentals that is free and clear or refinance it to get cash.

Related Articles

My rental properties

My plan to purchase 100 rental properties by January 2023

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13 responses to “Why you should Pay off one Mortgage at a time on Rental Properties

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  5. I’m curious — you also wrote a post about paying down your mortgage vs. buying more properties, and you seemed to be on the acquire-more side. In this post, though, you talk about paying down your rental properties. How do you balance the two?

    • Great question! My strategy can be confusing, but there are reasons for how I structure it.
      I don’t pay off any of my cars or my personal residence early, but I do pay off my rental properties one at a time early. One reason I do this is because it is difficult to get mortgages on properties once you have four mortgages in your name. It can be done, but rates are higher and options much fewer. Once you get over ten properties it gets even more difficult and rates get higher. By paying off my rental properties early I keep the total amount of mortgages lower and it is easier to get more loans.

      Once I have one rental paid off I can use the extra cash flow from not having a mortgage payment to pay off the next rental faster creating a waterfall effect. Paying off the rentals faster will create more cash flow and create higher returns. I can also get a line of credit on paid off rentals giving me more flexibility and buying options if I need it.

      To get the lowest possible interest rate on my rentals I also get 5 year arms. My portfolio lender does not offer 30 year fixed loans. That is another reason I want my rentals paid off early because the rates will be going up in five years and I am not depending on rates to be this low in five years!

      In a perfect world where I could get unlimited 30 year fixed rate mortgages on all my rentals I may not pay them off early, but with current lending guidelines that is not an option.

  6. Yes, my portfolio lender does not offer 30 year fixed, they offer 5/30, 7/30 arms or 15 year fixed. My rate now on 5/30 arm is 3.62%! Can’t beat that on an investment.

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