In most of my blog articles I describe how I invest and what I think is the best strategy for myself. However, not everyone is in the same situation as I am financially or geographically. I am lucky that my profession provides enough income to purchase multiple rental properties a year. I am also lucky that I am located in an area that has affordable properties that require a relatively small down payment. I hear from investors all the time how difficult it is to invest, because they average starter home costs $300,000, $400,000 or more! There is a huge difference between saving up $20k for a down payment and saving up $80k.
Because I can buy multiple properties a year I have decided to use the snowball method to pay off my properties 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 will have my first rental property paid off about three years after I bought it. I go into more detail on the snowball method in this article here.
Why I use snowball method
I use the snowball method because I plan to buy a lot of properties, in fact I plan to buy 100 rental properties. Right now my portfolio lender will give me as many mortgages as I want assuming I have enough cash reserves. The portfolio lender only offers 15 year fixed rate loans or 5 and 7 year ARMs. I choose 5 year ARMs to finance my properties and I want to pay off my properties before those ARMS adjust to a higher rate.
Another reason I use the snowball method is I do not know if my portfolio lender will always finance an unlimited number of properties. 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 solution to the cash problem is having a line if credit with banks. Banks like to see properties free and clear and will be happy to give a line of credit to investors with many free and clear properties. The more properties I have paid off, the more stable I look to banks.
When’s the snowball method may not be ideal
If you are in a situation where you are in need of more capital to purchase properties the snowball method may not be the right strategy. The snowball method works better the more properties you have and the more cash flow coming in. If you are only able to purchase one property then the snowball method is not going to work very well.
If you are buying your first rental properties chances Are you can get a 30 year fixed mortgage. If you have a 30 year fixed mortgage there is no reason to need to pay off ARMs before they adjust and that would eliminate one of the reasons I use the snowball method.
If you are just starting out investing in rental properties then you may not be too worried about financing over ten rentals. Most likely you are focused on buying one, two or three properties and then beginning to think about a larger portfolio that will require long-term planning. If you don’t have to worry about a portfolio lender financing your deals then that eliminates another reason I use the snowball method.
The biggest issue most people run into when beginning to invest in rentals is having enough cash for down payments on properties. It can take a long time to same up for that first property as it did with myself. It may make more sense to save your cash flow and put that towards the down payment on an additional rental property then to pay down the mortgage. It may even make sense to do this a few times until you have a decent sized portfolio of properties.
If you are just starting out investing in Real Estate there is no rush to begin a certain strategy with paying down mortgages. Saving your cash flow can be a good strategy for a number of reasons. 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 Real Estate 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.