Want More Cash Flow? DON'T Pay Off Your Rental Property

You want more cash flow, so you ask yourself, “Should I pay off my rental property?” In one word: No. Do NOT pay off your mortgage early on your rental property. But how does that make sense? Wouldn’t eliminating your monthly mortgage payment immediately increase your rental property’s cash flow? Yes, but you could be walking away from something that’ll make you more cash flow than a paid-off rental property ever could.

Chris Lopez is back on BiggerPockets to explain why paying off investment property is actually a BAD idea. Chris shows how not paying off your rental properties and using that money for something else can explode your cash flow and allow you to be MUCH richer in retirement. Using Property Llama, Chris calculates cash flow for three situations: Selling and 1031 exchanging your rentals, paying them off, OR reinvesting the money in something else. Wanna see how Chris increased the cash flow on this viewer’s portfolio by over fifty percent? Stick around!

Is paying off rental properties the wrong move for cash flow? If you were in the same situation, which option would you choose? Let us know in the comments below!

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00:00 Don't Pay Off Your Rentals?
01:56 Sponsor: Property Llama!
02:45 Current Portfolio Numbers
04:56 Option 1. 1031 Exchange
06:47 Option 2. Pay Off Properties
09:20 Option 3. Reinvest
11:23 Keep Your Mortgage!
12:14 Best Option for Cash Flow?
15:55 Comparing All 3 Options

[Teolulz]

interesting take but there are a few things missing:

1.when cash-on-equity was calculated, what was the amount of equity used? $700K or $1.2M?

2.investing in bonds, high yield saving, private lending only gets these high yields in the current high interest rates environment.

3. the incomes you get from the above, with the exception of some types of local gov bonds, are taxed at income rates at both the state and federal level. but rental income is tax free due to depreciation.

4. annual appreciation is a benefit that gets ignore. at 3-5% annually it more than offsets inflation, something none of the investments in 2 provides.

[BVel]

Ya but at 71 id rather cash flow on properties I own out right 100% than owing banks money and knowing when I die I owe absolutely nothing to no one.

[bravedream]

High yield savings is not going to be forever. Probably 3 more years at most. Buy multi family will get higher ROI for sure for long term

[katieheinsohn]

Love that you are taking real comments and real life examples! I thought "swap until you drop" was really the only option.... LOVE that I will have options! Thank you

[JasonJFlippingLife]

You forgot the option to tap as much equity in all the rentals as possible and reinvest that in new rentals. That would give you more cash flow than any of the scenarios you ran.

[kahledalbert]

This video is how to overcomplicate life. If you can pay off your mortgages DO IT. Paid off he makes an extra 50k a year.

[alicechodkowski]

This was an awesome explanation of all aspects of RE. It really clarifies different options. Thanks.

[jeffmitchell]

Great video, but how do we factor in risk and potential future changes in the interest rate environment? If someone sells all their cash flowing real estate and dumps the proceeds into treasuries, but then interest rates drop to zero again then they are in trouble. It also would seem to carry less risk with direct ownership in a cash flowing rental versus lending out a hard money loan to someone who couldn’t qualify for a mortgage.

[Markla]

Is this video to help someone or to advertise your product

[kailashsaravanan]

Great video, relates well for any RE investor even though it goes through a specific scenario. Also‌, the general path advice at the end of not using cash for more rentals, but something else like lending, makes a lot of sense today because of high rates. Return on Equity is a great concept I only heard from Chris a while ago. More from Chris!

[mg.]

I’ve been looking for a video like this. I have a similar scenario so thank you! The only concern I have is paying taxes again after reinvesting (eg private credit). If I pay off the other mortgages, I can still leverage the tax benefits in real estate.

[amagamit]

I have a different perspective. Maybe I am wrong. Please clarify. What if, you bought these properties in the last 1 -2 years with a high-interest rate mortgage. In that case, would you not rather want to pay off the mortgage itself. That way, not only are you increasing the Cash flow, but you have also canceled out lot of your amortized interest, resulting in probably more than half a mil in interest-dollar savings. Once you have captured more cash flow with free and clear properties, decide if you still want to grow more or live happily after that.

[davidaizuss]

Shold the conclusion therefore be sell all the properties and invest the money elsewhere for most cash flow? Why keep any of the properties if the conclusion is invest the money elsewhere for more cashflow?

[manny]

Does he need more income? Or want it? At that age it might make sense to hold as a legacy play and trigger a step up in cost basis and end of life.

[jimmylegs]

The rise in property insurance and taxes while the tenants job market being shaky is a great reason TO PAY OFF YOUR RENTAL

A perfect economy of jobs and interest rates makes sense to keep it going and max out cash flow

An economy of constant uncertainty and a ceiling on how high i can actually raise rent each year makes much more sense to pay it off.

[edgonzalez]

I don't consider return on equity as a reliable measurement for investment. Equity is a value similar as gold (nothing you can do about it, until you sell). For real estate investing, or any businees whatsoever, ROI is the one that lets you have the temperature on how your investment is doing; and lets you make decissions based on cash flows. We should think about the money we put in, the leases, operational costs and our debts.

[billstephens]

What about factoring in depreciation Recapture?

[netkev]

Nice video. The interface looks good for comparing scenarios. I like the comparison of asset classes. My family is uncomfortable in RE, and many here don’t like much but RE if the comments indicate. Picking a better game is how I’m accelerating my income growth.

[MaximusBlack]

Not a big fan of this advice for a 71 year old looking to uncomplicate things. Doing a hard money loan comes with risk and if he doesn’t want to take over a defaulted property that requires time and money then this could back fire. Risk is something that needs to be factored in and even more so at retirement. Not everything is a math question. Trying to maximize cashflow is fine but is the extra points worth the risk at that age? Only he can say. This is advice I wouldn’t give him.

[seanbrownsociety]

Does the credit fund start paying immediately? Is it monthly? What's the risk?