How to Pay Off Your Rental Property Mortgage Early - The Rental Debt Snowball

hey everyone my name is Chad Carson you can also call me coach and in this video I'm gonna show you a technique where you can pay your rental properties off early the technique is called a debt snowball a lot of you might be familiar with that and personal finances people use it to pay off credit card debt and student debt that sort of thing but as a real estate investor you can also use the same technique to pay off your rental properties so I'm going to show you not only how to do it but how this can help you achieve financial independence so starting with a very small amount of money you can invest that money you can buy rental properties you can build up some wealth with those rental properties and then you can start using the cash flow to pay them off and in the end have a maybe a small portfolio maybe a big portfolio depending on your goals but have a portfolio of rental properties that produce a lot of income every single month and in a very low-risk way of doing that so you can live off the income and do what matters that's the motto around here at coach Carson TV so hope you're interested and stick around as I show how to do that if you're new here to the channel be sure to hit that subscribe button and the little bell so you don't miss anything this is how I like to explain things I get the whiteboard and draw it out for you and I want to start off explaining why this might be a good idea for you to actually pay off your properties in the first place I talk a lot about financial independence here on this channel and one of the very simple scenarios that I want you to consider and this isn't necessarily the numbers that you have to use if you're gonna have a goal to achieve financial independence but I found this is a just a nice clear idea on where you might want to go with your rental properties so let's say you wanted to get ten houses and you could buy these ten houses and you originally maybe make a down payment and you have a loan but one of these days and used the techniques I'm going to talk about here in this video you get them paid off and each one of your houses rents for twelve hundred dollars per month that's what you collect from your tenant if since you have ten of them that's twelve thousand dollars per month of course you have some expenses and that's gonna vary from house to house but let's say your total expenses on all your properties is five thousand dollars per month and you would net you'd have left over after your expenses seven thousand dollars now this five thousand doesn't include your mortgage because in the end we're talking about here you've paid off your properties so you make seven thousand dollars per month or eighty four thousand dollars per year from a simple ten house portfolio and I like to stop for this example before we get into the nitty-gritty of how to do it because if you imagine for yourself now maybe this number is good maybe this numbers way more than you need maybe that you need a lot more than this but the point is eighty four thousand dollars for a lot of people can be all they need in retirement this can pay their bills they can live comfortably and you can do it with a very simple portfolio of properties that you can manage yourself a higher property manager but I have more properties in this than in our own portfolio and we could spend a few hours per week one to three hours per week doing the bookkeeping taking care of things and so this can be a very part-time passive thing to help you achieve financial independence so let's talk about how you might be able to get there using the rental debt snowball I've explained why you might want to do a rental debt snowball to achieve financial independence and to have income from your rental properties now I'll explain how it works and I can do that in five steps now these first three steps I'm gonna explain are pretty much the same whatever type of investing you're using with a mortgage and trying to buy rental properties but simply with number one you're just gonna save your cash yes there are ways to get into real estate with a little bit less money down especially are gonna move into the property and use like a lower down payment loan program like FHA loans or VA loans there's all sorts of programs out there I can show you some other videos how those work but the bottom line is you're typically gonna have to have some cash to get started so just count on having a period of saving money step number two is to purchase some rental properties and you could think of this as your growth or your wealth building phase where you have to go out and purchase those rental properties and this could take a few years on these first two steps to get to the point where you have a certain number of rental properties and you're gonna invest all you're gonna save all of your cash at that stage to buying more rental properties so step number three is that once you have those rental properties both the first one and the second one third one let's say you buy multiple rental properties you're gonna save 100 percent of that income that you have from your rental properties plus any other job savings you have so you're gonna save 100 percent of that and the reason I say that is sometimes people get like a 15-year mortgage or a 20-year mortgage and they go ahead and start trying to pay that loan down quickly the prop that one particular property the strategy here is not to pay down each property separately the strategy is to get the longest words you can like a 30-year mortgage perhaps and then you save a hundred percent of the income on each rental property plus as much as you came from your job in order to do step number four now step number four and here's the key of the rental debt snowball is instead of paying down each individual property and now that you've owned enough bought enough rental properties instead of buying more rental properties you're gonna take all of the savings you can and as much as money as you can save and you're gonna apply it to one loan at a time so that's the key here if you take all of those extra savings and I'll show you some numbers in an example here in a second you can actually pay your loan off a lot faster we're talking about like four years six years seven years instead of a 30-year mortgage and you can do that instead of spreading it out over multiple properties it comes it goes a lot faster by concentrating that's why I say all here and that's why you apply it to one loan and the cool thing is this is like a step by step process you can repeat it so if you have multiple rental properties you can do one and the first rental property might take a certain period of time let's say five or six years the second one because you freed up the cash flow from that rental property you just paid off you've now increased your snowball you're starting to roll that snowball is getting bigger and bigger and starting to compound the second one goes faster than the third one and then the fourth one however many rental properties you want to pay off that's very flexible you can stop and you can start and so that's the basic process let's take a look some numbers in an example about how that works I want to give a specific example and I'm gonna keep it simple you know if you want to do more properties in this you're welcome to multiply the numbers and get as big as you need to but this will make it easy to understand let's say you have a goal of having three houses free and clear you can buy three properties and at some point in the future you want to get them free and clear and I recommend this is a way to work it backwards and start with a number of properties you think you need and then you work it backwards to actually buying the properties and let's say you you know this is gonna depend on your location the type of property you buy but let's say in the this particular market you can buy a 3-bedroom 2bath house the garage because it's easier to manage and you'll find tenants who'll stay a long time so you're gonna follow that strategy easy too and let's say this property rents for $1200 per month and has $500 in expenses so these are things like taxes insurance maintenance capital expenses things like that not including your mortgage payment so when it's free and clear you'll have $700 per month using today's numbers and if you had three properties that's 2100 per month and income so this might be a way you're doing this on the side you have other income in retirement too this is a way to supplement your retirement so that's the scenario of what this goal might look like let's look at the actual properties eBay and look at the mortgage and the down payments things like that okay so the scenario in this example is that you have good credit and you can go to bank and get a loan a long term investor mortgage by putting 20% down so we had three houses remember and of course these numbers are gonna depend or depend on your location if you're in somewhere in California in New York you're gonna say these numbers are ridiculous to buy a regular single-family house but I happen to have a couple smaller towns right near my metropolitan area right I could buy a little bit below median property the median price might be like 180,000 and we might be able to find a good deal on a rental property these are gonna meet us any old property you got to search and find some properties but let's say you find $120,000 property you buy it 420 you put 20% down to 24,000 you get a loan for 96 thousand and my example I'm gonna use four and a half percent Interest 30-year mortgage you're keeping track of that on the side you have some closing costs and holding costs on the side as well so just to figure out how much cash you need to save you have twenty nine thousand on this first deal the second deal you buy a little bit later and you buy a little bit higher price so the numbers a little bit higher you have $30,000 down on that one the next is a little bit higher you have 31,000 down on that one so you buy three properties very similar properties this is how much cash you have invested total so $90,000 total and that gets you to the point where you have your three properties the other thing about these three properties is they produce income remember the numbers I've shared with you they each went for twelve hundred bucks and after expenses the operating expenses they make seven hundred dollars a piece but they also have mortgages at this point because we have that's how we bought the properties so each property has a mortgage payment 487 507 527 this is how much money they make net income every single month after paying all the bills before taxes but typically in this stage you're gonna have enough tax shelter called depreciation it's a whole another subject but most of the time this is also gonna be your after-tax income so you take this five hundred seventy nine dollars per month and that's how much you have from your rental properties after a year or two if you've bought these properties that's how much your little rental business is producing an extra income so now we've set the stage on what those three properties you bought look like let's look at the cash flow that you produce so that you can start doing the debt snowball to remember you have five hundred seventy nine dollars per month and net cash flow from your rental properties we just looked at that that's the difference between your rent you collect the operating expenses you have and then your mortgage payments that's the total you have and you're not gonna use the cash flow on each property to pay down each one you're gonna save that money set it aside in a savings account you then also I'm gonna assume you can save five hundred dollars per month from your job so you're still working a job and if you have a pal a spouse or a partner they're working as well and hopefully you can save five hundred bucks if you can do more than that this is gonna accelerate it even better but for my example I'm gonna use five hundred dollars per month and then of course you have one mortgage payment we're gonna start paying off and in this example the first for house number one is four hundred eighty seven dollars per month so we're gonna combine all of those into one big mega mortgage payment this is just an extra large mortgage payments that have you sent in for eighty seven per month you could send one thousand five hundred sixty six per month now for all practical purposes sometimes you might want to actually send a separate check or something just for accounting purposes some Tauri just want to make sure you track it really closely banks don't always credit this correctly so you can you know keep your accounting records keep copies of what you've done sometimes I even do it a little bit variation this is a total an aside but we actually save up the money and save one big chunk and maybe send it every 12 months especially when we're saving up a lot of money it's gonna be not quite as good of a snowball not quite as fast but sometimes accounting is just easier for us so however you want to do it whether you do it monthly send send this check monthly or save the extra money and send it once per year it's up to you but that's just a note about how that works you're gonna make one big extra payment every single month in this example and that's what it is fifteen hundred $66 now what I want to show you now is how fast and what this looks like and how this snowball starts working together over time so this graphic is something I want to show you how this big picture works for your rental debt snowball you can also see this graphic and a written explanation and a companion article that's in the description of this video but the way this works remember in the very beginning you had original savings at ninety thousand dollars and you bought three properties so we've gone over what those numbers look like just a summary here again you have a debt of here your debt payments 487 507 and 527 and your monthly cash flow on a yearly basis right now is six thousand nine hundred and forty-eight dollars that's how much you're saving up when you have your rental income coming in but the key strategy here this wasn't make the rental desk noble work is you reinvest a hundred percent of the rental income plus in my example you're saving an extra six thousand dollars per year five hundred dollars per month and you're applying all of that to one rental property at a time so there's one house that we had 487 per month by doing that about five years and ten months later I did the math for you running the numbers oh how long that would take with that extra big mortgage payment remember 1566 when you combine the minimum mortgage payment plus the extra cash flow from your savings and from the rental income it pays that first rental property all for five years and ten months pretty cool huh and so the cool thing is you start moving up step by step you have the progress of that and you now have a property free and clear that has no mortgage payment so now your rental cash flow has increased from that original that we had was six thousand nine hundred forty eight to now you're making twelve thousand seven or ninety-two it's a little bit over a thousand bucks per month plus you're still saving the extra money the five hundred dollars per month and you start attacking debt number two a five hundred seven dollar per month payment and that takes a total from the year from the time you started the cumulative time is nine years and ten months so you're almost at ten years and now you have two properties free and clear so I'm one more to go and but now you're making eighteen thousand eight hundred and seventy-six dollars per year so you're making some good cash flow now and you apply that into your third debt and in twelve years and nine months from when you started so this is when when you start buying your properties to the time you have all three properties free and clear you're now making twenty five thousand two hundred dollars per year in cash flow pretty cool huh because you have no mortgage payments because you applied those extra payments really quickly you end up with a spot where you have very little risk because you don't have any mortgages if higher cash flow and the thing I didn't take into account here is twelve years later is it possible you've had some appreciation on your rent that your rents are worth more that if things cost more in society generally you've had some inflation likely if you bought good rental properties like this this number is gonna be higher so is it buys you to today's dollars likely twenty five thousand dollars worth of income so that is the process of a rental desk snowball I like seeing a picture of it it helps me understand it it also helps me understand the benefits which I want to talk to you next about some of the benefits of a rental debt snowball and why you might want to use it in your own business so you probably already know this but in everything in real estate investing are really any business or investing strategy there's good and there's bad there's pluses and they're minuses so I want to go over the benefits and I'll share a few of potential downsides of using the rental debt snowball the first thing I really love about it is the control it gives you over your wealth building so when you're trying to achieve financial independence and particularly we're trying to do it early and a ten fifteen year period there's multiple ways to get there you can invest in the stock market and kind of wait for stocks that go up in value and your net worth increase you can own rental properties and wait for them to go up in value and owning the path of progress where things get a lot better and you can use appreciation to build build your wealth but I really like using the income from the property which you you've already heard about here saving that income and then paying the lows down that's something you have control over and rents do have a little bit of fluctuation that in down markets they might soften up a little bit you got to lower your rents but they're not nearly as volatile up and down as prices are and so it's like a little engine every year you're saving your money you're reinvesting it and you're paying your loan down and that's something you can control you can look out ten years from now or five years from now and say this is what I'm gonna pay my property off this is and then you have a very lot of control over that as opposed to letting the market and other people control the process so that's a big important thing number one number two is I like the measurable visible progress you make towards your goals so if you have a goal and you believe you can hit it and you can actually have milestones along the way so every month you're seeing your loan go down and in three or four years later it's paid off you're hitting these milestones we can celebrate you can enjoy it and you can't underestimate the psychological value of that kind of progress that's really big it works in sports when I played sports having those milestones is really a bit big and it works very well and real estate invest into the third thing I like is the flexibility you know everything in life changes your plans are gonna change we know that so when you have a 10 to 15-year wealth-building plan you have to be flexible and this allows you a lot of flexibility what if you get one property paid off and then you lose your job you need to take a break for a while you could put it on pause you could put the debt snowball on pause not pay down any more loans for a while until you get your job back till things you know work out and then you can get back on the plan later on so you can start you can stop you can go faster if you want if you get a big inheritance or you win the lottery you can pay this off a lot faster so it has a lot of flexibility you is measurable visible progress and you have control let me give you a couple of the potential downsides just to kind of balance this and give you a whole picture of how this how this debt snowball works so a couple of the downsides that I see with a rental debt snowball that you might get from other people or you might consider for yourself and the first one is so you have to have a lot of self-discipline over many years to make this work so that's just the way it is there's there's no sugarcoating that that even in the short term a five to seven year period you have to save money consistently every single month every single year you got to not spend that money you got to reinvest it and pay the loan down and that's not an easy feat it sounds pretty simple to do there's one of those things that's simple and not easy so you got to know yourself you got to know am I willing to commit to something for a 10-year period 12 your period if it means that at the end of that 12 year period I'll have free and clear properties and I'll be able to leave my job or I'll be able to have more flexibility with my job have financial independence do what matters yeah that's that's the question that's really not a question even just rental debts no balls that's the question for any kind of investing it takes self-discipline and and you think about a lot of the plans out there retirement plans we're talking about 20-30 years they're asking you to wait and we're talking about being disciplined and focus then you can still enjoy your life and have a lot of fun in the mean time but you're saving a lot of money and you're paying debt down during that 10 to 12 year period so that is definitely a challenge something you need to be aware of up front the other thing you might hear is hey you're paying off loans and for example at 4 and 1/2 percent Interest so the best you're doing is making a four and a half percent return when you could be investing that money somewhere else that makes a seven percent return or a 10 percent return or a 20 percent return and there's no sugarcoating that either is that yes you are choosing to pay off debt you are not choosing to maximize your growth but let's go back to the whole point of why you're doing this and this would be my my counter point is that you are trying to achieve financial independence and the mechanism of doing that is building wealth which you do by owning rental properties you put down payments you hopefully they're growing over time but you're also trying to achieve financial independence which yes has to do with maximizing the amount of wealth you have but also has to be about reducing risk by paying off debt increasing your income so you can live off of that and so there's always a balance between those things and there's no there's no free lunch you got to trade things off and the idea and this has been a personal experience of mine is that if you get to a point we have a very low risk portfolio and in my book retire earlier with real estate I called that having a income that's really what you're doing here you're kind of building a base a floor underneath your portfolio so that you get this nice low risk income coming in and that doesn't mean you can't also invest for growth somewhere else but maybe you do this debt snowball on part of your portfolio you also have a 401k than invest in the stock market or in real estate we have some other rental properties that you're trying to maximize growth on and these are just your income floor so that you can cure and tea that you have a nice amount of income coming in just to pay some basic bills that's the idea here is you're not trying to maximize growth of this part of your portfolio you've already grown enough you're trying to get to a point we can live off the income and reduce your risk so those are some downsides if you have any other thoughts in the comments below let me know I don't had the only answer here and that in one solution it's not always right for everybody so let's have a discussion in the comments to see what you think about the rental debt snowball as well so I'd love to hear from all of you in the comment section below do you want to pay the debt off on your rental properties how do you feel about carrying debt first paying it off when do you think it's a good idea to do that and if you do want to pay off your debt on your rental properties is the debt snowball the technique that you plan to use if you like this video I really appreciate it in that like button it helps us spread the word and share with other people on YouTube and if you're new here and you haven't done it yet be sure to hit the subscribe button and the little bell so you don't miss any of the future videos I have coming out soon if you'd like to get free tools on how to invest in real estate they're actually the ones that I use them best in my own business look in the description below there's a free real estate investing toolkit link and you can just put your email in and you can get that for free it includes things like my deal worksheets that I use to evaluate properties and I have the questions that negotiate with people when I'm buying properties has a closing checklist to help you when you're buying a property so you don't forget anything and it has a lot of other tools that will help you on your journey to financial independence so just click that free toolkit link in the description below I really appreciate you spending some time with me here today I'm coach Carson TV my name is chad Carson you can also call me coach and this is a channel all about investing in real estate so you can achieve financial independence and do more of what matters see you next time

Channel: Coach Carson

Views: 42,226

Keywords: real estate investing, real estate, buildwealth, cashflow, earlyretirement, earlyretirementplan, earnmoney, finance, financialeducation, financialindependence, financialliteracy, financiallyfluent, fire, firemovement, growmoney, income, keepmoney, personalfinance, realestate, realestateinvesting, rentalproperties, savings, wealth, wealthbuilding, dave ramsey, debt snowball method, debt snowball, the dave ramsey show, debt free journey

Id: _hUIoK6Pz7I

Length: 21min 17sec (1277 seconds)

Published: Fri May 15 2020