Haven’t you heard its taboo to talk about money, politics, and religion? Well, we are going to go taboo in this article, but don’t worry, only one of those three is our focus today: money. And more importantly, debt. We are going to put all our numbers out here, so you can see just how much debt we have, and you can follow along to see just how effective we will be at paying it off.
Better to go to bed hungry than wake up in debt – Proverb
A few articles ago, we posted about going From One to Nine Rental Units in a Year, and we mentioned that once we pay off our mortgages, we will have just under $40k a year in rental income to live off of, not including our 401k or Roth. We’ve looked at a few properties in the meantime, including our first potential foray into buying a mobile home park, but all the deals were either snatched up, or we were just too far apart on price. Well, since those are off the table, we’ve decided to become laser focused on paying off the mortgages.
Here, we are going to be documenting our journey to paying off the mortgages as quickly as possible. With nine units, five properties, and five mortgages, it’s a discussion that we have often. “Do we take the money and roll it into down payments on a couple other properties?” “How many more properties do we need to retire?” “Even though the properties are paying for themselves, is there a chance we are overextending?” So, we’ve decided to forego the potential return and lower the risks by going ahead and paying off the properties. With all that in mind, our personal preference will be to keep enough cash on hand (around $30k) for another down payment on a property, in case another one pops up. And this is also subject to change. Other than that, we want most of, if not all of, our savings going toward our mortgages.
So, the breakdown of the balances on our properties, in order of acquisition, are as follows:
Condo Mortgage: $35,540 / $318.66 per month
Duplex #1 Mortgage: $35,049 / $393.03 per month
Single Family Home Mortgage: $80,186 / $581.53 per month
Duplex #2 Mortgage: $37,259 / $350.26 per month
Duplex #3 Mortgage: $37,259 / $362.97 per month
Totals: $225,253 in mortgage and $2,006.45 in monthly payments.
While we are over $225k in real estate debt, we truly have no other debt. We pay our credit cards in full every month, and we have no car loans, student loans, or any other consumer debt. So, this $225k gets to be the bullseye, and we are loading up the gun.
The fun part comes with the order. Dave Ramsey says that the “Debt Snowball” is the most effective way to pay off debt. Essentially, you pick the lowest debt amount and pay it off first while making minimum payments on the rest. Then using the amount you were putting on that amount and add it to the next highest debt. The benefit to this method is the mental and emotional confidence you receive from paying off a debt motivating you to keep going. Us, on the other hand…we are stone cold killers. Emotion doesn’t dictate our decisions or what we do with money. In this case, the “Debt Avalanche” is superior. In this method, you pay off the highest interest rate first because it is logically the one costing you the most money. Once you pay that one-off, you apply that amount to the next highest interest rate. And so on and so forth. The drawback to this approach is that it could take you years to pay off the highest interest rate, and it can become disheartening to be working on one debt that long instead of accumulating small wins with smaller debts.
The good news for us is that Duplexes 2 & 3 have the highest interest rate at 5.5%, and that all the loans other than the $80k on the SFH (single family home for those of you not keeping up) are within a couple grand of each other. So, we get to knock out a relatively low loan amount while also taking the mathematically superior approach of paying off the highest interest rates. Following the two duplexes, we have the other duplex with the lowest mortgage amount, but an interest rate of 5.375%. Next up is the SFH (single family home. Do I really have to keep explaining this shit?) with a 5% interest rate. And finally is the condo with a 4.5% interest rate.
We currently have a pretty high savings rate, because we are such cheap assholes, and we are going to be pumping the rental income we receive right back into paying off one property at a time. I don’t want to jump the gun here, or set the expectations too high, but I think we could knock out the first property in 5 months, and each property after that should come fractionally quicker.
Follow along and see if we succeed in reaching our goal or if we completely missed the mark and have to work for 30 more years.