Why We Paid Off Rental Early - picture of family walking into house with For Rent sign

We Paid Off Our Rental Property Early – Here’s Why

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Early in our marriage, Greg and I decided we wanted to leverage passive income to help us build long-term wealth. We also yearned to create a lifestyle where work would become optional. Buying rental property became part of our strategy.

So, we purchased our first rental home in 2007, dreaming of the income it would eventually provide. After buying a second rental years later, our craving for passive income only grew stronger.

Well, here it is about 9 years down the road… and we just paid off one of those properties – a three-bedroom brick ranch in Greenfield, Indiana. Pop the champagne! For the first time in our lives, we own a home free and clear. The crazy thing is, we’re only 36 and 37-years-old so this property should pay dividends for years to come.

Why We Bought Rental Property

While we didn’t know a ton about real estate when we started, we were at least smart enough to realize a good deal when we saw one. With some time, a little start-up cash, and some patience, we could have our renters pay for the bulk of our properties over time. Using rental income to build equity was an immediate win for us.

On top of that, we wanted to diversify our investments as much as possible. Outside of stocks and bonds, we wanted investments that we could see, feel, and touch. Since we also love real estate and don’t really mind the hassle of owning rentals, buying property made a lot of sense.

Before you write a 500-word comment on how paying off rental properties is dumb, please keep in mind that we had (and still have) no desire to keep these mortgages. Yes, we used debt to buy our rental properties, but our goal has always been living debt-free.

A lot of landlords love keeping mortgages forever so they can leverage debt to build more wealth, but that’s not really our style. Plus, this particular house came with a 4.97% APR, which made it worth paying off in my eyes. Right now our savings is only earning around 1%, and we’ve got plenty of cash. So, why not?

And, did I mention I hate debt? Really, the last thing in the world I want to do is pay mortgage payments for eternity. Even though we’ll no longer be able to deduct mortgage interest, it’s worth noting that the bulk of our deductions come from depreciation anyway.

In summary, we bought rental property because:

  • With a small initial investment and some sweat equity, we could build wealth over time.
  • Our renters will actually pay off the bulk of our properties, not us.
  • We love passive income, or at least mostly passive income.
  • We wanted to diversify our investments and not put all our eggs in one basket.

Our reasons for paying off our properties vs. keeping a mortgage can be summarized as follows:

  • We hate debt and love living debt-free.
  • We are already maxing out our retirement accounts with Vanguard, investing a total of $4,500 per month.
  • We’re ready to enjoy the spoils of somewhat-passive income each month.

Related: Why We Use Vanguard for Our Solo 401(k)

Our Plans Now that We Own a Home

Our goal with these investment properties has always been to create a (mostly) passive income stream that could produce additional money for things like college tuition and retirement. We intentionally diversified our long-term investments, hoping to protect ourselves and create an additional layer of security. For us, “security” also means paying off all our shit so we can live entirely debt-free in the future. Now that we’re half-way there, we’ve got some other plans, too.  Here’s what we’re doing next:

We’re going to snowball our payments into our other rental mortgage.

What’s better than a paid-off rental property? Two paid-off rental properties. Am I right?

Right now, we owe around $70,000 on our second rental property, a three-bedroom ranch that is larger and nicer than the first. This home also has a mortgage, but it is at 4.75% APR. With our first rental property paid off, we plan to snowball the rent from house #1 to pay off house #2. That means we’ll pay $2,000 a month on this property, which is around $1,300 more than the minimum monthly mortgage payment.

Related: Your Complete Guide to Using the Debt Snowball

With such a huge mortgage payment, this home should be paid off in less than four years. However, we plan to pay it off faster by making lump sum payments each quarter. As a stretch goal, I hope to have this second rental paid off by December 2018. Of course, that could change some, depending on the timing of our second goal. Wait for it….

We’re going to save up cash to buy a third property when the market dies down.

After moving to the adorable town of Noblesville, I started itching to buy a third rental property right away. The problem is, real estate here is noticeably more expensive. Worse, houses fly off the market in days – or even hours – all the time. Buyers have to be quick if they don’t want to find themselves in a bidding war.

We still want to get in the local real estate market, but our plan right now is to wait. If we sit and hoard cash long enough, the hot housing market should eventually cool and leave room for regular buyers like us. Once the time is right, I would love to buy another three-bedroom, single-family home to rent that is located within a few minutes of where we live. As a suburb of one of the larges cities in the United States, I truly believe this area is still undervalued – even with the higher prices.

If we’re able to buy in the next five years, we could see huge returns in the near future and beyond. At the very least, we’ll have a third rental property bringing in a sizable amount of cash every month.

We should own all of our houses free and clear by the age of 40.

While I pay extra toward the mortgage on our primary residence every month, I’ve been waiting to pay it off last. This is partly because the interest rate on our 15-year loan is just 3.25%, but also because this house won’t bring in passive income like the others.

Still, we should be able to pay this house off – or get close – by the time we turn 40. That leaves us about four years to bring this dream to life, but we all know dreams change. If an awesome rental opportunity comes along, we may choose to pay cash or put down a huge down payment. In that case, the payoff date of this house could get pushed off yet again.

Related: Unison Review – Fund 50% of Your Down Payment and Avoid P.M.I.

Final Thoughts

Once our two rentals are paid off, we’ll have about $2,000 a month in (mostly) passive income flowing in. While that’s awesome, our next goal is finding a third rental property that can boost our monthly rental income between $3,000 and $3,500 per month.

In the future, $3,000 per month should *theoretically* be more than enough to cover all of our expenses. Since we’re debt-free besides the mortgage (and fully intend to stay that way), all we really need is enough income to pay for utilities, food, medical care, insurance, and miscellaneous bills.

At the end of the day, this is what it’s all about. Creating a lifestyle where work is optional has always been our goal, and it’s fun to see us inching closer all the time. For now, all I want to do is celebrate not just where we’ve been, but also where we’re going.

One mortgage may be ancient history, but I’ve still got a few more to go.

Are you trying to pay down your mortgage? Why or why not? 

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47 Comments

  1. Congrats, Holly and Greg!!! You guys rock! We would LOVE to own rentals one day but the market here is pretty pricey as well right now. We just paid off our SUV two months ago and are also now debt-free except our mortgage. It’s a great feeling, but we do need to be adding to our wealth. I also believe rental properties are a fantastic way to do that!

    Hope you both are doing well! Happy holidays! 🙂

    -Sarah

  2. I’m totally with you on paying off my rentals ASAP Holly. I know it’s not mainstream or popular thinking & I understand the argument/logic for not paying off rental mortgages early, however, I think we have to live true to ourselves & what we feel is “right” for us. I love getting rid of debt as soon as possible & I don’t think anyone can argue that living debt-free isn’t a smart way to live. You never know what the future will bring so why carry debt with you if you don’t have to? Plus, if debt feels like a weight around your neck, getting rid of it brings such freedom & relief. Doing it for that reason alone makes sense to me. It’s NOT just about the money. It’s ultimately about feeling free & living in freedom (at least for me it is). Glad to know there’s like-minded people out there like yourselves who share similar ideals. 🙂

    1. YES. Let us all remember how many people had rentals with mortgages with the recession of 2008 hit. One of our current tenants came from a rental whose landlord was facing foreclosure for that very reason. Paying down debt is not something most people regret.

  3. #myheros

    We have been paying extra on our rental too. We went to a financial planner and when I said we pay extra on it he turned from his computer and told me we were stupid to this. Due to that and a bunch of other reasons he isn’t planning our financial future anymore.

    1. Yes! I’m sure he would rather you spend your $ on investments that pay him a big, fat commission. Nobody gets anything if you pay down debt instead (except for you!)

  4. I love that you’re going against the grain in paying off the rental mortgage. You do you and that’s what matters.

    I would love to own a rental but prices where I live in Northern CA is insane. So, like you, we’ll wait it out and hoard cash for the meantime.

    Love your blog!

    1. Thanks, Esther!

      Yeah, we’re waiting it out until the market drops some. But real estate in Indiana is more affordable to begin with so the barrier to entry is much lower!

  5. We are searching for our first rental property, which is proving difficult with in a seller’s market, but I’m going to keep socking away money to pay as much down as possible for when we do find a house. Like you, we are taking the approach of buying with leverage, but paying the mortgages off asap. Thanks for sharing!

  6. This is EXACTLY what I want to do. Ive been telling my husband for years that I want the house we currently live in to become a rental one day. We have two kids and are bursting at the seams, but we will stay put as long as we can and then turn this into our first rental. Or if we can swing it and the numbers are in our favor, we will invest in a neighboring property and live here longer.

    1. Very smart! It might be a good idea to turn your current property in a rental if you’re happy with your mortgage/interest rate and all that. One of our rentals is our first home, and we’re happy with the way it worked out. Like you, we moved out when we wanted a bigger place.

    2. Something to consider is that you will lose your principal residence exemption. If you sell your principle residence and purchase a new rental property you won’t pay any tax on the gain.

  7. So awesome. We have one rental property, but are debating whether to save and pay for our next one in cash or get a mortgage and pay as much extra as we can to get it paid off as early as possible. My thought is this: you aren’t guaranteed a 4% return if you invest the money instead, but you ARE guaranteed to get your 4% if you pay off the debt. You guys rock!

  8. Thanks for sharing this! I have been going back and forth on whether it’s worth focusing on paying off the mortgage on our rental (that is definitely not in Northern CA because wow is that ever out of reach). In our case the interest is higher on the rental than our home property since we refinanced and would be the logical place to start to reap the guaranteed savings but I’m going to ask our CPA to run the numbers this coming years and compare how our returns will look with and without the interest.

  9. Congrats on paying it off! Thanks for sharing. I have been going back and forth on whether it’s worth focusing on paying off the mortgage on our rental (that is definitely not in Northern CA because wow is that ever out of reach). In our case the interest is higher on the rental than our home property since we refinanced and would be the logical place to start to reap the guaranteed savings but I’m going to ask our CPA to run the numbers this coming years and compare how our returns will look with and without the interest.

  10. Nice! I want to pay off my mortgage by the time I’m 40 as well, although I don’t have rental properties. Mostly for the increased cash flow and the security of owning my home, not for what I’ll earn on the interest savings (I have a 2.75% mortgage for 15 years-not going to earn a lot there). If you’re living where there’s a “hot” market, then it definitely sounds wise to wait a while before getting a third home.

    1. Yeah, I think we will be better off if we wait. We bought this house three years ago for $187,500. Now similar houses in our exact neighborhood are selling for $230K!

  11. Congrats Holly!!! I know how much you two have wanted to kill those mortgages and I don’t blame you. I have $125,000 left on my condo’s mortgage. It’s an ARM and it looks like it’ll reset to 3.875% in February 2018 so our goal is to possibly have it paid off by then, which seems doable! People think we are crazy and the stock market has gone crazy in my Roth IRA at 9% returns over the last five years, but there is just something about living without debt that is amazing.

  12. We are right there with you Holly & Greg! We paid off our first rental property this year (it had a 5.89% mortgage) and we’re working on #2 now. We want to pay the mortgages off to increase our cash flow and we’re not planning on buying anymore. We have one bigger rental property mortgage after #2 – and that’s it! Piece of mind is definitely worth it to us!

  13. Being debt free is almost never a bad decision. Nice job on paying off the rental properties. I’ve been doing a lot of reading on BiggerPockets and some real estate books and we would love to get into the rental property game. Taking a little longer to save up for a good cash flowing property since we live near DC but we will get there!

    And most importantly you’re absolutely right about having more income streams. That’s the way to real wealth and security, and owning rental properties is a great way to do that.

  14. You’re contributing $4,500 per month to investment accounts?! That’s crazy awesome! I’m hoping I can start maxing out my Roth IRA, haha.

    I may actually be getting into real estate investing in the next few years.

  15. I like your plan. Do you manage the rental yourself or do you hire a third party to do it for you? I like the idea of rental income providing another source of passive income, but don’t know about being a landlord. That part of it scares me a bit.

    1. We manage them ourselves! That is a key part of our plan since hiring a rental manager can cost a month’s rent or more every year. But that’s also part of the reason we only have 2 rentals.

      1. Hi, how do you go about finding and vetting potential renters for your properties? Do you run background checks on them, and check previous rental history, etc? I would like to rent out our condo once we are done paying it off in a couple years and would like to save the money of using a property management company to rent it out for us. My concern though is I would also like to avoid the headaches of picking a horrible tenant . Is it possible to see a detailed list of steps you take to help you rent your properties in the best way? thanks

  16. I bought a rental property out of state because it’s too expensive here in NYC. I’ve been looking into Indy also. I did hear that some areas, especially near Fountain Square, are getting really hot. I’d love to take your approach in paying off the rentals as well but I think at this point, I’m more focused on buying more properties first.

  17. “Even though we’ll no longer be able to deduct mortgage interest, it’s worth noting that the bulk of our deductions come from depreciation anyway.”

    I imagine this was a key factor in your decision? I too am emotionally inclined towards debt-free living, but ultimately this is still a math problem.

    Anyway, congrats on your prudent planning and your success.

  18. Congrats, Holly! We are all about paying off the mortgage early. We are also interested in rental properties in the future, and would probably follow a similar pattern as you did–we’d be willing to take a mortgage on the first one or two places to get the ball rolling, then when we start generating that income we’d love to pay them off early. I don’t know if/when we’ll make our move, but it’s something we’re talking about and it’s very helpful to hear about your experience!

  19. We have one rental paid off and have been looking for another one for over 6 months. I love the passive income that we receive every month! Our goal is 4 or 5 rental houses. It’s fun to watch it all unfold., isn’t it! Congratulations to you guys!

  20. Awesome read! My wife and I are trying to payoff two rentals by summer of 2019. We will both be 38 then and with the cash flow that those two rentals will create once paid off, it will cover the mortgage payment on our primary residence. Then work becomes “optional” for us too! Or we could double payments on our primary or save the cash or whatever! It feels great to have a plan and be so close we can taste it! No other debts except mortgages, as 2016 was about paying off the student loans and car. Two more years to freedom!!!

    1. That’s so awesome, Paul! I’m glad there are other people who think like us! We will be so glad we had the dedication to do this one day, right? Keep it up!

  21. Hi Holly, We started buying houses at 20. We just paid off our last mortgage on rental properties in Northern Ca. We have 16. We are 48 and I am now wondering what is next?? We did exactly what you are doing. When one got paid off we doubled down on another mortgage.

  22. somecallmemike says:

    Just curious, do you own these properties or did you incorporate a real estate company that holds the properties? I have been reading extensively about the risks associated with direct ownership properties and it seems incorporating an LLC is the best option.

  23. somecallmemike it is imperative to put them into an LLC to protect yourself from liability.

    Anyone have any thoughts on paying a rental mortgage down vs. investing in the stock market? I am in the same thought that I want to snowball my 3 rental mortgages (totaling roughly 120k) and get them paid off as soon as possible to minimize my risk/increase cash flow, as Dave Ramsey also suggests but he says to put rentals in baby step 6 with personal residence. I would put a hold on retirement really only for this year and then after I get the first mortgage paid off I think I could use that monthly payment to get the snowball going and resume retirement. I have about 100k in retirement 32yrs old.

    Hard to know but my thought is if I get these rentals paid off I might not even need retirement savings…so I am leaning towards going after it.

  24. How do you manage your rental properties? My bf has a house and I have one so we are considering renting one out. He is so scared someone will damage the home and we’d be one of the horror stories you read about that he wants to sell one and I think the passive income is better by having it be a rental. So how do you find tenants, leases, maintenance, getting that phone call of a water leak at 1am? Thanks!

    1. Hey Krista,
      We manage all theproperties ourselves. You can find basic leases for your state online (we borrowed one from a friend who has rentals). Our renters take care of basic lawn care, we handle maintenance ourselves (or hire someone to do it). We find tenants with a sign in the yard, newspaper ads, and social media posts.

      If you get into rentals and do it long enough, you will eventually have a renter that damages the home. It sucks, but you simply fix it and move on. 😀

  25. Congrats! Maybe I missed it but you said $2000/month in mostly passive income. Does that mean you are getting approximately $4000/month in total rent?

  26. Great article. We have a triplex rental property and we are about $100-$200 cash flow positive each month with a 15 year 3.75% APR. I’ve been reading a lot of articles on whether we should pay off our rental property which would generate enough cash flow to pay for our primary residence mortgage or should we let it be. Currently the money that would be used to pay off our rental property is invested in the stock market which has yielded ~20% over a 12-month period, however investing in the stock market has risk associated with it and with the stock market in it’s longest bull run in history this makes us nervous.

    We are debating two course of actions on what to do with our cash stash.
    1) Move all money from stocks into index funds to reduce risks and wait for the housing market to come down so we can purchase another rental property which will leverage our money.
    2) Pay down the rental property, enjoy life a bit more with the thought of having the rental property paid off and having a secure passive income stream, and take some family vacations with the excess money/save up excess money to purchase another rental property.

    Our ultimate goal is financial security and less stress, but don’t want to miss out on future opportunities. It’s a difficult decision!

    Any comments would be appreciated.

  27. Frederick Atwater says:

    So.. it’s Nov 2018. Are you going to make the Dec 2018 payoff you mentioned??

    Congrats and great job! We live in a paid off house, own 2 rentals outright, and will have the third paid off by Jun 2019.

    The invest it and keep the debt or pay off the rental mortgage is a debate as old as the rental business… it’s totally up to you and your spouse and your situation.

    1. We didn’t pay off our second rental property but we did pay off our primary home in February of this year. We also bankrolled a room addition and patio in cash!

  28. This is the same plan that I’m working right now….I’m in a dilemma though! I have one rental right now that I’ve got a renter paying me full year up front with cash. Which is nice for the bulk payments I want to do on the mortgage…got about 60,000 left on it which I should be able to knock out in about 1 1/2 yrs max, but i’ve got a small $70,000 home that will be popping up for sale in a few months and Its one I’ve been wanting to go on the market because its right next door to my other one! Which was my plan to get when the guy relocated, so I was thinking of putting that on a 30 yr mortgage with 20% down, which would bring in profit right away, I would just snowball this first one and then roll it into the second one. I’m 31 so I’m thinking by the time I hit 36 I will have those paid off for sure! With the 2 paid off I can bring in about 2000/month and then I can work on the mortgage for the home I live in and use it as a rental once I upgrade to the next house and that will bring in at least 1400/month and by 40 I will be past the 3000 mark! But I would probably roll that income into another investment route…with all this info do you think I should just go for the second house now even though I was a yr or so from paying off the first? Oh and I also max out 2 roth ira’s for retirement while doing this! I just figured if I have a guaranteed renter in the first one I have another year to work the mortgage down without the vacancy worry… Your thoughts Holly?

  29. I lived in an apartment building when I met my husband and then we got married and bought a house together. We almost had it paid off in 12 years and then my former apartment building went up for sale. Kind of sad that we didn’t get to feel what it was like to have it paid off. We bought two four-plexes, using our equity in our home (we started over on that mortgage and borrowed the rest, commercial loan for apartments). Then the same year we decided to buy a new house closer to the schools for our kids, so we took out a loan there. At one point, we owed about a half million dollars! Thankfully, our first home and new home have lower interest rates because they were homes and not commercial property like the apartments. We were kicking it with paying down the mortgage on the apartments when the new tax laws took affect. We will likely use the standard deduction, so the interest won’t be deductible anymore. Our CPA said we should not pay down on the apartments anymore, but should pay on our house instead. I LOVE the idea of being out of debt and it is emotionally deflating to not pay down the apartments anymore, but my husband doesn’t seem bothered by it. Hopefully we’ll have first house paid off in 2027, direct all of those payments we have been making toward our house instead and have both houses and apartments paid off by 2032. We have two kids facing college in 2022 and 2024. We also have a son with disabilities and the idea was that he could help us run the apartments; he just graduated high school and helps me clean the hallways every month. I am glad that we made the all the crazy decisions we made in 2012.

  30. Hi Holly! I’m so glad I found this article. I, too, decided to pay off my first rental property as quickly as I could! I loved reading your post from a like-minded perspective. A lot of people will say it’s silly to pay off a rental early when you could invest that money elsewhere. However, it truly is necessary to do what is best for your own unique situation! I really value having the extra positive cash flow each month and knowing I have a $140k+ asset paid for free & clear!

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