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?