Paying Off Rentals vs. Buying More and Low-Money-Down Loans (Rookie Reply)
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Okay, let's get your questions answered. I'm Ashley Kerr, and I'm here with Tony J. Robinson. And welcome to the Real Estate Rookie Podcast, where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today, we are diving back into the BiggerPockets forums to get your questions answered.

Now, Ricky's, the forums are the absolute best place for you to go to quickly get all of your real estate investing questions answered by experts like me, Ashley, and so many more within the BP community. So today we're going to discuss first how to determine when and if you should pay off your rental properties. Second, we'll discuss how to use an FHA loan to get into your first multifamily property. And then finally, we'll talk about the best ways to get your rental filled as fast as possible. So let's get into today's show.

This question is, who has paid off their rental properties? My wife, 39 years, and I, 42 years, currently have three single-family homes. I own a business, and she works in the health field. Together, we bring home $270,000 annually after income tax. First rental is valued at $370,000, and we paid it off last week, renting for $2,100,000.

Second rental is valued at $470K, still owe $200,000. Renting for $2,495. Plan to pay it off within two years.

Current one is a primary home valued at $450,000, still owe $300,000. We plan to get one property each year to get up to 10 properties. When we retire at 60, we want to have all 10 properties paid off so we can live off of the passive income along with our stock investments. Does anyone have similar goals? Most investors I talk to don't want to pay off their rental mortgage, but I guess it just depends on their specific goals.

So Tony, let's start with you. Do you have a goal of paying off all your rental properties, all your short-term rentals? I personally do not right now, but I think there are pros and cons to each approach, which I'm sure we'll get into. But I personally do not. None of my properties are paid off right now. They all have mortgages against them. What about you, Ashley? Do you have goals to pay off everything as well? Well, since I started investing, after about two years...

I made it a priority to at least have a couple properties paid off. So right now, I think I just have two that are paid off. But I sleep better at night knowing that I have the option. And one of the properties that we have paid off. So I think there's many different options and sometimes better options you can have not having debt on a property. So yeah,

I think I'm kind of mixed. I like to have some properties leveraged, but I also like to stay under leverage. Like I don't want to have a property. There's only 10% equity and 90% of it is debt on the property. That doesn't leave you a lot of margin. So I think for security sense, and this really is not even an investment strategy or how to get the best return, but to have that comfort of sleeping at night, knowing I'm not over leveraged, I like to have several paid off properties.

And I think you kind of hit on a few of the pros and cons, even in your response. The obvious benefit of having a property paid off is that the risk becomes significantly reduced when there's no debt against that property, right? So you don't have to worry about shifts in valuation of the property itself because there's no debt. You'll never be upside down, quote unquote, because there's nothing to be upside down on. Can you maybe strike a balance, right? Because you have one property that's fully paid off.

You have another one where you only owe 200K on a property that's valued at 470. So you've got some good equity in that one as well. And maybe instead of getting every single property to the point where there's a zero loan balance, maybe you keep your loan to value at 50%.

So if you've got a property that's worth 370, what's 370 divided by two? It's like 16 and a half, something like that. So maybe you keep 160K in debt, but then you get access to that other 160K, which you can then use to go redeploy to help you get to that goal of 10 properties, maybe a little bit more quickly and a little bit more efficiently. Because it sounds like you guys have a decent goal, right? In the next...

18 to 20 years for the both of you, you want to be able to retire. But I wonder if maybe instead of taking all your cash and aggressively paying down the properties that you have, could you maybe get to that goal of 10 properties in the next...

decade as opposed to two. So there's some, I think some things to consider there in terms of goals and strategy. Yeah. And I think one thing to do is to run the numbers also. So have you compared if you paid all these off instead of buying more properties or maybe 1031 exchanging some of these single family homes into one apartment complex or something like that? So I think you have many different options. So the first thing is, is

Is this plan for a sense of security or is an emotional thing to not have any debt? Because that can be a priority. But if that doesn't matter to you and you just want the best return, then that's where we need to run the numbers and to look at is that really the best return on your investment? Is paying off those properties or is it investing into other properties and having more? I like the idea of having less overhead. So, yeah.

you know, you're not having, you know, five roofs to replace because you only have three properties instead of five properties. So, um,

I think that's definitely one thing to look at is to actually sit down and run the numbers as to what your return is going to be. What your cash flow is going to look like if you have the 10 paid off properties or if you continue to take your capital you have and buy more properties and then maybe you have 30 properties instead, but they have the 50% debt on it. What does that cash flow look like?

compared to the 10 paid off or doing the 1031 exchange and scaling up until you just have one apartment complex that has 30 units in it and your cash flowing off of that. So you're absolutely right, Asha. I think running the numbers is an important step to kind of make...

make this decision. But a lot of it also comes down to, I think, personal goals and just like, where are you at in your investing journey? And for me, we are still more so focused on asset accumulation. That's a big goal for us right now is to keep kind of growing the size of the portfolio and the profits that come with that. So for us, the ability to add the next property has a lot of value for us just in terms of the goals that we have.

So that's the reason why I'm choosing not to focus on paying anything off right now because I, at least for the strategy that I put together for myself, the goal is that we can build a really big portfolio and then 20, 30 years down the road, we can sell that off and have like a really big payday. That's just the route that I'm trying to go down. So for us, getting the next deal makes more sense than paying down the one deal that we have. But what about for you, Ashley? I guess, is there, you talk kind of like emotionally, but I guess, are there any other impacts you've seen

By focusing on having at least one or two paid off properties in your portfolio? Yeah. So when I had probably been investing for maybe five years at this point in time, maybe four, and I was just in acquisition mode, accumulating, accumulating. And I...

ended up selling one of the properties I had in cash because I was so overwhelmed. Like, I didn't have the systems and processes. I was so focused on acquisition that...

Once I closed down a property, the onboarding into the property management software, getting the tenants signed up, all of those systems are so broken. There was no process that it was so overwhelming. And so I actually sold a property, a duplex, to kind of restabilize myself and take a breath. Like, okay, let's really work on developing these things out. And it was very nice to...

have that option of I'm going to list this property and I'm just going to get this chunk of cash back because I don't have that debt on it and that's

That gave me the ability to invest some of that capital, not all of it, but some of it into actually taking the time to implement systems. So, you know, if I wasn't buying, that meant I wasn't gaining any more cash flow. So I had to live off a little bit of that capital for some time while I took that space to actually build out the systems and processes, but also like hiring people to to kind of help implement that, too. So.

I think just the flexibility of having a property that is more liquid in a sense that you're not worried about

Selling it for what you have to, what your mortgage payment is. That, the emotional side of it, we really touched on having the ability to offer creative financing. So offering, being able to do seller financing on a property, like the property I'm trying to sell now is a great benefit. But also I have another property in mind that I want to pay off next. And the reason is because it has flood insurance.

So the bank requires flood insurance because it's in a flood zone. And I feel confident in this property that if it does for some reason flood, that I would be able to self-insure myself.

the property to get it back into a livable condition. So that is another reason for me wanting a paid-out property. So I'm not paying $2,000 or more a year on flood insurance. I'd rather just save that cash. And if for some reason the property does flood of this situation,

700 square foot cottage that I can go ahead and rebuild the property without needing insurance anyways. Can you talk about that actually? Like why does you paying off the property mean that you wouldn't have to pay for that flood insurance anymore? Yeah, so I mean flood insurance is optional to anyone.

Unless there is a lien on the property or required by law, which like in New York State, you have to have auto insurance. But in...

But for flood insurance, if you don't have a bank doesn't have a mortgage on the property, you do not have to go and get flood insurance. You do not have to go and get homeowners insurance. I think the I think the last piece to maybe add into actually is just there's probably also a benefit in just thinking of thinking about where we're at and like the interest rate cycle as well. You know, I think the best interest rate I have in a property right now, I believe, is like two point six.

So you're not paying off that property. I'll probably never pay that property off. I'll just let that ride for the next 20 plus years. Now, there's another property that we purchased that's at like 8.75% that we bought kind of during the peak. I don't know if I'll pay that one off, but I'll definitely look to at least maybe refinance that one once the prepayment penalty kind of kicks away. So I think that's another piece to take into account as well. It's like how expensive is the debt rate?

on it and how difficult would it be for you to redeploy that capital and get a better return, right? Because I mean, dude, you know, 2.6%, you know, and we're getting a pretty good margin on that property. Could I redeploy that capital elsewhere today at a 7% and it'd actually be a better deal for me? Maybe not. Yeah, I think that's a great point to bring up, whether you're looking to refinance the property or if you are looking to pay it off, if you do have a really high interest rate, it's almost like the

Dave Ramsey of Snowball. You know, if you start with the highest interest rate and you start working your way down, accumulating your payments and continuously snowballing to pay them off, you would want to start with the higher interest rate unless there was that emotional factor, like for me, the flood insurance. But a lot of people pay off their primary to have that sense of security.

And I was gung-ho about that for a long time as to like, I cannot wait to do that. I want to do that. But now I look at it mathematically, it is my lowest interest rate. Like, I don't want to do that now. I, you know, pay off something else. So definitely that part of it to think about too. Okay, before we jump into our second question, rookies, we want to thank you so much for being here and listening to the podcast.

As you may know, we air every episode of this podcast on YouTube, as well as original content like my new series, Rookie Resource. We want to hit 100,000 subscribers and we need your help. If you aren't already, please head over to our YouTube channel, www.youtube.com at Real Estate Rookie and subscribe to our channel.

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All right, this next question says, I live in New York. I have almost $7,000 saved up and I'm looking into an FHA loan to buy a fourplex. Now, how does all of this work? I understand that I will have to live in the property for one year, but can I start renting it out ASAP? What else should I do to help me on my journey with this?

Any people you guys suggest to watch or study, how difficult will this be for someone at my age with around 7K in savings? And I work a regular job making 16 bucks an hour. I also trade on the side, not enough for an actual full-time income, but what should I do as of now and what should I look out for and learn? Thanks. All right, so questions about FHA and leverage when you get to purchase a fourplex with 7,000 bucks saved up.

Here's just the first thing that I think I will call out. If you're buying a fourplex and you only have 7,000 bucks to your name,

I would be a little concerned if there were some kind of major thing that happened and your 7K maybe wasn't enough to fix those issues. So I don't know if you agree with this, Ashley, but I might say the first step is to add a little bit more into the reserves to make sure that if there is some kind of unforeseen event, regardless of how much money you have to put down to actually buy it, let's say that you got some kind of zero down option,

You still want to have a little bit left over, especially in like a multifamily where you've got other tenants living there as well to cover some of those costs. What are your thoughts on that, Ash? Well, and too, like even if you got 0%, but most FHA loans are 3.5% to 5%. 3.5%. It's not only the down payment. You're prepaying your property taxes. Yeah.

you're prepaying your insurance. So that right there, like especially in New York State, property taxes are expensive. So that right there could be half of your $7,000. That could be $3,500, especially on a four-unit property. Your property taxes are going to be higher, most likely, than a single-family home. So...

There's others closing costs that you have to account for too that you're going to be paying for out of pocket unless you get some seller concessions where you offer a higher purchase price. Let's say you're buying this for, easy math, $100,000 and then you ask for...

you know, 5,000 in seller's concessions to help fund. So then you will get, you know, that 5,000, you'll actually put on the purchase contract 105,000, but the seller concession of 5,000. So you'll actually get 5,000 credit towards those closing costs that can help fund your escrow with the property taxes, the insurance. But you also have in New York state, you have attorney fees.

Depending on the lender that you're using, there may be some type of lender fee that you're required to pay. Sometimes that's baked in where the actual...

loan company is paying the broker and you don't have to worry about that. But there's title fees. There's the appraisal, which I just ordered an appraisal on a property and $750. So that's almost one seventh of the money that you have there. So all of these fees really do add up. There is a website and I'll link it into the show notes, but it shows an example of a client

closing disclosure. And so when you actually go to a bank and get pre-approved, they can give you this estimate of like, based on, you know, the amount you want to spend on a house in this area, this is what your closing funds would need to be that you would need to bring to the table to actually close on the property. And here are all of the fees. Um,

Um, most of those fees are non-negotiable. You can't change. Um, that's just what, you know, the bank charges or that's what the company charges for their filing fees, things like that. But it's, um, an example of a closing disclosure. So I'll link that into the show notes if you guys want to look at that. Or if you're watching on YouTube, you can go down into the YouTube description to get an idea of what that looks like. Yeah. I think let's, let's maybe hit some of the quick pros and cons of just like the FHA mortgage in general. Um,

The two kind of big reasons why people go FHA is first because the down payment, like you said, actually can get as low as three and a half percent. Second, credit scores can be a little bit more forgiving through the FHA loan as well. So you don't have to have like top tier credit a lot of times to get this. And then it's like government backed as well. I think that's another benefit. But I think the...

the cons or maybe the things to consider, even if you have maybe more than the 7K, I think some of the other things to consider are that the FHA loan has more restrictions

in terms of the type of property that you can purchase. And I've definitely heard stories from other investors, people who've interviewed in the podcast, people I've just kind of like met in the real world where their offers weren't accepted, even though they had a higher price simply because it was an FHA. And part of the purchasing process of an FHA loan is you have to do an inspection. And the FHA inspection can be very,

What's the right word? Tedious? Tedious. Yeah. Like, I can't remember if it was someone that we interviewed on the podcast or someone else that I met, but I remember something about like the handrails had to be replaced like on the staircase. Exactly.

That might have been me talking about my cousin. Okay, there you go. Her dad, my uncle, had to go over because the sellers weren't willing to do it. Before they closed down the property, he had to go over and install handrails. And I think maybe like on their front porch or something like that, there needed to be a handrail for the three steps going up. And so her dad actually went over and did it because the sellers weren't going to. And then they had to have the inspector come back, do a re-inspection. Okay.

And a lot of times you're charged for these inspections that need to be done to the VA, the VA loans, they do an inspection to on the property that's separate from you doing your own home inspection on the property. And as the seller, the purchase price is one thing that they consider. But the second thing is,

um is just like certainty to close like how what is my level of confidence that this buyer who submitted this offer will actually meet me at the closing table and get the deal done and someone who's got maybe conventional financing or some other sort of financing that's not fha the hoops the seller will have to jump through to actually gets the closing table will be much smaller sometimes non-existent so a seller oftentimes might accept an offer for a lower purchase amount

simply because they won't have to do anything during the closing process to actually get the deal done. So it may give you some challenges during just like the negotiation phase as well to actually close on a deal. Not saying that you shouldn't try it, but just know it is something to consider.

One other part of this question was if he can rent out the property right away. So if it's a fourplex, you can rent out three of the units right away. But one unit you have to live in yourself for one year is what the FHA requires as far as.

As far as how they actually track that, as I've learned from several loan officers that mortgage companies are getting more and more strict with this, where they're actually following up and making sure that people are following the rules that they agree to when they take these different loan products. So, you know, I wouldn't try and skirt that rule by only living there for three months and then renting it out. So...

the requirement for FHA is to live there for one year. So if you're looking to move out quickly, something to consider. There's one other loan product that we've talked about here on the show as well that I feel makes sense to kind of bring up in this situation, but it's the NACA loan. So that's N-A-C-A. And we've interviewed a couple of guests. Nancy Rodriguez was the last person I believe that we interviewed and she used a NACA loan. But I know you can use NACA for up to four units as well.

But the benefit of NACA is that the inspection is

of the actual property isn't as intense as the FHA. And second, it's actually 0% down loan product. So there's literally no down payment. And historically, their rates are about half a point to a point lower than prevailing interest rates. And if you literally just go to their website, it's naca.com. Their 30-year fixed right now today is 5.875%.

They post it every day on their website, so you can always go there and check, which again is about a point lower than I feel like what we're seeing elsewhere. So lower interest rate, no down payment. You can use it up to four units. There are no closing costs, and there's no mortgage insurance.

So there's a lot of benefits to using NACA. Now, just like the FHA loan, there's challenges with that one as well. It is a pain to get approved for. It's akin to like an FBI interrogation to try and get approved through it. But once you are approved, there's a lot of benefit in doing it. So anyway, NACA, NACA, another loan product to check out.

There's also the USDA loans, too, if you're looking to live in a rural area that have lower interest rate, low down payment to try to get people to live in rural areas. So that's another loan product that you can look at, too. On the website, I think it's like USDA.gov.

actually have like a calculator and a property map to actually show what, you know, would be an eligible location or if you would be eligible for one of their loan products through the USDA. Okay, if you guys don't already know, we love talking about real estate. We also love answering questions like this with you all, and we'd love it if you'd hit the follow button on your favorite podcast app or wherever you're listening. We'd

We do have to take one final break, but we'll be back for more after this. Real estate. It's been a cornerstone of wealth building for generations, but it's also often a major headache for investors. You got 3 a.m. maintenance calls, tenant disputes, and property taxes to deal with. Enter the Fundrise flagship real estate fund, a $1.1 billion real estate portfolio built for you.

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All right, let's jump back in to your questions. Tony, what's our final question today?

All right, our last question here says, I have a vacant apartment in upstate New York that I'm trying to fill. It's listed on Zillow and apartments.com. I also use these services for applications and there is a $50 fee for the applicant to run the background and credit check. Now, although I get plenty of interest and requests for tours, probably 75% are no shows. Today, for example, I had four scheduled for this afternoon and not a single one showed.

Any strategies to reduce this rate of no-shows or does it just come with the territory? Should I ask prospective tenants to complete an application before a tour? I currently request one only if a prospective tenant takes a tour, likes the apartment and wants to move forward.

So there's a couple questions here, Ashley, on just like generally speaking, what can we do to try and get people to show up more often? And then what's the kind of best sequence of events? So I guess let me ask you, Ashley, what is your process right now? If you have a vacancy in one of your units, what process do you follow to advertise, show, and kind of collect applications and background checks? So

So we list it to our website and then we list it to about 13 other website services that are included in our property management software. So a lot of property management software has, you know, ties with these different websites where you hit one button and it will post to 13 different websites showing your property for rent and all the information. Then it leads back to your software.

Yeah, that's what I was going to ask. So like if someone applies on any of those 13 websites, do you get to see all of those potential tenants inside of your property management software? Or do you then have to go into 13 different platforms to see those? No, it brings them all back to our software. So if someone is interested, it creates a guest card. So that guest card will say where the lead came from. So if it was Zillow, Apartments.com, and it'll be whatever information they chose to fill out. So their name, their phone number, their email.

So once we get the guest card that basically says they're interested in the apartment, we have our VA that sends them a link to actually schedule a showing and then a link to fill out the online application.

So if they choose to schedule a showing, they can go right online. Our leasing agent sets her availability and they can just go ahead, pick a time slot. Again, this is all through the property management software. Pick a time slot and schedule their showing.

So usually most people don't fill out an application before they see the apartment, but it's becoming more and more common. Within the last year, we've had a lot of people that fill out the application beforehand. We only charge a $15 fee that covers their credit and background check.

And so they'll fill out the application. And then once they do the showing, our VA will reach out to them and confirm, like, do you want to move forward with your application or not? Um,

So we do make them view the apartment usually before we'll actually go and run their credit or background unless they specifically tell us that they, you know, are super interested, they want to get approved, and then they'll go see it. So once the showing is scheduled, they get a text reminder and 24 hours before, like, you have a showing here, but they also get a text an hour before the showing.

and they have to confirm. If they do not confirm, their showing is automatically canceled. So that way we know they're not showing up. There have been some glitches sometimes where people don't actually read the text, and then they show up, and nobody's there because it was canceled. But we also do blocking windows.

So we let multiple people come at the same time. So we'll block out maybe 45 minutes so they can book 15-minute windows, but there could be three people that book the 6 o'clock, there could be one person that books 6.15, and then there could be five people that book 6.30. So that way it's just if one person doesn't show up

you know, hopefully someone else does and it's not wasting a ton of time. So we're super big on, because even before I had this kind of software to help with the scheduling, I started doing open houses where it's like, these are the two time slots and, you know, maybe a Wednesday night and a Saturday morning come anytime between this hour, you can come and view the house. So, um,

Then once, you know, they've done the showing, our VA will follow up. Would you like to continue with their application? Then we do the actual application process. If they are approved, we go down the list in order of people that have submitted and then people who say that they're interested to continue to move forward. So, like, if you get your application in first, you obviously have first priority. But, yeah.

As far as people canceling, that is always going to happen. We used to post on Facebook Marketplace

Oh my God, it would be thousands of notifications of like, I'm interested and all this stuff. And nobody would ever, ever show up. It was the worst funnel for us of the leads ever. We would get so much interest, but nobody ever, ever actually showed up. So we found that people who are actually serious are more likely searching on the more reputable media.

websites and, you know, things like that. But that's kind of our process. And we pay a leasing agent. Our maintenance person used to, you know, help with the showings because then sees the boots on the ground. But now we have a dedicated leasing agent who's paid a flat rate. So if people don't show up, they do show up.

whatever, how many times she needs to go. Like for one apartment, she could maybe do one showing. Another apartment, it could be eight showings and maybe nobody showed up

And then she's paid that flat fee. So it's kind of, you know, for us, it's a benefit because it's not like we're paying somewhere, someone there to consistently be there or I'm not wasting my own time to do kind of a flat fee with a leasing agent. Okay, so if you want to get involved in the community, like all these other real estate investors, go to biggerpockets.com slash forums. And don't forget to subscribe to our YouTube channel so we can reach 100,000.

thousand subscribers. Thanks so much for joining us on this week's Rookie Reply. I'm Ashley and he's Tony and we'll see you guys next time.