Three things I did to pay off my third rental property

As of this writing I have written well over a thousand articles on a wide range of topics.  A topic that I haven’t written about is real estate.  And it is probably one of my favorite topics on the planet.

I bought my first rental property in 2006 at the age of 26.  It was a duplex that I owned up until I moved to Florida in 2015.

My attraction to real estate started when I was young and it is something I have loved ever since.

As of this writing I own five single family residences.  Four of the five are paid off. Two of the five are condos that I paid cash for when I bought them, so I never had mortgages on them.

Over the years I have listened to many so called experts.  I say so called experts, because I am sure they are all successful in whatever they have done and accumulated.  However, they all had different processes they used to get there.

Some of them used a lot of debt to have success, some used minimal debt, and some used no debt to accumulate the wealth and experiences they have in the area of real estate.

I have always been a fence rider on the topic of debt when it comes to real estate.  I innately hate debt. When I became debt free other than the mortgages I had on rental properties and the house I lived in.  I said I would never have debt again.  And I haven’t.

The topic of debt in real estate is something I go back and forth on though.  I am not sure I have a clear opinion one way or the other on it as of today. However, I did make a commitment to myself that I would pay off the other three houses that I did have mortgages on though.

This morning I looked in my journal to see when I made the goal to get the third rental property paid off. The first date I wrote in this journal is 10/19/2018.  Today is 7/1/20.  I assume it may have been in there before.  However, lets just assume that was the first date I wrote that goal down.

On 1/31/2020 we paid off the third mortgage. Since then we have paid off a fourth and could pay off the fifth, but I am having that whole internal discussion on whether to pay it off or use the money we have saved to buy more.  This is another topic for another day.

How did we pay off that third mortgage?  What did we do?

  1. I wrote the goal down everyday:  As I mentioned, I can look in my journal and tell you when I started writing that goal down.  I wrote it down for close to two years almost everyday, until I accomplished the goal. This one thing is first for a reason.  To achieve what it is you want to achieve you have to remind yourself daily that this is what you want to achieve.
  2. Everything extra went towards it. As I mentioned I struggle in the area of whether to have debt or leverage debt when it comes to real estate.  There is one person who is clear on this topic though.  That is Dave Ramsey.    He is a firm believer in no debt on anything.  He has a proven method for people to get out of debt and has helped millions of people do it. One of the things he talks about is the snowball effect.

    The snowball effect is if you take a ball of snow and you roll it down ahill.  As it makes it way down the hill it gets bigger and bigger as it accumulates more snow around it.

    Also, the momentum of the snowball picks up as it makes it way down the hill.  He uses this method when it comes to paying off debt.  Which is to take all extra money and apply it to your smallest debt and pay it off first. He believes, and he is right, that the momentum that a person creates when they are able to pay off something quickly provides them the momentum they need to keep them going to pay off other debts.

    I used this method for paying off this mortgage.  I took all extra money we made and applied it to this mortgage.  It allowed us to pay it off in seven years from the time we took the loan out.

  3. Stay committed no matter what: From the time I made this commitment until we accomplished it, a lot had changed.  I started two different companies, we moved twice, and my income was wildly unpredictable.  During these kind of times most people throw their goals out the door and say they will come back to them when things are more secure. I did not.  I stayed committed.  I kept committing to that goal everyday.

I am a novice when it comes to real estate investing  However, it is something I am committed to and will continue to get better at.  My hope is you find this information to be helpful in your journey.

To your success and your future.

 

Why I will always rent the home I live in, unless I do this…

If you haven’t heard of Robert Shiller before, then my guess is you haven’t been watching the news or anything related to money or economics.

Shiller is the economist that predicted the housing bubble in 2006 that sent the world as we knew it into a tail spin for the next five years and I am not sure if everyone has yet to recover from it.

Shiller and his team did something ridiculously simple, yet effective. Shiller simply looked at U.S. housing prices dating back to 1890, stripping away inflation. He “benchmarked” the 1890 prices at a value of 100 and tracked relative housing costs through the lens of inflation-adjusted dollars.

Here is what they found:

  • A house in 1897 cost the same as a house in 1997, adjusted for inflation.
  • If you benchmark 1890 prices at a value of 100, you’ll notice that U.S. housing prices have stayed within the 100-120 range over the past century.
  • In 1950, for example, the index stood at 105; in 1996 the index stood at 106. Real estate didn’t make any gains (other than inflation) during that 46-year timespan.
  • Starting in 1997, an unprecedented bubble began forming.
  • Every housing ‘peak,’ or bubble, is followed by a tragic, painful, ugly fall.

Shiller and his team have created the Case Shiller Home Price Index.  Below is the image of the current one.  This index is created quarterly.  If you look at the most recent spike.  Right before the recession hit.  You can now see why he was able to predict the housing bubble.  What is even scarier.  Is that you can see a current one is being formed as I type this.

 

So you are saying right now Brian, you are silly.  A home is an investment.  Over time, this appreciable asset can be sold for more money.  Everybody makes money on real estate.

Well, let me tell you a few other reasons why I will never buy a home again as my primary residence.  First of all, I own five homes.  They are all rented out and make money each money.  Matter of fact they are very profitable.  But I rent where I live. And here are some other reasons why I will always rent, other than the fact as you can see by the chart above it isn’t a very good investment.

The only time I will not rent is the day I can write a check for the place I want to live in.  Meaning I don’t take out a loan.

My other reasons.

Mobility:  I don’t plan on staying put.  I stayed put in my hometown from birth until age 38.  I am not doing that anymore.  I want to move.  I want to see the world. I want to see the United States.  My plan is to move at least every three or four years or so, or maybe sooner.  Look, I get bored easily.  I like new things.  I want to move around and see new things and be in new areas.

Assets vs. Liability: The lie you have been sold is that a home is an asset.  Its not. It is a liability.  It doesn’t make you money every month.  It costs you money every month.  I know, so does rent.  And unless you plan on staying in a house for more than five years, and depending on price, it doesn’t make sense to buy a home unless you plan on staying in it over five years.  Which is not the case for a lot of people.

An asset is something that can provide you cash flow.  If it doesn’t provide you cash flow, then it is not an asset. Simple definitions, an asset makes you money every month.  A liability costs you money every month.

But I am getting the gains from appreciation?  What is the point of appreciation if you can’t do anything with the money?

Costs:  The average down payment of a $150,000 home should be, $30,000, 20%.  If you invest that $30,000 into a home, you have to think about opportunity costs associated with that 30K.  Which means, since you invested your 30K into this home, it means you can’t invest it into something else.  Like a mutual fund, a business, or some other kind of asset that can provide you a return.  So this money is tied up.

I, like you have been sold the “American Dream”, whatever that is.  I think most would say, home ownership is the “American Dream”.  I subscribed to that thinking growing up as well.

But to me the “American Dream” is “Ultimate Freedom.”  Freedom from doing anything I don’t want to do.  Freedom from any debts or obligations to others.  Freedom to come and go as I please.  Freedom to live off of my own assets that I have accumulated.  Freedom to travel and live where I want to live.  Freedom to get up on a Sunday and not have to worry about cutting the grass.

If you like to cut the grass, good for you. I don’t. Life is too short to spend one hour a week  cutting grass.  I have better things I want to do.

In 2006, I bought my first rental property.  It was a $175,000 dollar duplex.  At the time, I was renting a great apartment/duplex in the best area (in my opinion) in my city at the time. That duplex gave me cash flow every single month that helped me establish a love for real estate and a love for seeking pure freedom in my life.  I am closer today to this goal than I was then.  And I get closer every single day.

If you are not sold, I would encourage you to do your own research instead of just taking my word for it.

At age 21, I bought my first house.  To live in.  At that time, that was considered to be the biggest achievement one could make, at least in my circles at that time.  Hey, I am not discounting it if that is what you want to do.  If this is one of your goals, and you do it, then good for you.  I am glad you set a goal and accomplished it.

But for me, ultimate freedom is the goal.  And conventional and traditional ways of thinking have never got anyone I know to this goal.

Also, if you looked at the above chart, this should be a concern if you plan on selling your home over the next few years.  We could be at the top of the bubble.

To your success and your future.

Chart:  http://www.multpl.com/case-shiller-home-price-index-inflation-adjusted/