Video Closed Captioning:
good morning good afternoon good evening
folks michael zuber one rental at a time
uh if you don’t know something i love
doing every week is saturday morning 8
a.m pacific time
i go ahead and do a live stream live q a
for 60 minutes
right on youtube you can go back and
look at the playlist i think it’s called
live q a
i’ve now done probably
50 or 60 of them so lots of material
there for you to binge watch
this particular video actually goes back
to a question from yesterday i’ve been
asked this question a lot
so i thought i would give you my
four-step thought process to
when you should focus on paying off your
mortgage right
again in this example excuse me in this
example we will assume this is an
investment property
not owner occupied okay it’s a different
thought discussion in my opinion if this
is owner-occupied verse investment
property
and we’re going to really probably do
this in two segments
because i do believe it is based on who
is asking the question
in this example i will do my best to set
the variables for the question that came
yesterday and then i will tweet them
for a different outcome
before we get into this example let me
be very clear
if getting a mortgage
an investment property mortgage
keeps you up at night
it is telling you something
i don’t care who you are what
circumstances you are i do not believe
an investment of any time
should keep you up at night
whether it’s stocks or crypto or yes
even investment real estate even one
rental at a time if it keeps you up at
night and it’s because of the mortgage
you know in that example you should pay
it off so if that’s not the case if you
are legitimately thinking about hey what
should i do with excess capital
these are kind of the four situations so
first off if i remember yesterday
the question came from a
34 year old so you’re 34 years old
you’re employed
right you don’t need
the cash flow to live on in this example
you have a 3
mortgage
fixed for 30 years
and the asset cash flows so again
option one and we will change this in
this video later but option one 34 years
old
early stages of their investing career
they are employed
right so they have a day job that are
paying the bills
and they have a 30 year fixed rate
mortgage at 3
so yesterday during the live stream
i basically went into a little bit of a
rant that basically that 3
here is an asset and an asset that needs
to be appreciated but what i want to do
here is kind of break down four
questions i ask myself
so question one and i have my notes in
front of me that’s what i’m looking at
question one
does the asset cash flow let’s actually
change colors here
let’s just change it up we’ll go back
here does it cash flow
with
debt
so you have an asset maybe you bought an
alligator maybe you overpaid maybe you
did a bad deal
if it doesn’t cash flow with debt even
at three percent
then i suggest paying chunks of that off
because again rule number one of one
rental at a time is no alligators we
don’t do bad deals but sometimes bad
deals happen
and if this asset does not cash flow
with the debt structure in place
pay off the debt
okay that’s rule number one that i think
about
rule number two
uh what is
cost of new capital
and i’ll just write the dollar sign
what is the cost of new dollars new debt
right you have a three percent mortgage
in this case
let’s just pretend that new debts nine
percent
right what what are you gonna do in that
situation well
you probably would save your money right
because again why would you pay off
something at three percent when you
could build cash and then use it instead
of nine percent debt
right because one thing you have to know
about this three percent mortgage is you
can deduct it on your taxes again this
is an investment property
so tax wise it’s more like a two percent
loan or maybe 1.8 because again you’re
writing off mortgage interest because it
is in investment property at least
that’s how my accountant does it for me
go ahead and check with yours and make
sure your situation does that as well i
don’t want to get in trouble
next what is the return on capital
right what does your market return for
the next deal
right does your market return two
percent
well
then paying off a three percent debt
might be more efficient does your market
return 10 percent
well ten percent
is higher than that uh and again the
last one is what is your plan
are you done right are you 34 years old
and you don’t want to own any more
investment properties if so you’re no
longer growing so it doesn’t really
matter
then pay it off if you’re still planning
to grow recycle capital do all of those
things
again lots of options so in this example
we assume their plan is to keep growing
uh we’re going to assume their return on
capital in the in new new capital or new
investment what i call yield is above
eight percent
we’re going to assume cost of new
capital is six percent
and we’re going to say yes the building
does cash flow with existing debt here
so in my world with this four scenario
if this was me
i would not focus on paying off the
mortgage i would take that extra build
it let the income snowball take over
and allow me to buy another asset this
three percent mortgage is going to be an
asset for the next 30 years in my
opinion
so let’s change this up
let’s make this person 84. let’s see if
i can do this
84 years old
and let’s make this eight percent
mortgage again let’s just cheat oh look
at that now it’s eight
how about that doesn’t look great but
here you go so again
just changing the game we’re changing
two variables no longer 34 you’re 84 and
the mortgage is eight percent not three
same example
does it cash flow with debt
maybe not if it doesn’t pay it down
let’s say it does
what is cost of new dollars right what
does it cost to raise that capital what
are you going to do
is is it suddenly
is new money seven percent six percent
this is debt right
is it lower than eight if so go get that
what is the return you can expect if the
return in your market is six percent
pay off the debt
right if your return is 16
well maybe you go and get the next deal
but again if the return is six percent
paying off the debt is better and then
finally the plan
hey you’re 84 years old you’re gonna
live to be let’s say 120 maybe you’re
done right maybe you’re gonna live to
100 who knows but maybe your plan is not
like a 34 year old but you are done and
you are looking to just
keep what you have and move forward so
again in this example uh
maybe it doesn’t cash flow pay it off
costs a new capital it doesn’t really
matter for you because you’re done
growing
return is six lots of reasons to pay off
debt so
in my world there are plenty of reasons
to pay off debt in my world there’s a
plenty of reasons not to pay off debt it
really depends on your situation but i
want to close with this video how we
started
if
having a mortgage on an investment
property keeps you up at night that is a
sign
and i am totally okay with you paying it
off even if the rate is three percent
even if the rate is one percent if it
keeps you up at night it doesn’t matter
what i think it only matters what is
happening between your ears and if it
keeps you up
pay it off totally okay hopefully that
makes sense let me know what you think
leave comments below ask questions
hopefully you enjoy these whiteboard
discussions bye bye