Sunday, January 13, 2013

Pay off my rental real estate = Financial Independence

Welcome to my "Payoff  My Rentals" Blog!

I have been a small-time real estate investor since 2003 (Arguably right in the middle of the formation of the largest real estate bubble in the history of the world.) 

Where we are now vs. where we want to be by July, 2016 (42 months or 3 1/2 years)...

We live in SW Oklahoma and currently own our home.  Three years ago we paid $74,700.00 for a small, remodeled 2 bedroom house.  We put 20% down on a 30 yr. FRM and proceeded to pay it off in 19 months because we couldn't stomach having a mortgage on our home.

In addition to our home, we have 6 rental properties ranging in value from $105,000 down to about $20,000 for a small studio house for which we paid $10,000 cash several years ago. 

List of Real Estate Assests (Excluding personal residence):

              Property                   Approx Value                    Owing         Rents
  • House 1:  3 bed/2 bath        105,000                         57,619          850.00
  • House 2:  3 bed/2 bath          90,000                         70,908          895.00
  • House 3:  3 bed/2 bath          80,000                         49,123          850.00
  • House 4:  2 bed/1 bath          56,400                                  0          585.00
  • House 5:  2 bed/1bath           40,800                                  0          595.00
  • House 6:  Studio House        20,000                                   0          400.00 
Total owing on mortgages:       $177,650   (as of 1/13/2012)

Notes:  All mortgages are currently 15 yr. FRM's averaging 4.375% 
             (Be sure to read the latest monthly update to see how we're progressing since this initial post.) 

The Goal:  Pay them off in 3 1/2 years by adding an additional $3,400 per month toward the lowest mortgage and snowball the prepayments until the last one is paid off.  The net result will be the savings of P&I (Payment and Interest) totalling $1,476.46 per month.  When added to the current free cash flow (after subtracting Rental Management, Maintenance & Vacancy allowances) of $985.00 per month, that will give us a free cash flow of $1,476.46 + $985.00 = $2,461.46 per month.

This is our early retirement fund.  You could compare it to an inflation adjusted annuity, or to living off the dividends of a stock portfolio.  For example: A portfolio totalling $590,750 invested in dividend-paying stocks averaging 5% will throw off the same income of $2,461.00 per month or just under $30,000 p/yr.   If you choose to compare it to a portfolio with a 4% withdrawal rate, you would need the equivalent of $738,428 invested.

With frugal living and a paid off house, this is a very livable income.  It should essentially adjust with inflation as rents rise to cover expenses.  The principle (the houses themselves) is safe and untouched.   There is no drawdown or 4% rule.  The income is perpetual.

The money is safely invested in paying down the loans and the return is guaranteed at greater than 4%.  While I'm a big believer in Dividend Growth Investing, that still carries a higher degree of risk.  Therefore, my choice after much soul searching, reading and taking into consideration my personality and character, is to de-leverage while taking the >4% guaranteed return.


The Executioner said...

This looks like an interesting blog. Good luck to you in your quest. House prices in your part of the country certainly are a little lower than they are here in New England.

Pay off my rentals said...


In fact it was your "Death to the Mortgage" blog that inspired me to do this.

Houses are most definitely cheaper in this part of the world where it's still cheaper to buy than rent. Do check back from time to time.

me myself and I said...

I would think you could/would want two income sources, real estate and dividend growth. No reason to pick only one vs the other.

Pay off my rentals said...

I do want multiple sources of income and that is part of the plan; just not till after the rentals are paid off. It's simply a matter of timing.

I guess that's the "personal" part of "personal finance". Being 100% debt free adds a layer of comfort and security to our lives that is more valuable to us now than ever before. To us being debt free equates with a higher level of financial, mental, and emotional freedom.

Gertrude Poulsen said...

It looks like you have everything figured out, not just with mortgage payments but also on how to live off of what income your properties and investments will generate. I’m still trying to figure out a scheme to pay off mortgages within the next 5 years with having a rural property on top of a couple of rental properties.

Gertrude Poulsen

Anonymous said...

It is scary how similar our situations are! I have 6 rentals, with my first one due to be paid off by the end of the year! I am also using the snowball effect. I plan to keep buying as many as I can the next ten years and to continue to use the snowball effect.

I see many reasons to stick with Real Estate over dividend growth. The returns are much greater, the tax advantages are better and you have much more control over your investment with Real Estate.

Keep up the good work

Albina N muro said...

project to pay off the remaining mortgages on my rental real estate and add an ... $1,476.46 per month to my goal of Financial Independence. commercial mortgage buyer

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