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About This Episode
Episode #338 – The age-old question of: should you keep acquiring properties or shift gears to pay down existing debt? Coach and Erion talk you through the nuances of this decision, exploring key milestones, income goals, and lifestyle considerations to help you navigate your unique path to financial freedom.
Episode Transcript
Chad (00:00)
You saved up some cash as a rental investor. Maybe it’s 50,000 bucks, maybe it’s 100,000 bucks, but now you’re trying to decide, should you take that money and buy a new property, or should you use that money to pay down debt on your existing rentals? That’s the question we’re going to tackle in today’s episode of Ask Coach, and we’re getting started right now. Today’s question comes from Erin Amin, a member of my private coaching community called Rental Property Mastery. If you haven’t heard of Rental Property Mastery, it’s the place where I coach and help small and mighty real estate investors to buy more properties, to raise more funds, and to turn their rental properties into passive investments so they can achieve financial freedom. You can check it out or join at the link below in the podcast and YouTube description. To help me discuss this question, I brought on my friend and one of the smartest real estate investors and professionals I know, Erion Sheehae. He’s from Houston, Texas, and he’s also known as the Investing Architect. Now, let’s go to our conversation.
Chad (00:50)
I want to ask you, and let’s have a discussion here about when is it the right time to start paying off some of your debt on your rental properties, and when is it time to to just keep buying more?
Erion (01:01)
That’s a great question, but I just want to make a clarification first that this question is only useful in the context of an investor’s individual journey towards financial freedom. So I have no interest in discussing the debate between people who are leveraged maximalists, like they just want… You should always be leveraged for the rest of your life, and the Dave Ramsey people that you should never have any debt. That debate, to me, it’s never going to be resolved and it doesn’t lead to anything worthwhile anyway. But I think Within the context of a person’s journey or an investor’s journey, I think there are some critical times when you should consider paying off debt. So for example, you should consider paying off debt when you’re trying to turn equity into income. If you’re in the stage of your investing where, okay, you started out with a certain amount of capital, you’ve grown that capital into a bigger pile of capital, and now you’re trying to figure out, how do I transmute this into income, or how can I make this earn more income? The way to do that sometimes is to pay off the debt on your portfolio because it will give you the highest level of nominal income, even if it lowers your rate of return or your yield overall.
Erion (02:12)
That would be a good time. If you’re in the ender phase to use some of your terminology, that would be a great time to think. The equivalent, I think, in the investing world is when you move from stock to bonds in traditional investing. That you don’t want to be 70 years old and still invested in very aggressive growth stocks.
Chad (02:37)
I’ll give a football metaphor to even add on to this, is that you’re in the fourth quarter and you’re the… Who do you follow? The Texans? Yeah. Houston Texans are in the Super Bowl, and they’re in the fourth quarter, and they’re up by two touch downs. And do they keep throwing the ball and trying to go for the long pass, potentially have an or do they start running the ball and just trying to run the clock out and be conservative? Correct. To me, that’s the equivalent. It’s like you’ve clearly hit a point in your career where you want to start playing a different game where the risk of losing is more painful than the excitement and the benefit of you getting another touch down or getting another amount of wealth that you could get. To me, that’s the big… It’s hard to define that sometimes. I can’t define it for you, but psychologically, a lot of people, you can figure that out for yourself if you’re ready to switch gameplay. A different game plan.
Erion (03:32)
Correct. I think a lot of the investors that I work with, they aren’t looking for real estate to be their current source of income, but there’s a point in the future where maybe they want to go take a sabbatical or they want to maybe go part-time on their job, and now they really need an income subsidy, that would be the way to make your real estate portfolio do that for you by paying down debt or paying off debt.
Chad (03:58)
I’m going to go down a little segue here because We’re on the same topic. I think in many people’s mind, they hear the 70-year-old analogy. All right, end of my career, I’m retired. That makes sense. I get that area on. I’m going to do that. I found in my own journey, there are these points where I’ve been at these many retirement stages where I’m like, All right, I don’t have enough equity yet to have $10,000 per month in income, which is my goal, but I could have $4,000 or $3,000 a month, and that would give me the chance to take this little sabbatical, and it would give me a chance to breathe for a year or two. I think fewer What do people think about that sub-stage of their growth journey. I don’t know if you had any thoughts on that because that one’s a little fuzzy or a little tough to decide if you should pay some debt down.
Erion (04:39)
No, that is a perfect point because it’s less about age. That wasn’t the right example. It’s not about, Hey, you’re 65 and now you’re a retiree. It’s more about whenever you decide to act like a retiree. That could be when you’re 40 and you’re going to be a retiree for a year because you’re in Spain Or you’re going to pull back so you can spend more time with your kids because you can feel like your kids are growing too fast. And by the time that you get done chasing money, they’re going to be out of the house. So maybe you want to pull back on your career a little bit. Now you’re trying to turn Where your focus changes from capital growth into income. That’s the point that we’re talking about here, is that the moment that you need to focus on income, that’s a stage that you should consider paying down some debt so that you can increase the amount of income that your properties produce.
Chad (05:33)
I think really what we’re saying here, when you talk about strategy in real estate, one of the best strategies to grow your wealth is to maximize your return on your investment. You got $100,000, you want to turn into a million bucks, what can you do to safely get a good return on your investment? It typically involves leverage in real estate. Typically, you’re going to make a down payment, you’re going to get a loan. That’s the game plan. That’s the way you win the game. What we’re saying here is that there are times in your life when the game plan might shift where maximum return on investment, maximum growth is not the top priority. The priority is now shifted to maximizing income. I would also say maximizing peace of mind, sleep at night, those things which are a little bit harder to calculate. But having a simpler portfolio and high income portfolio, less risky portfolio, can make a lot of sense at that point.
Erion (06:25)
Well, yeah. I mean, that’s part of the plan, but that’s skipping one step. It’s not that you want to turn 100,000 into a million. It’s you want to turn 100,000 into a million so that then that could produce 50, $60,000 a year of income for you. So just accumulating the money and then selling everything and then paying it off or spending the money and drawing down on the capital, that’s not a very smart plan. And just accumulating capital so then you can die, that’s not a very smart plan It’s the utility of it. Your investment should serve your life. The idea is the capital growth phase is there so that it can be followed by the monetization phase, by turning capital into income.
Chad (07:13)
As I I’ll put this out there, this idea out more with my book and with my videos about paying debt off, I’ve run into this. It seems like there’s this lack of or a difference in strategy. Even with Robert Kiyosaki, I’ve seen some of his stuff. The idea is that you never to stop using the game plan of using leverage and growing, and there isn’t this monetization stage. You just get bigger and bigger and bigger. Then if you get bigger, instead of having a leveraged $200 a month cash flow, now you have massive apartments with leverage, and now you’ll make 10 times that because it’s 10 times bigger. But the leverage, that hasn’t changed. That’s the game plan. I know we said that’s one end of the debate, but there are billionaires out there, people like Kiyosaki, who say that their goal is to always have a a ton of debt and more power to them. But I just think that’s a different approach. I’m just deciding that it’s just a different way of looking at success with your portfolio.
Erion (08:09)
Well, I think ultimately, it’s like if you really want to dig deeper into your decisions, You always have to ask the corollary question, so that you can do what? That is the key part. If you tell me, Hey, I want to use leverage, and I want to grow it to this level, so that you can do what? What What are we trying to do here? If it’s a matter of, Well, I want to be able to tell my friends that I have billions of dollars. Okay, fine. But as long as you’re clear on what is the end game, I think you have to figure out why you’re playing the game so that the game doesn’t start playing you. That’s the key.
Chad (08:53)
Yeah, absolutely. If you want to keep playing the game, there’s always a reason. I think I read an article about Elon Musk and Jeff Bezos, there’s always a bigger yacht to compare yourself to. Maybe you told me about this. You’re always going to have a game you can play a little bit higher, a little bit higher, which I love talking to you about this, Ariel, because in the end, investment is just like a toolkit we have. Paying off debt, buying another rental property is just a tool question, the philosophical question. Then what requires you to think about your life and say, What matters to me? My content? Do I have enough? What does enough mean? What do I want to do with my life? What makes me happy? That’s a much more difficult question. Those are way more difficult.
Erion (09:32)
Especially for somebody who’s figured out the game. If you figured out the real estate game or if you’ve figured out the game of business, that comes easy to you. You can just scale to the next level and you don’t have to spend time asking some of those questions which are far more existential and far more difficult to answer.
Chad (09:50)
All right, so we went down some segues there, but I want to go back. We’ve talked about some reasons, some phases of your life when it might make sense to consider paying off debt. But there also So many times the answer is, I want to go buy another property, I want to invest in another property. So maybe, can you speak again to that decision matrix, maybe on a more granular level when somebody’s having to decide one way or the other?
Erion (10:10)
Generally speaking, you should acquire when you’re in acquisition mode. Meaning when you’re putting your portfolio together, you have to always have a clear idea of what you’re optimizing for. So in the early phases of building your portfolio, you should optimize for growing the scale of your portfolio initially. In other words, you don’t want to have just one really perfect property that is optimized to the guilds when it comes to the cash flow and the ROI and all of that. But in the end of the day, it’s one property and it’s not really going to change your life. So the first key is, how do you reach critical mass, whatever that means to you? I don’t mean a certain number of doors or a certain very round number of net worth. I just mean whatever critical mass means to you. Until you reach that point, you should almost be always focused on acquisitions. So as long as there are properties in the market that fit your buy box. You should always prioritize putting the puzzle pieces in place in your portfolio. If you have one property and you have $150,000, and that property has $150,000 $150,000 mortgage on it, to use your example, you could take that $150,000 and pay off this one property, and you could go on Dave Ramsey, start screaming, debt-free, and make you happy.
Erion (11:43)
But that one property is not going to help you reach your goals. Instead, if you take that $150,000 and use that to make, I don’t know, maybe two or three very strategic purchases, right? Now you’ve got four puzzle pieces in your… Three to four puzzle pieces in your portfolio, then that’s going to give you opportunities later on that you wouldn’t if you had just paid off the one property that you had.
Chad (12:09)
So it requires you thinking a little bit longer term, and it also sounds like it requires you to have some milestone you’re shooting for. That leads me to the question, is having a networth milestone, is that a good way to measure roughly the progress you’re on? Hey, I’ve got $200,000 in equity and networth right now. Maybe not a good time to start paying the debt off, and I still have money in the years. Or is it, I’ll wait till I’m at a million dollars in networth? How do we measure when we’re making progress?
Erion (12:35)
No, the networth is a proxy. But what I’m talking about is more basic than that. The idea is, okay, you work backwards from what your goal is. So if your income goal in the future is, let’s say, I want to earn $50,000 for my real estate investments, and let’s say, for the sake of the argument, the yield that I can earn on a free and clear is 5%, that tells me that now I got to have a million dollars worth of free and clear real estate to be able to create that $50,000 income. So if I’m starting out now and I’ve got $50,000, really the formula is, how do I turn this $50,000 into a million dollars 10, 15 years from now? The easier way to do that is in order to pay it off, you first have to have it. You have to add it to your portfolio and then you can pay it off and then you can get to the point where you… And hopefully, the growth will help so you don’t have to do all the heavy lifting yourself. But that’s the idea that you’re working backwards from… So it’s not a networth goal in and of itself.
Erion (13:41)
It’s not about, I want to be able to say my networth is a million dollars, but it’s like, that’s the number that my pile of money needs to reach to be able to create the income that I want, which is the proxy for the life that I want when I’m financially free. Got it.
Chad (13:56)
So it’s a networth combined with the number properties or the amount of income that those properties produce. And so if you start getting closer to that point where you’re like, All right, if these properties were paid off that I already own, I would meet my $50,000 per year goal. Maybe you start at that point thinking, All right, how can I now start transitioning to a debt payoff mode instead of an acquisitions mode? Then you start going through the different strategies. They either do a debt snowball, maybe you sell a few properties and pay off the other ones. There’s other ways we’ve talked about before to try to get those properties paid off. Yeah.
Erion (14:28)
It’s really what point are you in the journey? In the beginning, you don’t own any property, so you don’t know. You don’t know what they will yield, what they would do if they’re paid off. So you almost have to do, like in your book, you talked about how you do your market research and you figured out your buy box and what is the typical investment property look like in your area and does that fit your buy box? So that’s the idea is that, okay, if I’m saying, okay, I need my net worth or my pile of money to simplify to be a million dollars, and my average property in the area is $200,000 that could help me get there, you could say, Well, I need to buy five of those so that I can get to a million dollars. Well, not necessarily, because you got to discount that to the present. You could buy four of them, and through growth, they will get to a million dollars 15 years from now, depending on whatever the level of growth is. You can basically work backwards from the income to the pile of money that that requires, and then divide that into the average property that you can acquire in area, and then that gives you your property number if that’s an easier way to look at it.
Chad (15:34)
I find that a much simpler, reassuring way of looking at it. It’s almost like stacking blocks. You get this one property, that’s your first block. It’s moves.
Erion (15:43)
Second property is your second block. It’s five moves. That’s all I need to do. Yeah.
Chad (15:46)
Yeah, I love it. Well, Arion, the reason I love talking to you about this stuff is you take complex situations and you make them seem a lot simpler. So thank you for that. There’s more we could say on this, but I think this is a good place to wrap it up. If If you still have comments, please leave them below in the YouTube channel and let us know your thoughts on this episode. If you have other questions you want to ask, you can also send us an email if you’re listening on the podcast, an email to podcast@coachcarson. Com. Arion, people are going to want to hang out with you online. They want to see where you are. How would they connect with you if they like what they’ve heard so far today?
Erion (16:17)
They can connect with me on X or Twitter @InvestArchitect. My website, signaturehouston. Com, and on LinkedIn.
Chad (16:26)
Great. I’ll have links to all of that in the podcast description, the YouTube description. Thank you so much for being here.
Chad (16:31)
Look forward to talking to you again soon. Thank you. In this video, my goal is to help you decide, should you take your cash and buy another rental property, or should you use it to pay off your rental property debt? But what I didn’t cover here is if you decide to pay off the debt, how do you actually do that? How do you do it as quickly as possible? My next video is titled How to Pay off Rental Property Debt in Five Years or Less. It’s a case study where I go into a lot of detail on four different strategies you can use to pay off rental property debt and to do it as quickly as possible. If you want to watch that, there’ll be above me here and also a link in the podcast and YouTube description below. I’ll see you in the next video.
🔗 Connect with Erion:
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- Erion’s Twitter: https://twitter.com/investarchitect
- Erion’s Website: https://www.signaturehouston.com/
- Erion’s LinkedIn: https://www.linkedin.com/in/erionshehaj/
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