No.., I’m not talking about taking a loss when selling a home or a negative cash flow situation!!!

This is a form of growth that is the complete opposite from the growth of adding new rentals and/or the ability to buy more property to wholesale or rehab/resell…. I’ve exercised this mode of growth twice in the past with the most recent being after the events that followed 9-11.   This is a mode of growth that most often people identifying as pulling back and sitting still.  Not commonly thought of as growth but often more aligned with going backwards.  I think it’s all how one looks at things.   Is the glass half empty or half full?

Old school landlords are more likely to identify with this situation because it is a tried & true (slow and steady) method of creating wealth in a more conservative format.  This situation works best for those that already hold a steady group of investment properties.   If you’ve ever spoken to me at length you’ll hear me refer to the cycles of life….  Cycles occur in every fashion of our lives and even business’s/investment’s have cycles of traditional forward growth and times of pullback to solidify a foundation on which to form a new basis of growth -to go forward again.  It’s natural and an anomaly if it doesn’t occur.

I’ve had a series of conversations with a good real estate friend over the past couple of weeks.   He’s got some 14+ rental investment properties in Charlotte, NC and he’s hit a wall.   He has 9 traditional bank loans.   A plus is that he has a healthy w-2; unfortunately, he’s run against a very common problem that most real estate investors have found for the moment- a lack of affordable financing for holding investment properties for the long term.  

Sound Familiar!?!


There have been two common denominators at the foundation of our discussions.
To move forward in growth via purchasing additional properties one will need to explore avenues of owner & private money financing and what I call “Reverse Growth” via a planned mode of disciplined (good) debt pay-down of mortgages secured by your existing portfolio of investment properties (or chess pieces in the asset column). No I’m not going to be pitching those computer model debt programs that claim to eliminate all your debt in 5-6 years once you refinance your home with a new 1st loan and our hybrid equity line to move money in and out of for the low low upfront price of some $1,500 to $3,500.   Save your money.  I think the old fashion way of doing it will work just fine.

I’m talking about good old fashioned accelerated pay-down of existing debt. This means adding additional principal payments to your existing monthly mortgage payment. First off let me clear the air for the inflation hawks in the crowd.   I’m not advocating an across the board all or nothing move… , simply a posture or form of growth for at least the short term whether that be 2 or 10 years…  Certainly at some point in the future inflation will kick in (or we had better hope it does) and the cost of money will be higher than it is today.   One will look back and wish they had kept all the 5, 6, 7%  fixed interest rate loans when the cost of new (loans) money is higher (such as 8, 10, 12%+).   However during transitions one should opportunistically look towards forms of growth that maybe considered non-traditional at least for the short term.   I certainly intend to keep as many of my 6 & 7% fixed rate 30 year loans I have for as long as possible. Why you ask? If I can buy new investment real estate pieces with a lower cost of capital and the property being priced partially based on a higher cost of capital to purchase (when inflation & thus interest rates kick up) then I will be able to correspondingly obtain a greater spread in my rate of return and be ahead of the competition because my operating costs are lower. What is the greatest cost of operating a real estate investment (or merchandising) operation?   The Cost Of Capital (money)!

I’m suggesting that one writes out all their existing mortgage loans.  As I list mine out, I have bank loans that are fixed and variable -some being standard 1-4 housing loans and others -commercial real estate loans.  I have  IRA and private money loans.   List out the origination date, original balance,  interest rate (fixed or not), monthly payment,payoff or balloon date,  and current balance for starters.   I like to look at the higher rate loans in the low to medium loan balance size(s) with a preference towards adding extra principal payments towards the mid term loans.    Focus on those  smaller loans that can be paid off with profits taken from sales of rentals or flips on the merchandising end.    I prefer to leave a smaller loan out there from a psychological impact too.  Once I overcome paying off a mid-size loan -it feels better that the next one I may overcome is actually smaller; therefore, creating excitement about the ability to pound it down even sooner versus looking at a large loan size hurdle. Making life’s challenges as enjoyable as possible is part of the ride of life -so setting the hurdles at reasonable intervals and heights helps make the journey easier.

As I mentioned in Owner Financing is Out There: A Tale of a Win/Win Arrangement & The Power of Compounding., I have two private loans that payoff on 10 year amortizations & I’m just about half way through them.   These loans are both under $25k each at 7% interest rate.   At this point, I got my eye on a $49k private money loan at 8%  that balloons next year and still has 25 years left on its 30 year amortization setup.   Just looking at these loans, I called the 8% investor and asked if he would consider extending the loan out for another few years and lowering the rate -to perhaps 7%.  Now I will remind you that my private lenders receive their payments before the due date -removes the guess work and unfounded concern when they look into an empty mailbox for a day (or three) if it arrives around the due date. I advised the investor that I do have cash and maybe looking to payoff a loan as I’m having trouble putting money to work and that I may pay him off and his thoughts to that versus a continued well secured investment  He doesn’t want to lower the rate but will extend the loan.    From that alone, can you see how I’ll focus on paying that one down because it will balloon out (again) versus the others amortizing out and it is set at a higher interest rate?  Once I overcome that one it will certainly be a more enjoyable exercise to tackle one of the smaller ones -unless, another loan is on the radar.

Certainly one also needs to focus on loans where you may have a nervous investor/lender or one in dire need to have the funds back.  We must remember that this is a team situation that is creating opportunity for one another. The lender is getting a guaranteed rate of return on the loan & the borrower has all the opportunities afforded them in the real estate bundle of rights (cash flow, depreciation, leverage, appreciation, housing, etc.). So from this teamwork, we sometimes need to look at the bigger picture and remember to help those that help us; after-all, what comes around goes around. Around October 3, 2008, I had a panicked private money lender (of mine) call me wanting his money back as the sky was falling.   For us in Charlotte, NC it certainly felt like it.   Wachovia was going under, the financial and credit markets were imploding, and the DOW was on a rapid decent down the elevator shaft.   Even though our loan was formally written out with official payoff dates,  I had made the oral commitment that if he ever wanted his money back that I asked for 60 to 90 days to pay him back.   He verbally agreed.   When I received that call, I reminded him of that conversation and updated him with the realities of my situation so as to calm his anxiety. I believe in an old fashion tradition of “You are only as good as your word” -something lost in translation in the all about me society we live in today. So I committed to paying him off by Thanksgiving -I had his entire investment (plus interest earned) in his hands within 30 days.   While we cannot always forecast the worst case scenario’, I think it’s important to remember who your dragging along for the ride with your fiduciary responsibilities.   That would be your bank, private money lender, contractor, tenant, not to mention your family.   Treat them as you would want to be treated.  Protect them and make prudent business decisions versus gambling with other peoples futures too.

That’s called:  Under promise & over deliver!

I would leave the 15 & 30 year amortized fixed rate bank loans dead last (unless this is just all you have).  If you’ve got a 15 or 20 year amortized commercial loan, consider focusing on paying it down -especially if there is a balloon component to the equation.   Making extra principal payments to a loan with a 15 year amortization creates some incredible compounding.  Let’s just say you have a 6.5% fixed rate $100k commercial loan with a five year balloon.   By just making the minimum payment of $871.11 per month, when the loan comes due you’d have a balance of $76,716.93.    Let’s say you added $150/mo extra -your balloon balance would be $66,11584.   Now look at what could happen if you applied an extra $500/mo -the balance would be $41,379.95.  Wow, after 5 years one could take a $100k loan down to $41k.   That is disciplined wealth creation -something I call reverse growth.

Let this all sink in….

Some natural thoughts would be to just acquire more rentals with that extra cash flow.   Sure you can; however are you in a position to grow with extra property? Do you have proper reserves and cash flow in the first place to handle the intricate (yet predictable) capital improvement, general maintenance, and average tenant turnover costs that occurs with the average rental.  Is financing a problem or are you already over leveraged?  I suspect most don’t truly factor in the real cost of maintaining a rental investment property over the coarse of 3, 5,10+ years -thus an honest (pro versus con) written plan of what one has is needed.  Another angle is to diversify into other assets; such as stocks or even a business; however the risks (or ones ability of affording said risk) may outweigh the additional web of growth through leverage especially during an the economic uncertainty we face.  Times of economic uncertainty also correlates into unpredictable cash flow streams and thus creates uncertain risk.  At times, I feel that in order to grow (healthy)… one has to pull back and restrengthen the foundation before proceeding to the next phase…

If you took that $60k in wealth created after 5 years of forced principal pay-down on that hypothetical $100k commercial loan,   one could use it literally into a down payment for the next real estate investment without any money down.  After all, this $60k came from a loan that was incurred to purchase and/or rehab that property and more than likely paid by residents in your rentals.   Imagine this.  Refinancing that $100k loan that’s been paid down to $41k and pulling out another @$60k.   Say you bought a new rental home with it…  Could we agree that if you’d rent that paid off home (remember that new $100k commercial loan is still tied to the original investment property) for say $650/mo, that you’d be able to average at least $300/mo in positive cash flow.   Add that to the original model of paying down the $100k loan.    So you have the payment of $871.11 (assuming same terms) plus the additional $500/mo you were paying, and now your adding another $300/mo…. Care to guess what the balance of that loan would be in 5 years?   $20,177.76!!!  So your residents effectively created another $80k in wealth for you (and this doesn’t include any tax savings nor appreciation).  You could go out and repeat the cycle with that $80k and buy another home or two free & clear.    See how reverse compounding works.

Think about this for awhile.  If you find it a struggle of time to handle all your properties or a time of tight cashflow, consider a “reverse growth” mode as the next leg of creating wealth with real estate. I think you’ll find it rewarding after the compounding effects of 2, 3, or 5 years of disciplined debt reduction.

Written by Tyler McCracken

Local Real Estate Investor & Hard Money Lender in Charlotte, NC - Read Bio at our "About Us" page on the top right of this page.

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