In real estate, the debt snowball method refers to utilizing 100 percent of your rental income cash flow to quickly and aggressively pay off your rental property’s mortgage in its entirety.
What is the debt snowball method?
Essentially, the debt snowball method is an aggressive strategy to pay off credit cards, loans, and consumer debt that has “snowballed” out of control.
The term and method were popularized by the well-known financial author Dave Ramsey. The strategy calls for individuals to begin paying off their debts in order of smallest to largest. The idea behind the debt snowball method is that paying off smaller debts first allows you to see progress more quickly. In turn, seeing progress quickly helps to build momentum, which will lead to behavioral changes that help you to stay out of debt in the long term.
In the scope of real estate, many investors use the strategy of buying and holding rental property with the hope that the value and rent price will appreciate over time. While this method works for many real estate investors, those who utilize the snowball method for paying off their mortgages quickly can actually grow their property portfolios faster.
Case study of the debt snowball method
The following example serves as a case study for the debt snowball method in action.
Imagine that a real estate investor purchases three investment properties, each through secure low-interest mortgages. The investor then rents out each of these properties. However, instead of pocketing the income from these rental properties, the investor takes 100 percent of the cash flow and aggressively pays the mortgage on the lowest balance. Through the snowball method, the investor works to pay off the lowest of the three mortgages in its entirety first. The investor continues to utilize the snowball method until each mortgage is paid off completely. Once a mortgage is paid off entirely, the rental income can then be saved to obtain a cash down payment for the investor’s next rental property.
While the debt snowball method can take many years to complete, investors who utilize this method eventually own each of their properties free and clear which allows them to have free reign over all decisions made with the property.
The bottom line
In a nutshell, a real estate investor can use the debt snowball method to pay off mortgages on their rental properties quickly and aggressively. By following the debt snowball method, investors reap the benefit of owning each of their rental properties outright. In addition, the debt snowball method provides investors with flexibility in their mortgage payment planning, allowing them to pay it off aggressively and pull back on payments when necessary.