BiggerPockets

Originally posted by Patrick E

I was wondering if anybody that buy and holds a house if they ever use the positive cash flow to pay off a house faster?? Is this a good startegy?

Yes! we did just that starting in 2004 leading up to the current financial situation. Then we contacted the lenders to get the amortization reworked to lower the payments.

Now, we can easily adjust and adapt to any rental conditions without suffering from being over leveraged.

For now, we are making the expected payments in anticipation of having to adjust to a more competitive rental market over the next couple of years.

While I agree that owning free and clear increases your cash flow, reduces debt, and drastically improves your ability to adjust to changing market conditions without the burden of a mortgage payment, I would respectfully disagree that it is the smartest thing to do.

Two of the most powerful advantages to investing in RE are the deductions (interest on mortgage & depreciation) and the ability to leverage. Giving up your leverage reduces your ROI percentage, increases your exposure to liability, and hinders you from making more purchases.
Of course there have been too many who have "over-leveraged" but I am speaking from responsible leverage practices and not the opposite.

I 2nd the remark about leverage.
in my tiny world (inside my head) leverage is KING and cashflow is the result of smart leveraging.

I could be wrong though, again thats only what the inside of my head is like.

The equity you have in a property is an asset that can be siezed as part of a lawsuit. The theory is that a leveraged property is a less interesting target for a lawyer than a paid off one.

Leverage is a two edged sword. If your investment gains in value, you can pocket all the gain for a lower investment. If it falls, though, you can end up losing all your investment. With leveraged stocks (i.e., buying on margin), you'll get a margin call, and be forced to pony up the losses or sell the stocks. With real estate, you can hang on hoping for a recovery until you're deep in the hole. Just ask the many, many people who are underwater on their houses.

Leverage can allow you to accumulate more properties than buying cash. It can also produce a higher ROI. It can also leave you with a loss you may struggle to repay if the situation goes against you. I don't really think there is a right or wrong answer to this question.

Pretty sure, though, having investment property that you cannot quickly sell and repay any debt is a very risky position. Realistically, I think that means you have to have at least 20% equity in any leveraged property. 10% to cover the transaction costs, and 10% to discount it for a quick sale.

I am still sticking with paying it off. These times are teaching all of us a lesson. Leveraging everything you have to buy just one more is not king any more. If you have 10 properties 5 are free and clear and 5 are mortgaged, you have all the write offs you need. If not, you will qualify for another property because you actually have a net worth. Easy to get a line of credit on a free and clear house. There is your mad money.Sitting their not costing you anything till you need it. As for exposure, put each house is it own land trust, or llc, simple way to keep tract also,
123 Main St. LLC. Anyone can keep tract of that book keeping.

What exactly is leverage?

Originally posted by John Andre

If not, you will qualify for another property because you actually have a net worth.

PROVABLE positive net worth is about to become very important in the lending world.

Just say'n. :cool:

I also still think paying it off is the way to go... and an umbrella insurance should cover potential lawsuits.

Originally posted by Patrick

What exactly is leverage?

In finance, leverage (or gearing) is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced. It generally refers to using borrowed funds, or debt, so as to attempt to increase the returns to equity. Deleveraging is the action of reducing borrowings.

Originally posted by John Andre

I am still sticking with paying it off. These times are teaching all of us a lesson. Leveraging everything you have to buy just one more is not king any more.

It never was king John and I never suggested anyone should leverage "everything they have" to buy just one more. What I did say is owning free and clear is fine, and a personal preference of many, but that they are giving up the power of leverage. I also stated that an investor should use leverage responsibly and efficiently. Over-extending is one of the main reasons many investors fail.

There are several advantages to each situation: both for the paying off of mortgages and the leveraging of debt. I recommend that people be really careful in over leveraging, but also use leverage to the advantages it has, (IE tax advantages, appreciation, etc). Make sure you consult with a savvy accountant to see how these can balance out for your specific situation.