BiggerPockets

I've got a question for all my debt-free investors. My strategy I'm employing is buy and hold rentals purchased with all cash. I've got my entity set up and have already begun contributing cash to accumulate to buy my first property (should be able to pay for my first $50-75k property in the next 2 years). Saving up cash is a slow process by nature, but I need to know, where do you suggest I hold the cash while I'm accumulating it? Business Savings and Business Money Market accounts aren't paying a squat and I'd like to make a little money on my money while I'm in the slow saving phase.

This is not a cash vs leverage post. My mind is made up. I've seen too many people lose their shirts being over leveraged. I'm trying to build a nice solid base here in my 20's to bring my cash flow to where I want it in my 30's.

It's simple, not complicated, and it works for me. If you want to run your rental business on the financial redline and be 2 months of vacancies away from bankruptcy, by all means go for it. I have been raised to focus on strong cashflow and mitigating risk. Running negative every month is stressful and hoping for appreciation to outweigh your cost of borrowing money is like playing the roulette wheel IMO.

I know it's not that extreme, but I do not want to borrow money in my strategy. I appreciate you calling me naive, thanks. I could donate $400 to charity and receive the same tax benefit as $400 in mortgage interest. Rentals can be had here for $30-75k. More than likely I'll be buying two owned outright at first. Trust me I see people everyday who are losing money annually in the the name of landlording. (I'm their accountant) I don't see much justification in adding the expense of borrowing money to the already slim margins. It's all about risk tolerances, I suppose. A little leverage I would be fine with, what I'm talking about are the 0 down guys. It all works on paper until you implement it in the real world and run into a hiccup. That's what I'm saying, but thanks for the constructive criticism...

Hi there,
Quick thing to point out then I'll move on. You said that this isn't a "cash vs. leverage" post, but then in the last paragraph you basically made a series of remarks that almost made it impossible for a leveraged investor to keep quiet! But here's my two cents!

I invest some money in Lending Club. I'm earning a return of about 8.6% right now. You DO have to tie your money up somewhat. there are 3 year loans and 5 year loans. You put any amount of money in and people "chip in" to loan people unsecured money. I have 455 loans out totaling 15k. you DO get defaults, but with a little strategy (i.e. screening strategies) you keep them to a minimum.

Other than that, I think they other posters are right about hard money. But be creative, like they say. buy something for $100 bucks and sell if for $150. I like your thoughts. I don't thinki it's completely silly to be 100% free and clear. The return on investment might be lower than being leveraged, but you can sleep at night, and if you do NOT need the cash flow now, putting it into more properties certainly can boost that return.

(I put 25% down on every property and have 3 free and clear out of 11 properties that I will now do cash outs on to buy more property. I will NEVER be more than 75% leveraged though, and I have a plan to domino my mortgages for early pay off)

Without using leverage, you won't make a great fortune in real estate, but you can still make a medium sized fortune. Using moderate leverage can kick you up beyond a medium sized fortune. However this is a risk vs reward decision,

In a similar vein, I turned down institutional financing about 4 years ago for my hard money lending business. The institution was willing to lend dollar for dollar with my equity. When I ran the numbers the extra profit was not worth the risk, to me. Other investors with a greater risk tolerance, and perhaps younger might have reached a different conclusion.

Private mortgage loans at 50 % LTV should allowe you to earn 12-18% on your money on 12 month loans. In fact, the return is so good on private mortgage loans that you might want to add them as a permenant part of your portfolio.

Dave Ramsey always recommends people only own rentals free and clear, but he is hyper-cautious on every issue relating to debt...that's his schtick.

On the other hand, there are people who say you should always have all your properties leveraged to the hilt so that if a tenant tries to sue you, their lawyer will see that there is no money to be gained and give up. But my feeling is that they will sue anyway because they can go after your insurance, so why make your decision based on this?

You need to consider who Dave Ramsey's audience is...

The majority of them are not knowledgeable about real estate and the majority of them probably have/had money problems and aren't sophisticated when it comes to saving and/or investing their money. When your audience is unsophisticated, the message of "always do this" and "never do that" is probably the way to go...

So, for Dave Ramsey, the recommendation of only owning free-and-clear rentals is probably a very good one for those that listen to him.

Luckily, for more sophisticated investors, there are a lot more options (and opportunities) than the one simple suggestion of "always buy free and clear rentals"...

Good point. The majority of his callers who are LLs seem have major issues with their rentals. They need a set of black and white rules to live by.

"I could donate $400 to charity and receive the same tax benefit as $400 in mortgage interest. "

Lol, I discuss this so many times... "but I get the tax break..." Yeah, so you save 30 to spend 100, your cost is still 70 that you would not have if you did not have interest expense...

But I am not against leverage, just the uninformed (stupid) arguments for taking debt because you "get a tax break". Guess who wrote that sales pitch (the threesome of bankers, politicians and realtors...).

Do some modeling. You are against excessive leverage. You are an accountant. You can run some scenarios for growth with 0% debt, 20% debt, and 40% debt and see how much sooner you can pay off the properties. If you can buy two houses for 100,000 with no debt, you can buy 3 houses at 40% debt and have 10,000 left for a rainy day fund (which is an important part not discussed thus far). This should give you good cashflow, protect against going underwater if house prices decline further, spread vacancies (one unit empty is still two paying rent, instead of just one unit), AND you get some tax shelter from the income without needing to donate to a charity.. :)

But the biggest advantage is that you now have three units to cashflow to save for the next unit, you do not need to save so much because you are buing at 40k instead of 50k, and your equity is growing faster. And your risk is much less than the 90% leverage guys.

Keep 6 months in reserve, plus a fund for major problems, plus a bit extra, and you should be ok, not overleveraged.

Just my two cents. I think you should take advantage of the interest rates offered today if you are buying houses...

Tony

Daniel,

"My strategy I'm employing is buy and hold rentals purchased with all cash. I've got my entity set up and have already begun contributing cash to accumulate to buy my first property (should be able to pay for my first $50-75k property in the next 2 years). "

Very similar to my model. This is a sideline that I wish to use to build cash flow for retirement.

Question: Are you planning to do any rehab work, or do you wish to by properties that are ready to go . . . more or less? I am looking at small, distressed, foreclosures that need some work. Pay a smaller amount to buy the property, and use your cash flow to renovate it. Because you have no payment, you have the flexibility to keep it vacant. In the meantime your money is working for you, and you can gain the equity of any work you do yourself. You can then rent it and move to the next one or sell it for the cash to move up to your targeted price range. (You can also learn the painful lessons you must learn on a smaller scale before you start with bigger numbers.)

Of course, that only works if you have the time, skill, and inclination, but it is the route I am taking.You might be surprised at the deals that are available on the low end right now.

I am not opposed to debt used wisely and competently, but I support your idea to go without it. Start getting rich slowly at your age, and you are wiser than most.

(I mean all those NOT on this forum, of course.) =)

Thanks for the replies everyone. Sorry for the slow reply on my end..it's tax season! I am still looking for places to stash my cash away to earn the maximum return while I'm building up my savings, but I have definitely considered the benefits of leverage. I think I would be comfortable with about 60% of the property financed at most and I do see how my returns would be maximized, especially if I'm buying at 30% or better below market value. I'm going to keep playing with some numbers while I'm saving and get in the game as soon as possible.

I'm designing my entire operation to run like a business with everything from marketing vacancies, property management, repair requests, etc. I'm not looking for this income to replace being an accountant for a long time, I'm just looking to increase my net worth over the next 20-30 years. I'd like to be 25 years from now (thatd make me 48 years old) with $5mm in equity and somewhere in the $200k ballpark of annual cashflow. I think this is reasonably possible and I'm trying to do without neglecting 401k and maximizing IRA contributions.

Possible?