Point-Counterpoint: Debt Is Bad When It Comes to Real Estate
A new series of articles we’re calling “Point-Counterpoint” will focus on one real estate investing issue at a time from two different investors’ perspectives. The first topic we’re addressing is debt. Is it good or is it bad?
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In this post, Engelo Rumora argues why it’s bad. Weigh-in with your opinion below the article in the comment section, and be sure to read the entirely opposite stance in Andrew Syrios’ counterpoint article.
Contrary to Andrew Syrios, I’m here to talk about why all debt is bad.
Before I get started, I want to tell you I’m not looking to garner any friends. I don’t want your friendship, I don’t need your friendship, and I know I’m going to catch a lot of criticism for this blog.
But, hey, whatever. Comment below, and I’ll respond to you as soon as possible!
For those of you who have been following me for a while, you know that I’m a bit rough around the edges, and I like to use blanket statements—why you should never do this and why you should never do that.
So here I am today with another blanket statement: all debt is bad. Period.
For those of you who are going to criticize me, I have something to tell you: I think all of you guys are lazy. That’s my opinion. I think that you want something for nothing.
Why I Think Debt Is Bad
Look, I have done over 500 real estate deals, and I still consider myself to be an unsophisticated real estate investor. I’m a rookie and a baby when compared to more experienced, older investors, who have done more deals and been in the market longer than I have.
But to this day, I still only buy with cash, and I’m a big believer in only doing cash deals.
So for those of you who have bought one or two properties (or haven’t even bought yet) and say that leverage is the way to go—debt is good—how can you say that? If you haven’t done many deals, you can’t know that.
As someone who’s done many deals, I think I’ve earned at least some credibility. And I strongly believe that you shouldn’t borrow money. I believe that you should do all-cash deals, and I believe that debt is bad—especially when you’re starting out.
Related: 3 Ways to Eliminate Mortgage Debt
Why Real Estate Investors Should Do All-Cash Deals
Here’s why I think you should do all-cash deals. First of all, it gives you more control of that particular transaction and your circumstances.
Something beginner investors (and even some seasoned investors) don't know is a lender can call on that loan whenever they want. It's in the fine print of the mortgage documents!
Now the likelihood of that happening is not high, but it did happen during the global financial crisis. And I can tell you that a lot of folks went bankrupt because of it. So why expose yourself to that risk? I just think it’s unnecessary.
All good things take time. I think you shouldn’t leverage when you’re looking to invest in real estate either. I think you should build the foundation of your portfolio with cash.
I think that 50 percent of your entire portfolio should be cash-owned—if not higher. I’m very conservative when it comes to these things.
There is no such thing as overnight success. It’s going to take you five, 10, or 15 years to build a large and sustainable real estate portfolio. So forget what you’re seeing online! Forget about these unique strategies, and remember it takes hard work.
What I wish for you is to prove to yourself that you can go out and work hard. Work two jobs if you have to, and save $50,000 to $100,000 in cash before you start your investment journey.
If you can’t do that, in my opinion, you shouldn’t even invest in real estate. Why? Because you don’t deserve to. You don’t know what it’s going to take to get to where you need to be.
I do. Trust me, I’ve been there and done it. I’m still doing it, and it’s not easy. It’s a lot of blood, sweat, and tears. It can also mean a lot of sacrifices and maybe even health issues.
It’s not going to be easy. However, if you can’t be patient and work hard—two jobs if you have to—and save $50,000 to $100,000 in cash before you start, I don’t think you should invest in real estate.
What to Do If You Can’t Afford to Buy With Cash in Your Market
You’re probably thinking, well, what does $50,000 to $100,000 buy me? I live in California or New York.
Great question, and to be honest, I don’t think you should invest in those markets, because it really doesn’t buy you anything. (Or it might buy you half of a parking spot.)
This is why I think you should invest in the Midwest. I also think that you should take things to extreme lengths. If you want financial freedom and success in real estate, move to the Midwest (or to another market where the numbers make sense).
You can make a profit flipping and make a great return on investment with a buy and hold in a better area. It’s a sacrifice, guys, but you have to go to a market where the numbers make sense.
We live in the 21st century. Things change. There is a lot of technology; everything is virtual. We can be more mobile, and you don’t need to live in the same house for 30 years.
Make a sacrifice now so you can live the life that you want in the long term—or don’t. Live in California and borrow a ton of money and someday you can retire.
Regardless, I’m a big believer in cash because it gives you more control. That way the lender is not in charge of your destiny.
I’m a big believer in the Midwest because the numbers make sense from a profit standpoint and from a cash flow standpoint.
I’m a big believer in cash because you get to buy the best properties. You can quickly close with cash in seven days. That’s how you get the best deals.
Leverage is too risky. It’s an easy way out, and let’s face it, many of you guys are just being lazy. That’s why you want to use leverage. You want something for nothing and think it’s going to happen overnight.
Real estate does not work that way—period. The only time when you should leverage is when you are an experienced real estate investor.
If I don’t consider myself an experienced real estate investor despite 500 deals under my belt, I think that should speak volumes to you. I have started using leverage, because I think I know what I’m doing at this point. But I’ve definitely gotten burned using leverage in the past. I don’t want you to make the same mistakes that I have!
Take your time, be patient, work hard, save the capital. Then invest in your real estate journey. And remember, debt is bad.
How do you feel about debt? Have you used it? Did you regret it? What do you think about doing deals in all cash?
I’d love to hear from you in a comment below.