Is debt free the way to be?

Question

Hello, my question is about being debt free. As I have been getting my personal finances in order by being debt free and having a savings. I was wondering should I do the same with my investment properties? And does any do this now? What are the pro's & con's?

As always thanks in advance, all help is really appreciated.

Sylvia B. · Answer

"My tenants are paying my mortgage."

HOGWASH!

That rent money travels from the tenant to your pocket to the lender. If you don't have a mortgage it stays in your pocket.

Use debt when you need to, but don't fool yourself. You are paying for it.

Justin Green · Answer

In our personal lives we are debt free and it is an amazing feeling. In our real estate business we do have debt. This debt is smart debt. Someone else is making the payments and we are benefiting from debt pay down, tax savings, and market appreciation. I dont feel comfortable highly leveraged and strongly believe in a large emergency fund to carry everything yourself for 6 months if needed. It is all based on your comfort level. The greater the risk the greater potential reward or......

Sylvia B. · Answer

We own 8 rental homes, our own home, and our business property completely debt-free.

Pros: WE are the ones who own our properties, not the bank.Buying properties is simple. No loan apps, no points, no delays. Lower closing costs.How much casualty insurance to buy is our decision, not a lender's.The risk of losing the property is practically nil.

Cons: All risks associated with the property are ours alone since it is our money invested.Purchases are limited by the amount of cash we have to invest.

We are not opposed to using a lender if needed, but we prefer not to. We have excellent credit, so if and when we need financing, we will be able to get it, but have never liked paying for something we don't need.

Whether you should choose the same route depends entirely on your situation. It works for us, but might not for you.

Joe Moore · Answer

I was debt free for 4 years and loved it.  I bought another property last year and brought the debt free period to an end.  Truly to really grow, debt become necessary at some point.  I just refuse to put myself on a limb to grow.  I just make sure I have sufficient  reserves and cash flow that can carry the debt easily.

Neil Schoepp · Answer

Hey @Lawrence Cox III thought you might be interested in this post.

To leverage or not to leverage

Neil Schoepp · Answer

I can't say much more then @Kimberly T. Said. She gave a very nice basic example. Given the choice of leverage or tying all my money up in one property I will choose leverage every time. Leverage is one of the things that makes real estate such a great thing. I can buy a 200k property for 10k. Stocks, bonds, CDs anything else and I have to pay the full 200k.

Kimberly T. · Answer

I can work really hard at my job to save up $200,000 to pay cash for a property, or I can work just hard enough to save up $50,000 to put 25% down and then let the rent cover the rest of the loan payments (and give me a better ROI, per my example above).  Obviously not everyone wants that kind of risk/exposure, but I chose the second option.

Michaela G. · Answer

A lot of that depends on your definition of what's enough.

Pros: With mortgages you can accumulate more properties. You have leverage and grow.

Cons: you likely have more stress, if the market goes down. More paperwork. Higher management cost (because you pay their percentage on the whole amount, including mortgage, not just your positive cashflow)

Personally, all my properties are debt free. Not so much by choice, because I can't get mortgages in my situation. But there have been many times where I've sort of juggled my financials and was glad that I didn't have mortgages to deal with.

Daniel Humphries · Answer

Here is another way of looking at it, my version.

If you buy a property for $100k cash your investment is $100,000. You rent it for $1,000/mo your annual return on investment which #1 doesn't start until your investment is paid back (in my opinion, which would take 8.33 years if it stayed rented and you had nothing break) #2 would be 12% again if it stayed rented and nothing broke.

If you buy the same property for $100,000 with 20% down your true investment is only $20,000. Now you will have a mortgage payment roughly 60% of rent BUT you have $80,000 to invest in other properties.

This is just a rough draft obviously but hopefully you can see where I am coming from.

Debt doesn't personally bother me.

Hope this helps.

Is debt free the way to be?

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