Need some debt words of encouragement
Investor · IL · Member since 2023 · 12 posts · 8 votes
Need some debt words of encouragement
Most Popular Reply
Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes
2yI think there should be two different words. Debt means you take out a loan and go on a cruise. The value is gone. There is no asset. You still have to pay it back. Find another word. I don't care what it is. This other word means you take out a loan. You buy an asset with that money that is worth more than the loan. Try to start looking at the situation more like an accountant or bookkeeper would look at. You have assets and you have liabilities. Make sure your assets grow faster than your liabilities and make sure your assets throw off enough cash to easily pay down the loan. This is why the spreadsheets that analyze real estate investments include lines for vacancy, all expenses, taxes, capital expenditures, etc. so that you can be very certain that the asset can pay the loan payment each month and you don't lose sleep. I've read many books on real estate investing and every one explains the advantages and the risk management of buying using mortgages. To the best of my knowledge not a single book has been written explaining the advantages of real estate investing without loans. For me personally, if you want to invest without borrowing, the best address to invest on is Wall Street.
21 Replies
- 2yMichelle CrochetBusiness MemberRealtor · Burbank, CA · Member since 2019 · 81 posts · 62 votes
Hi Keith! Starting out in real estate is exciting but it's totally normal to feel a bit apprehensive about taking on debt. Here are some things I usually tell people:
Leverage can be your friend- Debt can actually help you grow your portfolio faster and boost your returns in the long run. Focus on cash flow: Make sure the rental income from your properties covers all your expenses, including mortgage payments. Positive cash flow is key!! Diversify your investments: Don't put all your eggs in one basket. Spread your investments across different property types and locations to reduce risk. Think long-term: Real estate investing is like a marathon, not a sprint. Take a step back and focus on building a solid, sustainable business over time.
It's totally okay to feel a bit nervous, but with some smart planning and informed decisions, you can definitely make your real estate dreams come true :) Good luck, Keith!
Quote from @Keith Sehi:
My wife and I are very serious about starting our rei business. We don't currently have a property although we have narrowed down the market and have been looking at a lot just haven't found the right deal. Only thing concerning me is as we scale larger in the years to come the large amount of debt we will incur. I understand tenants will be paying it down but being totally debt free for 2 years now it just concerns me getting into a large amount of debt. Just thinking if we focus on $100k homes and over the next 5 years buying 2 a year we could be at a million in debt. Just needing some different ways of thinking about this to put my mind at ease. Thank!
If debt is a huge concern, don't do leverage. Everyone is different, if this is pass your comfort zone then that is perfectly fine. Rather then trying to talk you into it, I'll sit on the same side as you. I would not recommend getting into debt for real estate, if debt concerns you. There are plenty of other ways to invest without taking on leverage-- exercise those.
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
If leverage scares you, don't invest in RE. If you buy without using debt, then you are paying full price for the property and you maximized your risk, because you will have put everything at risk
- Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes2y
I think there should be two different words. Debt means you take out a loan and go on a cruise. The value is gone. There is no asset. You still have to pay it back. Find another word. I don't care what it is. This other word means you take out a loan. You buy an asset with that money that is worth more than the loan. Try to start looking at the situation more like an accountant or bookkeeper would look at. You have assets and you have liabilities. Make sure your assets grow faster than your liabilities and make sure your assets throw off enough cash to easily pay down the loan. This is why the spreadsheets that analyze real estate investments include lines for vacancy, all expenses, taxes, capital expenditures, etc. so that you can be very certain that the asset can pay the loan payment each month and you don't lose sleep. I've read many books on real estate investing and every one explains the advantages and the risk management of buying using mortgages. To the best of my knowledge not a single book has been written explaining the advantages of real estate investing without loans. For me personally, if you want to invest without borrowing, the best address to invest on is Wall Street.
- Real Estate Agent · Skagit Valley, WA · Member since 2021 · 257 posts · 283 votes2y
Fear of being in debt and taking on risk in general....can be greatly mitigated, if not completed eradicated, by having clear exit strategies planned in advance. Being "a million dollars in debt" is rarely a deep concern to an investor who knows that her assets are worth 2 million dollars.
Another way of getting rid of your concern over debt.....is to do correct math. (Math is a tricky and glorious thing). If you have purchased 10 $100,000 homes over the past 10 years, and at the end of that time you still owe a million dollars on them.... you have other areas of REI that you should be focusing on. My point is that correct analysis and correct math will go a long way Keith in helping you and your wife move forward.
@Carini Rochester is correct. A million dollars of debt for buying stuff you didn't need.....versus a million dollar loan for a cash producing asset are not the same thing. Once you clearly understand that difference you'll have understood what leverage means.
- Realtor · Columbus Ohio, Cleveland Ohio · Member since 2022 · 849 posts · 830 votes2y
As others have already stated, you should consider debt as a tool to amplify returns, ensure positive cash flow from tenants and remember that while you incur debt, you're building equity. Start small, focus on strong rentals, opt for conservative financing, and maintain a financial buffer for unexpected expenses. Do thorough research in the market you're investing in and confidently leverage debt to build a successful real estate investment business.
- 2yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
Cash is trash! I owe 2.5 million on my properties. I’ve scaled up by leveraging my way to wealth. Monthly profits are 17k after all my expenses thanks to debt. I don’t have any of my own $ into RE. I’ve paid myself back and scaled up by using debt. So it’s all infinite cash flow from here on out. Dave Ramsey says pay cash for rentals. I disagree because I didn’t have much money when I started. Only had 25k to my name and was making only 40k/year. Leverage your way to legacy wealth by using OPM. Then “Refi til you die!” lol
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesCorrect. Your only cost is the cash you put in,...as long as you have positive CF. If you have negative CF, then the negative cash flow is more cash you are putting in, and more cost to the REI.
Quote from @John Morgan:
Cash is trash! I owe 2.5 million on my properties. I’ve scaled up by leveraging my way to wealth. Monthly profits are 17k after all my expenses thanks to debt. I don’t have any of my own $ into RE. I’ve paid myself back and scaled up by using debt. So it’s all infinite cash flow from here on out. Dave Ramsey says pay cash for rentals. I disagree because I didn’t have much money when I started. Only had 25k to my name and was making only 40k/year. Leverage your way to legacy wealth by using OPM. Then “Refi til you die!” lol
- Investor · Arizona & Oregon Coast · Member since 2023 · 128 posts · 113 votes2y
There is no reason to try and find a different way of thinking about it to put your mind at ease. Instead change your ideas of how to invest. I am an outlier on these forums as we have very little debt on our properties. What you can do is put a larger amount of cash down. This will allow you to get a higher amount of cash flow. High leverage will allow you to make more money as the properties go up in value, but you also put yourself at higher risk if there are problems. If we were to go into a big recession and you have tenants that are not paying and you can't get them out in a timely manner (think California), or if you all of a sudden have multiple houses that need new roofs or new ac units that can be a huge hit and if you can't pay for them you can be in a big problem. Having large cash reserves can also help alleviate the risks.
Most of the BRRR people tend to have a lot of properties but they only make a little bit on each property because they are highly leveraged. The theory is the increase in value on all properties plus the rents go up each year so that profit margin gets bigger each year. I have very little debt so I make a much larger amount on each property. Granted I have fewer properties so I do not get as much appreciation gain as they do since they will have more properties to appreciate. However fewer properties is less work to manage and I have significantly less risk. It sounds like you worked hard to get completely out of debt and taking on new debt is bothering you which is why I am giving you a middle ground option of keeping the debt amount lower to minimize your risk. I am guessing that if you look at the numbers of what it would be like getting the debt on the properties down to only 50% as quickly as possible that you will find it not as troubling. Figure out what you really want to achieve (how much cash you want to get monthly) and how many paid for properties you would need to achieve that. Once you get to that number of properties (assuming your goals have not shifted by then) then start aggressively paying down those loans to even further lower your risk.
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
question
you said "starting a business"
so what will your business do
100K houses? vanilla LTR? buy and hold?
- 2yAlecia LovelessPro MemberMember since 2019 · 3k+ posts · 2k+ votes
@Keith Sehi I’ve been investing in real estate this go round for four years. I’ve got about $800,000 leveraged with debt and equity of right at $3M.
My cash flow is enough that I’ve just quit my 9-5 and it’s enough to sustain me and pay my contractor each month.
I’m about to take out a cash out refi for a little bit so I can buy when I find the next great deal.
Maybe start with one deal if you’re scared of debt and see how you feel about it once you’ve had time to live with it a little and cash flow some. You can always sell if you still feel sick about it.
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesEverything you said is the exact opposite of what is true.
Quote from @Brian Kloft:
There is no reason to try and find a different way of thinking about it to put your mind at ease. Instead change your ideas of how to invest. I am an outlier on these forums as we have very little debt on our properties. What you can do is put a larger amount of cash down. This will allow you to get a higher amount of cash flow. High leverage will allow you to make more money as the properties go up in value, but you also put yourself at higher risk if there are problems. If we were to go into a big recession and you have tenants that are not paying and you can't get them out in a timely manner (think California), or if you all of a sudden have multiple houses that need new roofs or new ac units that can be a huge hit and if you can't pay for them you can be in a big problem. Having large cash reserves can also help alleviate the risks.
Most of the BRRR people tend to have a lot of properties but they only make a little bit on each property because they are highly leveraged. The theory is the increase in value on all properties plus the rents go up each year so that profit margin gets bigger each year. I have very little debt so I make a much larger amount on each property. Granted I have fewer properties so I do not get as much appreciation gain as they do since they will have more properties to appreciate. However fewer properties is less work to manage and I have significantly less risk. It sounds like you worked hard to get completely out of debt and taking on new debt is bothering you which is why I am giving you a middle ground option of keeping the debt amount lower to minimize your risk. I am guessing that if you look at the numbers of what it would be like getting the debt on the properties down to only 50% as quickly as possible that you will find it not as troubling. Figure out what you really want to achieve (how much cash you want to get monthly) and how many paid for properties you would need to achieve that. Once you get to that number of properties (assuming your goals have not shifted by then) then start aggressively paying down those loans to even further lower your risk.
The more cash you put into a deal, like a higher DP, the more you are paying for that property. This is true as long as you have negative CF. If you have negative CF, you are adding cash (cost) every month with the negative CF you have to come up with out of pocket.
The more equity you have, the less your property is worth to you, and the more risk you have, not less risk. You have to first realize what you have at risk...it's your equity.
If you have a property worth $100k, and you put only $20k into it as your DP, your cost is $20k, but that $20k is worth $100k in PV. If you have no debt, as in 100% equity, that means you have $100k in cash (cost to you) into the property, and the $100k is only worth $100k. Remember, bot property values are $100k, so they both increase in value from appreciation the same way. The difference is, an all cash deal is only worth $100k in PV, whereas that same $100k used as a 20% DP, would be worth $500k in PV. If both go up the same percentage of appreciation, the $500k in PF increases 5 times as fast, and exponentially increases faster as you move forward. Both options are investing the same $100k, so both options have the same cost,...and the same amount of dollars at risk. - Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes2y
In Gary Keller's book The Millionaire Real Estate Investor (which is definitely worth reading), he gives short bios to a bunch of different investors with different strategies. One couple would buy a house with debt and then put all of their profits into paying down that debt as fast as possible. Then when they paid off the loan, they would buy another one.
This strategy isn't for most as it's very conservative, but if you really want to stay out of (or low on) debt, it may be the strategy you and your wife should pursue.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Keith Sehi:
My wife and I are very serious about starting our rei business. We don't currently have a property although we have narrowed down the market and have been looking at a lot just haven't found the right deal. Only thing concerning me is as we scale larger in the years to come the large amount of debt we will incur. I understand tenants will be paying it down but being totally debt free for 2 years now it just concerns me getting into a large amount of debt. Just thinking if we focus on $100k homes and over the next 5 years buying 2 a year we could be at a million in debt. Just needing some different ways of thinking about this to put my mind at ease. Thank!
Leverage is not always bad. It depends on you and what you want to take on. I was at a conference this past week where someone had $2M in real estate and no debt. They wanted to scale but were afraid to take on debt. We told them even $1M in debt could go a long way and get you another $2M property. They did not want to do it. Where people get in trouble is they get over leveraged and also do not keep enough cash reserves.
7e investments53 Reviews - Investor · Arizona & Oregon Coast · Member since 2023 · 128 posts · 113 votes2y
Quote from @Joe Villeneuve:
Everything you said is the exact opposite of what is true.Quote from @Brian Kloft:
There is no reason to try and find a different way of thinking about it to put your mind at ease. Instead change your ideas of how to invest. I am an outlier on these forums as we have very little debt on our properties. What you can do is put a larger amount of cash down. This will allow you to get a higher amount of cash flow. High leverage will allow you to make more money as the properties go up in value, but you also put yourself at higher risk if there are problems. If we were to go into a big recession and you have tenants that are not paying and you can't get them out in a timely manner (think California), or if you all of a sudden have multiple houses that need new roofs or new ac units that can be a huge hit and if you can't pay for them you can be in a big problem. Having large cash reserves can also help alleviate the risks.
Most of the BRRR people tend to have a lot of properties but they only make a little bit on each property because they are highly leveraged. The theory is the increase in value on all properties plus the rents go up each year so that profit margin gets bigger each year. I have very little debt so I make a much larger amount on each property. Granted I have fewer properties so I do not get as much appreciation gain as they do since they will have more properties to appreciate. However fewer properties is less work to manage and I have significantly less risk. It sounds like you worked hard to get completely out of debt and taking on new debt is bothering you which is why I am giving you a middle ground option of keeping the debt amount lower to minimize your risk. I am guessing that if you look at the numbers of what it would be like getting the debt on the properties down to only 50% as quickly as possible that you will find it not as troubling. Figure out what you really want to achieve (how much cash you want to get monthly) and how many paid for properties you would need to achieve that. Once you get to that number of properties (assuming your goals have not shifted by then) then start aggressively paying down those loans to even further lower your risk.
The more cash you put into a deal, like a higher DP, the more you are paying for that property. This is true as long as you have negative CF. If you have negative CF, you are adding cash (cost) every month with the negative CF you have to come up with out of pocket.
The more equity you have, the less your property is worth to you, and the more risk you have, not less risk. You have to first realize what you have at risk...it's your equity.
If you have a property worth $100k, and you put only $20k into it as your DP, your cost is $20k, but that $20k is worth $100k in PV. If you have no debt, as in 100% equity, that means you have $100k in cash (cost to you) into the property, and the $100k is only worth $100k. Remember, bot property values are $100k, so they both increase in value from appreciation the same way. The difference is, an all cash deal is only worth $100k in PV, whereas that same $100k used as a 20% DP, would be worth $500k in PV. If both go up the same percentage of appreciation, the $500k in PF increases 5 times as fast, and exponentially increases faster as you move forward. Both options are investing the same $100k, so both options have the same cost,...and the same amount of dollars at risk.You definition of risk and mine are drastically different. With low leverage if the economy goes really bad and 25% of my tenants are having trouble paying rent I have zero concern about being able to pay my loans. Most people that only have 20% down would not be able to make their loan payments in the same situation.
- Investor · Richmond, VA · Member since 2023 · 459 posts · 474 votes2y
I suggest that you rethink you attitude toward debt. There is good debt and there is bad debt Debt secured by hard assets with someone else paying it down is good debt.
Consider how debt affects your return. Assuming a 75% loan to value ratio, your cash out of pocket will return 4x as much as it would if you paid all cash (0% LTV).
Debt in real estate is arguably the single most powerful tool in generating wealth.
- 2yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Keith Sehi
I was a Dave Ramsey guy and almost debt free. I even paid off my first two rental properties because I thought that's what you were supposed to do. Dumbest thing I've ever done financially. I was an idiot and didn't understand the power of leverage and how wealthy you can get with good debt. Since then, I pulled the equity out of my two paid off rentals and scaled up with the $. I went from only $1500/month profit off my two paid off rentals to 17k/month now with 25 SFR. I slowly bought 2 SFR each year with the equity I had in the two houses and cashflow to get 20% down on new cash flowing rentals. It felt like I was buying houses for free not using any of my savings to scale up and acquire more and more houses. I got creative by using (five) 401k and (several) 0% interest for a year credit card loans to buy more and more houses. I paid off all my loans with the rental cashflow. And I've paid myself back every penny I've put into real estate since I started almost 9 years ago. So it's all infinite cash flow from here on out. I'm ok having 2.5 million in good debt now. My tenants are paying it all off for me plus paying me a lot of monthly passive $ while I nap and enjoy life. Learn about the power of leverage and how you can build generational wealth off RE in just 5-10 years without using much of your own money. I started investing in RE with 25k of my own money and paid myself back that $. And I was only making 40k/year at the time so I wasn't loaded. lol. . I would at least explore using other peoples money (OPM) to get wealthy vs having zero debt. Wealthy people leverage with good debt. Learn from them, not broke people who paid off their bad debt and are debt free having to work a W2 until they're 60 years old and hope they have enough $ in their 401k to live til 90.
- Rental Property Investor · Elmira NY · Member since 2023 · 143 posts · 143 votes2y
I like to keep it simple, there is two types of debt. Good debt and bad debt. Up to you on what you classify as either but for me, debt that covers itself + makes you money is good debt to me.
Keep In mind that you can decide how much debt to have. For example if you get a good deal you could buy it with large amount of equity. That way your debt is still covered even if the market turns down a bit.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes2y
Play it by ear and cross that when you get there. Get 1 rental first.
So many worry about what never happens. Take getting over-leveraged on $100k houses for instance. Try to get a loan on 1. Too small to be a thing.
Quote from @Jamie O'Connell:
I like to keep it simple, there is two types of debt. Good debt and bad debt. Up to you on what you classify as either but for me, debt that covers itself + makes you money is good debt to me.
Keep In mind that you can decide how much debt to have. For example if you get a good deal you could buy it with large amount of equity. That way your debt is still covered even if the market turns down a bit.
That's actually why you don't put too much down. If the market downturns, all that cash you paid for equity is upside down. By leveraging more, it's the bank that's upside down not you.
Regardless, good debt or bad debt is the same in regards to how you have to pay it. You owe someone else. Yes, one is an asset the other a liability I get all that. But to view as a whole as good and bad, I would refrain from that. I would try to view it as something by a certain time you understand how to deleverage yourself.
I'd look at other avenues if you're debt averse. You're likely going to have a much higher floor for your money, but likely a lower ceiling. You'll forever not be stressed though with it, and that alone is worth the weight that floor: ceiling differential. At least to 99% of folks in Merica, and honestly should be to 95% of the folks on this forum. They just get too cute and swim as minnows in a pool with sharks and whales. I stick to my aforementioned advice in this thread.- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesDebt on a rental and debt on a personal home is different. When you can't afford the debt on your personal home, you risk losing your home. When you can't make the payments on a rental, you run the risk of losing the equity in that property.
Quote from @Brian Kloft:
Quote from @Joe Villeneuve:
Everything you said is the exact opposite of what is true.Quote from @Brian Kloft:
There is no reason to try and find a different way of thinking about it to put your mind at ease. Instead change your ideas of how to invest. I am an outlier on these forums as we have very little debt on our properties. What you can do is put a larger amount of cash down. This will allow you to get a higher amount of cash flow. High leverage will allow you to make more money as the properties go up in value, but you also put yourself at higher risk if there are problems. If we were to go into a big recession and you have tenants that are not paying and you can't get them out in a timely manner (think California), or if you all of a sudden have multiple houses that need new roofs or new ac units that can be a huge hit and if you can't pay for them you can be in a big problem. Having large cash reserves can also help alleviate the risks.
Most of the BRRR people tend to have a lot of properties but they only make a little bit on each property because they are highly leveraged. The theory is the increase in value on all properties plus the rents go up each year so that profit margin gets bigger each year. I have very little debt so I make a much larger amount on each property. Granted I have fewer properties so I do not get as much appreciation gain as they do since they will have more properties to appreciate. However fewer properties is less work to manage and I have significantly less risk. It sounds like you worked hard to get completely out of debt and taking on new debt is bothering you which is why I am giving you a middle ground option of keeping the debt amount lower to minimize your risk. I am guessing that if you look at the numbers of what it would be like getting the debt on the properties down to only 50% as quickly as possible that you will find it not as troubling. Figure out what you really want to achieve (how much cash you want to get monthly) and how many paid for properties you would need to achieve that. Once you get to that number of properties (assuming your goals have not shifted by then) then start aggressively paying down those loans to even further lower your risk.
The more cash you put into a deal, like a higher DP, the more you are paying for that property. This is true as long as you have negative CF. If you have negative CF, you are adding cash (cost) every month with the negative CF you have to come up with out of pocket.
The more equity you have, the less your property is worth to you, and the more risk you have, not less risk. You have to first realize what you have at risk...it's your equity.
If you have a property worth $100k, and you put only $20k into it as your DP, your cost is $20k, but that $20k is worth $100k in PV. If you have no debt, as in 100% equity, that means you have $100k in cash (cost to you) into the property, and the $100k is only worth $100k. Remember, bot property values are $100k, so they both increase in value from appreciation the same way. The difference is, an all cash deal is only worth $100k in PV, whereas that same $100k used as a 20% DP, would be worth $500k in PV. If both go up the same percentage of appreciation, the $500k in PF increases 5 times as fast, and exponentially increases faster as you move forward. Both options are investing the same $100k, so both options have the same cost,...and the same amount of dollars at risk.You definition of risk and mine are drastically different. With low leverage if the economy goes really bad and 25% of my tenants are having trouble paying rent I have zero concern about being able to pay my loans. Most people that only have 20% down would not be able to make their loan payments in the same situation.
There are three parts to risk:
1 - What is at risk. This is always the same thing. It's the cash that's in the property...the equity.
2 - Who is at risk. This is also always the same. It's the person that put the cash into the property. When you have a loan on a property, that cash is the bank's money. When you have no loan. the cash is all yours.
3 - Who is the risk. This is always the person (or entity) that is responsible for returning the cash to the person who is at risk. In a rental property, this is the cash that was put into it. If you have 20% DP, that means the DP returned to the REI, and the loan money returned to the lender.
There's a reason why you can't get a loan for 100%. The bank recognizes that the REI (borrower) has no risk in property. The bigger the DP, the smaller the loan, and the bank sees the REI taking more of the risk, to the terms of the loan are better.
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