I once met a real estate investor who said the trick to successful real estate investing is to keep as little cash in the property as possible; you don't pay a loan off as quickly as you can, rather, you keep it lean so that you are always cash flush and are able to then purchase more properties. He argued that the small profits over many properties add up a lot faster, and that money trapped in properties is useless. Obviously there is a danger in that way of thinking, as we saw in the 2008 real estate crash- people who were over leveraged lost everything. I'm a small potatoes investor but am curious to hear from folks who have larger real estate portfolios- what is your comfort level for keeping cash in your real estate investment? Is cash flow king, or is it all about buy and hold, letting time do all the work?
If you truly understand the difference between the two, you would agree with the REI you started off mentioning.
I've decided on a more hybrid strategy.
I calculated what my monthly living costs were and multiplied that by two. That is my base income that I need each month to maintain the lifestyle I currently have. I have paid cash for enough properties to achieve my base cash flow requirement.
Everything beyond that I am going to leverage as much as possible. If things ever go similar to 2008, I have each property setup as a separate entity, so worse case is I let the leveraged properties go and keep my wholly owned properties to ride things out. This certainly isn't the most aggressive approach, but I sleep well at night.
Hey, thanks for the replies. Joe, you're right- I guess I answered my own question there! I'm really trying to understand how other folks do it, where the line is between growing and protecting your assets. Some of the forums suggest strategies that I frankly don't understand (yet).
Christopher, interesting strategy. I noticed you have 8 rental properties and then you invest in flipping properties as well. Sounds like the capital in one venture helps pay for the second(?)
More or less - Flips are great for building capital (this is how I've built the bulk of my wealth) but aren't reliable for steady income. Since leaving my full time job in 2014, I've found that I don't like having negative cash flow in my bank account every month, so I decided to get back into the Landlording game to cover living expenses. I've found it is an excellent place to park the cash from flips to keep my personal wealth growing.
The "people who were over leveraged lost everything" in 2008 were speculators that were hoping to flip their properties as market values rose. They usually had ARM loans that ballooned so they couldn't afford the payment anymore. It doesn't really matter much if you are underwater on your loan if you are a buy & hold investor and your rents cover the mortgage and other costs. It will eventually work itself out in the long run, but this generally has more to do with "buying right" and making good decisions than extracting equity per se.
Another possible reason to take equity out of a property is as a legal deterrent. If you are sued, the first thing they are likely to look at are your properties with a high amount of equity. If you are leveraged, these will not be of much use to them.
Much appreciated for the thoughtful responses. In regards to your comments, Chad, it does seem like a lot of folks in 2008 had ARMs. On a related note I renovated to flip a house after purchasing it right before the housing crisis, and used a no-interest loan to do so. That taught me! I had many sleepless nights back then. The legal issue you mentioned is indeed a great point. It's one step further than creating an LLC to isolate the liability per property.
Christopher, seems like you found that happy place where you are covered for growth and protection. Thanks for sharing your sweet spot. Just to add a follow up, do folks keep those loans lean by refinancing them? Or by taking out a second mortgage? Or... ? Thx.