Starting out: Buy One a year or Pay One off?

Question

I am 21 and would like to start building wealth with passive income. My cousin and I are going to partner to start building a real estate empire. I personally would like to continue buying properties to rent out every year but he feels that is risky and will lead to unpayable debt. He would rather pay a property off first before buying another. Can I receive some opinions on the options and what I should tell him to convince to build wealth faster.

Account Closed · Answer

@Brice Poole

Come up with a operating agreement that includes entrance and exit strategies for each property you purchase.  You two seem to have different risk profiles.

Brice Poole · Answer

Thank you to everyone for the help. I do believe we have different risk profiles but I also believe he can see my side as well as all of your opinions on the benefit of not being too conservative.

Joe Villeneuve · Answer

Buy more than one a year, and let the Tenants pay off your mortgage.  That's THEIR job.

Thomas S. · Answer

My advice would be don't partner with your cousin. You are on opposite ends of the investment spectrum and will likely never agree. This will lead to a unstable relationship. It is, as Justin points out, risk tolerance and you will never come together on that topic. It will interfere with your investment future. Find a new partner...people never change.

Using leverage is the wise approach to building real estate investments and is the normal method. You make the required minimum DP and mortgage the rest. Your tenants then pay off the property over 30 years. A leveraged income property, done properly, will always be considered good debt. Paying off properties is the extreme in conservative investing and will impede your growth.

Using leverage wisely is smart investing where as paying off income properties is tantamount to  hoarding of useless cash. It is where cash goes to die, where the maximum return it earns is the prevailing interest rate.

Leverage to grow, pay off when you have so much income you have no use for it, your mattress is full and the only place left to put it is in real estate. Keeping in mind it would be wiser to be diversified than all in with real estate.

Justin Windham · Answer

@Brice Poole

I think this is mostly about risk tolerance and it's helpful if you and your partner see eye-to-eye about this. Sure, it's safer to pay off the first home before acquiring another. It's also relatively slow to do it this way. Perhaps you can agree to a certain loan-to-value ratio that will limit the risk of being over-leveraged and still allow you to acquire more homes than waiting for payoff would. Welcome to BP! I hope you're taking advantage of all the guidance offered here on getting started.