Can you avoid debt?

[Matt Carroll]

I’m currently in the Rehab process of my first Brrr and wondering how to avoid continuing to go into debt using the Brrrr strategy? Or is that just part of it?

I’m interested in a multi family unit and advancing other properties but feel hesitant because of taking on more debt. Any thoughts from BP folks would be great!

[Tim Herman]

@Matt Carroll there is good debt and bad debt(consumer debt.) The power of leverage,baby. Assume you find a property with a net operating income of 20k. Purchase price of 200k. Cap rate is 10%. using my trusty calculator and you put 20k down. Interest payments are 11.5k. So 8.5/20= 42.5% return on cash. So would you rather have 10% or 42.5% return on your money. Expanding this out you can buy 10 properties for the same amount of cash and generate 85k vs 20k per year. Like the Capital One commercial,"What's in your Wallet"

[Joe Villeneuve]

The debt of refinancing is a part of the BRRRR method.

The alternative, is the Stock Market

[Jim Pellerin]

@Matt Carroll Debt is your friend. Using other people's money (debt) is how you leverage. 

[Theresa Harris]

I agree with Tim.  While you do take on more debt from the mortgage, your tenants are paying all of those costs.

[Ola Dantis]

@Matt Carroll Debt is a good thing... Yes I said it. 

Now, we have to categorize debt and what it means for you and your business. 

Consumer debt you want to stay away from, in my opinion. Real Estate debt such as a mortgage is a great way to build wealth when leveraged properly. 

Don't be hesitant, be expectant of what debt can do for you! 

[Matt Carroll]

@Tim Herman any book suggestions on reading and learning about how to leverage debt?

[Tim Herman]

@Matt Carroll Find yourself a good rental calculator. If you can follow @Joe Villeneuve, his philosophy has changed my outlook. You have to look at how soon you can recoup your investment in a property, Until you get your money out you are not making a profit. The nice thing about BP is most people are willing to give there knowledge for free.

[Dennis M.]

Avoid debt and You’ll avoid getting wealthy  

[Account Closed]

Originally posted by @Matt Carroll:

I’m currently in the Rehab process of my first Brrr and wondering how to avoid continuing to go into debt using the Brrrr strategy? Or is that just part of it?

I’m interested in a multi family unit and advancing other properties but feel hesitant because of taking on more debt. Any thoughts from BP folks would be great!

Yes, you can avoid having debt in your name. I take over the mortgage of the houses I buy, (I do Not refinance nor do I assume nor do I change the loan into my name) then I either sell them to tenant buyers and get a $20k to $25k option fee if I lease option it, or if I fix & flip I get the profit. Sometimes I "quick cash" and sell to another investor without fixing it up, sometimes I fix it up and sell it Turnkey to another investor. None of those mortgages are in my name. (the title is in my name, but not the mortgages and no bank is involved, credit is never pulled and debt to income never questioned, appraisals not used.) HUH? How can these be? It's called "creative financing" and is happening in every city across the country every day. Sucks, it isn't even a new idea. I've been doing these for 25 years and others have been for longer than that.

[Heath M.]

I guess I'm a little more hesitant that what has been posted above.  Not disagreeing with the thought process but I prefer to have a good bit of equity available, a good cushion of cash and knowing I can ride out a storm if everything went vacant for a while (which would or at least should never happen).

But I do have debt, just not a ton of it.  I sleep better at night knowing my real estate hobby can not negatively impact me too bad if it went belly up.  It's just 1 of multiple investments I'm using to plan for retirement.  And I say hobby because I still work a full time job and don't plan to quit for another 15 years at least no matter how many rentals I add.  

As far as advice, I'd make sure the rest of your life is in order and you don't have a ton (any) of consumer debt, car loans or anything else crazy.  Get that cleaned up and put up some emergency cash somewhere.  Once you do that then decide on how much debt you are willing to bite off.  Maybe take the first one and move slowly to the next.  You'll get more comfortable but keep adding to reserves and make sure you and the wife are in agreement.  My wife is more conservative than I am so I keep an extra cushion than I normally would for her sake.

[Syed H.]

Impossible to grow without debt unless you have tons of cash.
Use leverage when you are growing your portfolio and then eventually you lower the amount of leverage you have to be conservative. 

[Ryan Landis]

@Matt Carroll not sure what part of the country you are in, but you can always go buy properties in cash and then just snowball the rents to get more properties as you accumulate up enough cash to go buy a new one. Most people are advocating for debt, just depends on what you are trying to do. It is totally acceptable to take on no debt and still get to the same place everyone else is trying to - for example, maybe your savings rate on your W2 crushes it compared to all of these "leverage" advocates ;)

[Amber Boskers]

@Matt Carroll

Hi Matt,

Yes, you can, but it doesn't have the same impact. Good debt enables your money to work for you.

Let's say you have a property that's free and clear, your primary residence perhaps, the equity in your property is basically parked until you go to sell it. It's just sitting there waiting for you to do something. Good debt like refinancing or getting a HELOC to buy more properties enables that equity to work towards increasing your portfolio. You can now take that money out and purchase (+ renovate) more properties with cash. You can sell the properties for a profit or buy and hold for awhile then refinance them to pull out more cash to continue the process and even pay back the debt on the primary. Your tenants pay down your debt while your money works for you to accumulate more properties. If you try to do it with no debt you can still grow your portfolio but it will be at a much slower rate. David Greene does a great job explaining this in his BRRRR book.

Your safety net comes from your established reserves for each property... many investors do 3 months (banks like that number), while others have whatever number works with their business plan.

Good debt becomes a machine that moves you forward toward personsl wealth faster than no debt.

[Amber Boskers]

@Amber Boskers

*personal

(Darn typo)

[Ryan Proffit]

@Matt Carroll I live in the type of town that I could buy a bunch of properties for cash and make good money. But I don’t want to deal with the headache these older houses and areas present. I would say, come up with a cashflow number, then achieve it with debt as safely as you can. Then, once it’s achieved, start paying them off one at a time. That’s one way you could get started, as well as not stay in debt.

[Frank Wong]

You can't avoid debt. Debt is needed to scale and grow.  You have to know what the proper amount is so you can scale without blowing things up.  Most people scale and grow too fast and that is when things get dicey. When you have been doing this for a while and when you start to get nervous about the amount of debt that is you telling yourself slow down you are over-leveraged. 

[Anthony Rosa]

Debt on Cashflowing properties is all good until repairs and vacancies and court cases come your way. Then, your not cashflowing for months or years and you will wish the home was paid off. Then, you dropped another 15K in repairs on a 100k home and will never be able to get money out of the sale.

[Steve Vaughan]

I don't think people discern the type of debt enough in these discussions.  Should I avoid (more) debt?  Well...

Hard money,  commercial, blanket,  seller-financed, private money etc debt is different than GSE-backed long-term mortgages and have significant risks and hassles. Are those types of debt good, at any time?  Less likely than a conventional mortgage.

Obviously, don't finance things that go down in value.  If you got a 0% interest car loan, you overpaid for the car.  ROFL  

I like to have at least a 30% equity position.  My overall position is about 50% but only because I purposely paid off my commercial and seller-financed loans in addition to any mortgage above 6.25% as easier opportunities dried up anyway. From 1998-2007 a good rate was 6.25--7.25% so I had a couple of those lingering around. 

Cash--out refinance is at the heart of the BRRR strategy, so tough to try and execute that strategy without additional debt. I just BRR and save organically if I want to buy again. The costs and hassles of a refi disrupt my nap schedule. I may refi a few if opportunities appear again or rates drop to my target of 15yr fixed at 4%.

[Michael Ealy]

Originally posted by @Dennis M.:

Avoid debt and You’ll avoid getting wealthy  

 Totally agree with Dennis.

In general...

Billionaires have higher level of debt than millionaires.

Millionaires have higher level of debt than the average American.

I probably have more debt than 99% of people here on BP but I make more money in a month than what 99% of people here on BP makes in a year.

Good debt (debt on investment real estate) makes your richer and richer.

As long as you have a lot of cash in the bank (operating, capex and personal) and you have 30% equity (or more), you will be fine even if you're a BILLION dollars in debt.

[Andrew Schmidt]

Debt is part of the game.

Depending on where you are in the business cycle, it makes more or less sense to use debt. If the markets going up get all the leverage you can get. If the markets dropping you go bankrupt. That happened to one of my friends brothers the last go around, multimillionaire to zero, killed himself.

Run the numbers all the ways an remove the downside.

[Bill Pate]

If the property has good cash flow on the back end(meaning when finished) then I have no problem using consumer debt to help get it to that point.  I recently bought a triplex, and with down payment and closing costs it took me close to my lower limit on free cash.  One of the units(the most desirable) needed about 5k in rehab to make it really nice and rent ready.  So I put $2500 for the materials on the credit card, and also ended up charging another 2k for inspections etc.  So total debt was $4500.  Sixty days later I have paid off $1500 of the credit card debt with money received in rent from the property.  And that's not using every penny of free cash flow from the property, I always put 10% into a capex fund for each unit each month.  One of the units needed a hot water heater immediately.  That was $800, but used my capex fund to pay for it.  So I have done this many times.  IMHO it just depends on how much debt and how fast you can pay it off with cash flow or sale funds.  If it was $25k vs $5k I would probably not do it.

[Luciana W.]

@Matt Carroll, I learned a lot with the “Buy, Rehab, Rent, Refinance, Repeat” book by David Green Is really good

[Adam Fiore]

@Matt Carroll

I much like yourself. Have a strong aversion to debt.

Can you make more money being leveraged ?

That’s what everyone says. Mortgage payments are front loaded. Clearly it effects cashflow.

Do they have cute acronyms that can make you sound like a genius, of course. The way I see it

Is if you can wait out a couple low ball value add offers and fine tune your project management skills

You can make the same amount of rent / cashflow if not more with less doors and less headaches.

Then owning 100% of 25 doors

Then owning 25% of 100 doors.

Will you have the same net-worth and appreciation no way, it’s impossible.

Can you build equity and credit and cash flow

While waiting for the right massive value add

Opportunity to come your way ? To then tap into your equity for right situation ?

God I hope so

[Matt Carroll]

@Adam Fiore thank you everyone! Greatly appreciated! Making quite a bit of sense.

[Matt Carroll]

@Bill Pate hi Bill thank you for your response? What did you use the $5k for to get it looking nice?