Buying property-All Cash
Member since 2021 · 38 posts · 20 votes
Buying property-All Cash
Most Popular Reply
Melanie P.Pro Member
Rental Property Investor · Member since 2023 · 1k+ posts · 922 votesFor most people starting out all-cash is not an option. Another way of looking at this is how much appreciation did you give up while saving to do the transaction all-cash. In economics this is called an "opportunity cost."
116 Replies
- 2yManny VasquezBusiness MemberReal Estate Agent · Orange County · Member since 2022 · 318 posts · 293 votes
Buying properties "all cash" is very secure, yes. Is it the most reliable form of investing? Not necessarily and It all depends on who you ask. Some people are happy just owning 1 or 2 properties that were paid all cash. However, it is very difficult to scale by purchasing all of your investments "all cash". Yes, there are people who have bought multiple properties "all cash", but these people are the EXCEPTION and NOT the NORM. Other people want to own several properties and they want to do it fast, so they put the required minimum down and they leverage the rest so that they can scale much, much faster than paying cash.
Is paying All Cash the smartest thing to do? Again, this all depends on:
1. WHO you ask (current financial situation at time of purchase)
2. The economic atmosphere at the time (think and compare the following years 2004-2006, 2008-2010, 2019, 2021, 2024)
3. The existing interest rates at the time
4. Price of the property
A quick example would be: Would it have been wise to purchase a property "All Cash" when interest rates were down in the mid-2%'s a few years back???? Personally, I think this would have been a foolish decision to make since borrowing money at that time is essentially free (very, very low cost). This would have been a good time to borrow (leverage) as much as you can because interest rates were very low. Fast forward and compare today's much higher interest rates, it would probably make more sense to purchase "All Cash" now because interest rates are in the 7%-8% range.
- 2yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
Quote from @K S.:
Quote from @Scott Trench:
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
You disagreed with my statement "cashflow is useless until retirement" statement because you can use it for unemployment or other investment opportunities.
So if you become unemployed and your minscual $1000 isn't cutting it, that's because you took 250k and locked it up. Had you not locked up the 250k, you would not need cashflow to get you by in this situation. To say that it's a good move to lock up 250k so you can have $1,000/month in an emergency, is rediculous because had you not locked up 250k in a house which is illiquid and could take months to sell and incur fees on, then you would have 250k for emergencies lol.
I'll help you with a quick example using my own condo. I dropped 250k on a condo with a 7.5% cap rate. That earned me 19k last year. Yes, I have gap funds for a situation that may never happen like when people spend their whole life practicing karate and end up never getting into a real fight or more on point, losing that fight because of your Karate because it gave you a false sense of security when walking away was the better choice.
For example, if something happened and I needed the $1,500/month that my unit earns, well, I have to live off of $1,500/month which may not be enough. However, had I a more liquid investment like a divident fund or S&P 500, I could not only pull out some in dividens, but I could pull out 250k in principal as well very easily and quickly. More quickly than the hassle of selling my property and then incurring enormous fees like recaputre, renovations, agent fees, federal and state taxes.
The money is there in either a cash investment or index fund/stock market. But one is liquid and the other is not. So assuming $1,500 is enough for this gap, emergency or other investment opportunity, then any investment that earns that much would be the same or better due to liquidity.
But wait, what about 5 propertys at 19k each? That's near 100k and you're out of the rat race right?
Not really, because I could not purchase all 5 at the same time. Saving cash for years is an opportunity cost. Not to mention, you forgot that even if you could purchase all 5 units right now and cashflow 100k/year, that's still less than putting that same amount in the S&P500 for instance or even a dividend fund that might pay you that much as well if you prefer monthly checks.
The S&P/401k is consistent for everybody and you won't get sued which can take all the cash in your house because you paid cash.
So even if you had $1M in cash to purchase 5 condos and retire with 100k/year. Well that's still less than the 120k/year index fund. You would still have less overall growth over time and real estate is less liquid for when you need to pull the principal for emergencies or otherh opportunities. Your train of thought is a poor way of thinking. Allowing the "idea" of rental cash to cloud your judgement when the simple math is staring at you, will keep you poor. But I agree with you, if you can diversify and do both, then do both, but I'd put more eggs in the stock market basket if I had to do it over again. I do like the cash, but it's an illusion.My advice to anyone is to have a house you live in and pay it off if your interest rate is higher than inflation or other investments or you're retiring. Then purchase a vacation condo/cabin for trips and quality of life. Invest the rest in the market.
Good debate! Some counterpoints:
- The $250K in real estate is not "locked up" and can be accessed via HELOC or sale. Real estate can be volatile, but usually not as volatile as stocks. It's unlikely that it will see a 50% price reduction in our lifetimes. The stock market will do that at least 2-3 times per century. So it's liquid, but in the example you used, the time when you most need that liquidity is likely to be the same time the entire market is crashing around your ears. A paid off property is pretty good insurance against that job loss. And if one has a paid off property in advance of that job loss they also have probably generated a solid cash position as well.
- I don’t think unlevered real estate is a great way to build long term wealth. I agree with you on that point. But it’s CAN be a great way to PRESERVE wealth long-term. That is why so many of the very successful real estate investors here have completely paid off portfolios.
It’s not always offense all the time for me. Sometimes it’s defense too. The thread is about unlevered real estate. And that should be a primary consideration from my standpoint.Really respect your points here and just trying to debate and share my views as well.
- Member since 2021 · 38 posts · 20 votes2y
I also want to add that by using leverage, that makes the property become debt. If you own the property out right (buying with all cash), then you own an asset. I do not think real estate debt is a bad thing.
- Member since 2021 · 38 posts · 20 votes2y
I like the buy & hold strategy for real estate and stocks.
- 2yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
We all know leverage magnifies returns especially in appreciating markets. It comes with a risk especially if over leveraged. In my market, virtually the only ones to lose money on RE are those that were forced to sell. Over leverage is a primary cause of being forced to sell (I suspect over the long term the number 1 reason people are forced to sell). At 80% LTV, the return from appreciation is 5x the actual appreciation. This implies a 5% appreciation can produce 25% return from appreciation at 80% LTV. Do not allow yourself to get over leveraged.
There is no cheaper money the F/F loans. Historically (meaning using S&P lifetime) having an F/F loan at todays rates and placing that money in the S&P 500 would produce a positive return. Historically F/F is like free return. I put forth a certain amount of effort to keep my properties at high leverage because I use that leverage to produce additional returns that is in excess of F/F rates. It is not difficult.
I can understand low leverage if the leverage causes stress. However, leverage is one feature that makes RE investing superior to other forms of investment. I rank it even higher than value adds. When I combine the leverage with the value add, it is what has allowed me to produce infinite return on virtually all my RE investments. Infinite return far surpasses S&P 500.
I wanted to address the all cash purchases. I have seen the stats on all cash purchases but want to point out Hml and private lending is typically considered cash. Many cash purchases are flips or refinanced after a value add (for example a BRRRR). The actual cash purchases that are meant to be held with no leverage long term is significantly less than those purchased "all cash". It would be interesting to know the numbers as related to planned long term no leverage hold.
Good luck
- Member since 2019 · 88 posts · 25 votes2y
Quote from @K S.:
I would not buy a condo in san diego with all cash regardless of how high interest rates were/are. what was your reasoning behind buying it with cash - just curious.
- Member since 2021 · 38 posts · 20 votes2y
Quote from @Vasudev Kirs:
Quote from @K S.:
I would not buy a condo in san diego with all cash regardless of how high interest rates were/are. what was your reasoning behind buying it with cash - just curious.
The reasoning for all cash seems to have benefits. I think this would even make an entire economy better. If someone were to buy a property in all cash, there would be less of a need to rely on steady income to pay for housing/living. If someone only had to pay for homeowners insurance and property tax, savings would increase substantially (owner does not have a mortgage). A mortgage is, “a legal agreement by which a bank lends money in exchange for taking title of the debtor’s property. The conveyance of title becomes void upon the payment of debt.” (New Oxford American Dictionary)
If you pay for a property in all cash, there is no need for a mortgage. There is no interest rates when you have no loan. The owner would hold title. - Member since 2019 · 88 posts · 25 votes2y
Quote from @Eric Justice:
Quote from @Vasudev Kirs:
Quote from @K S.:
I would not buy a condo in san diego with all cash regardless of how high interest rates were/are. what was your reasoning behind buying it with cash - just curious.
The reasoning for all cash seems to have benefits. I think this would even make an entire economy better. If someone were to buy a property in all cash, there would be less of a need to rely on steady income to pay for housing/living. If someone only had to pay for homeowners insurance and property tax, savings would increase substantially (owner does not have a mortgage). A mortgage is, “a legal agreement by which a bank lends money in exchange for taking title of the debtor’s property. The conveyance of title becomes void upon the payment of debt.” (New Oxford American Dictionary)
If you pay for a property in all cash, there is no need for a mortgage. There is no interest rates when you have no loan. The owner would hold title.I agree. My statement was in reference to a condo which can have other expenses like HOA and low appreciation compared to a house.
- Member since 2021 · 38 posts · 20 votes2yI’m not too familiar with the San Diego area for real estate. I have visited there a few times though. Appreciation is an increase in monetary value. If you look at home prices around 30-40 year span, they increase substantially. In 1964, the average single family home prices were $20,000. In year 2000, the average single family home prices were around $200,000. That’s a 900% increase over the span of 36 years.
Quote from @Vasudev Kirs:
Quote from @Eric Justice:
Quote from @Vasudev Kirs:
Quote from @K S.:
I would not buy a condo in san diego with all cash regardless of how high interest rates were/are. what was your reasoning behind buying it with cash - just curious.
The reasoning for all cash seems to have benefits. I think this would even make an entire economy better. If someone were to buy a property in all cash, there would be less of a need to rely on steady income to pay for housing/living. If someone only had to pay for homeowners insurance and property tax, savings would increase substantially (owner does not have a mortgage). A mortgage is, “a legal agreement by which a bank lends money in exchange for taking title of the debtor’s property. The conveyance of title becomes void upon the payment of debt.” (New Oxford American Dictionary)
If you pay for a property in all cash, there is no need for a mortgage. There is no interest rates when you have no loan. The owner would hold title.I agree. My statement was in reference to a condo which can have other expenses like HOA and low appreciation compared to a house.
I would assume apartments or condos have similar data in terms of numbers. - 2yGino BarbaroPro MemberRental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
Some investors enjoy having no debt, while others use leverage to grow their portfolio and diversify their holdings, and want to own more assets that will appreciate over time.
I would read the Psychology of Money by Morgan House if you haven't. It will give you an understanding of your relationship with money, you risk tolerance, the types of investments you would enjoy.
The problem with buying all cash is that mostly of us mortals would run out of it after some time, so we need to use debt to continue to scale. Leverage works well when things go up, and when things go down, leverage amplifies the losses.
My personal residences have very low debt, but I am comfortable with leveraging my investments.
Thanks for your post and for starting an important conversation
Gino
- Member since 2021 · 401 posts · 254 votes2y
Quote from @Vasudev Kirs:
Quote from @K S.:
I would not buy a condo in san diego with all cash regardless of how high interest rates were/are. what was your reasoning behind buying it with cash - just curious.
Yes actually here's the most important post in this thread towards the bottom where I compare two scenarios but to answer your question first. Besides bad credit at the time, I liked the idea of staying there rent free. I could pay the HOA and property taxes of a luxury condo with a retail job and when I rent it out, I maximize the cash flow giving me a feeling of security like Scott mentioned. In fact, I did lose my job and decided to sabbatical in my mortgage free condo for so little that the rent from my other condo paid all the expenses. Also, condos make more sense when you're single. I replaced 1 light bulb in my condo in 10 years and a coil on the HVAC. That's it. They provide security, parking, EV chargers and concierge service and I don't have to worry about the roof, fence etc as it's covered by the HOA insurance policy and is urban so it's in the city and walkable to everything which is geared better for medium term rentals unlike a house which means I was able to time my vacations towards the end of the tenants lease more easily. On the other hand, my house, despite not having an HOA, is made up for by the extra maintenance and higher property taxes and lack of aforementioned benefits, higher insurance etc.
I was living rent free for a total investment of $450k. That's 290k (primary condo) + 140k (investment condo) which earns 16k/year and paid all of the primary expenses.
That's a powerful level of protection and security against unknown economic disasters that Scott is referring to and is good, but not maximizing returns for the purpose of early retirement. I.e.
Plugging in my capital investment of 450k into the historical S&P 500 history calculator shows a total net worth 12 years later of over $2M dollars or 13% compounded. Remember this 13% is different than 13% in real estate as rental income is not compounded or reinvested.I just sold one condo for 500k and the other is listed at 275k. That's a total of $1.1M when adding 360k of cashflow over 12 years.
Sorry Scott but 2M is way more than 1.1M. That peace of mind has not been worth it. My condos just about doubled but even if I hit the macro location jackpot and they tripled in value, that's still only ~1.6M vs 2M had I just put that money into the S&P 500. I could purchase those properties today in cash and I would still have 1M left over. No matter what you say about comfort and backup, you're trying to convince yourself that my path was a better idea. Why? Because like I said, with that much cash,. I could literally just cash out my stocks when I was unemployed or simply take out the dividends and leave the principal and repurchase those properties in cash later with money left over.
I edited this to include the cashflow that I left out of the figures.
- Member since 2021 · 401 posts · 254 votes2y
Quote from @Scott Trench:
Quote from @K S.:
Quote from @Scott Trench:
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
You disagreed with my statement "cashflow is useless until retirement" statement because you can use it for unemployment or other investment opportunities.
So if you become unemployed and your minscual $1000 isn't cutting it, that's because you took 250k and locked it up. Had you not locked up the 250k, you would not need cashflow to get you by in this situation. To say that it's a good move to lock up 250k so you can have $1,000/month in an emergency, is rediculous because had you not locked up 250k in a house which is illiquid and could take months to sell and incur fees on, then you would have 250k for emergencies lol.
I'll help you with a quick example using my own condo. I dropped 250k on a condo with a 7.5% cap rate. That earned me 19k last year. Yes, I have gap funds for a situation that may never happen like when people spend their whole life practicing karate and end up never getting into a real fight or more on point, losing that fight because of your Karate because it gave you a false sense of security when walking away was the better choice.
For example, if something happened and I needed the $1,500/month that my unit earns, well, I have to live off of $1,500/month which may not be enough. However, had I a more liquid investment like a divident fund or S&P 500, I could not only pull out some in dividens, but I could pull out 250k in principal as well very easily and quickly. More quickly than the hassle of selling my property and then incurring enormous fees like recaputre, renovations, agent fees, federal and state taxes.
The money is there in either a cash investment or index fund/stock market. But one is liquid and the other is not. So assuming $1,500 is enough for this gap, emergency or other investment opportunity, then any investment that earns that much would be the same or better due to liquidity.
But wait, what about 5 propertys at 19k each? That's near 100k and you're out of the rat race right?
Not really, because I could not purchase all 5 at the same time. Saving cash for years is an opportunity cost. Not to mention, you forgot that even if you could purchase all 5 units right now and cashflow 100k/year, that's still less than putting that same amount in the S&P500 for instance or even a dividend fund that might pay you that much as well if you prefer monthly checks.
The S&P/401k is consistent for everybody and you won't get sued which can take all the cash in your house because you paid cash.
So even if you had $1M in cash to purchase 5 condos and retire with 100k/year. Well that's still less than the 120k/year index fund. You would still have less overall growth over time and real estate is less liquid for when you need to pull the principal for emergencies or otherh opportunities. Your train of thought is a poor way of thinking. Allowing the "idea" of rental cash to cloud your judgement when the simple math is staring at you, will keep you poor. But I agree with you, if you can diversify and do both, then do both, but I'd put more eggs in the stock market basket if I had to do it over again. I do like the cash, but it's an illusion.My advice to anyone is to have a house you live in and pay it off if your interest rate is higher than inflation or other investments or you're retiring. Then purchase a vacation condo/cabin for trips and quality of life. Invest the rest in the market.
Good debate! Some counterpoints:
- The $250K in real estate is not "locked up" and can be accessed via HELOC or sale. Real estate can be volatile, but usually not as volatile as stocks. It's unlikely that it will see a 50% price reduction in our lifetimes. The stock market will do that at least 2-3 times per century. So it's liquid, but in the example you used, the time when you most need that liquidity is likely to be the same time the entire market is crashing around your ears. A paid off property is pretty good insurance against that job loss. And if one has a paid off property in advance of that job loss they also have probably generated a solid cash position as well.
- I don’t think unlevered real estate is a great way to build long term wealth. I agree with you on that point. But it’s CAN be a great way to PRESERVE wealth long-term. That is why so many of the very successful real estate investors here have completely paid off portfolios.
It’s not always offense all the time for me. Sometimes it’s defense too. The thread is about unlevered real estate. And that should be a primary consideration from my standpoint.Really respect your points here and just trying to debate and share my views as well.
You just said someone that could pay off a house has a solid cash position. Ok so if one has a solid cash position then he doesn't need the income from the rental property lol. That's my point as well. Like I said, if you have the means to diversify with a property free and clear, then that does provide a safety net and peace of mind, but if your goal is to maximize your net wealth for the purpose of early retirement and you can only do one, then get a mortgage instead and put the rest in the market. You'll still have a house that you can cover with rent or house hack for security but you'll also benefit from the higher gains in the market. The math doesn't lie according to my previous post.
To summarize my last post. 2M from the S&P 500 (initial 450k investment to purchase 2 condos) is greater than 1.1M in total value today of my two condos of 775k + 360k in rental cash over 12 years.
In total, the cool factor of the idea of lower expenses and security cost me $900,000 over 12 years from a 450k initial investment.
- Member since 2021 · 401 posts · 254 votes2y
Quote from @Scott Trench:
Quote from @K S.:
Quote from @Scott Trench:
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
You disagreed with my statement "cashflow is useless until retirement" statement because you can use it for unemployment or other investment opportunities.
So if you become unemployed and your minscual $1000 isn't cutting it, that's because you took 250k and locked it up. Had you not locked up the 250k, you would not need cashflow to get you by in this situation. To say that it's a good move to lock up 250k so you can have $1,000/month in an emergency, is rediculous because had you not locked up 250k in a house which is illiquid and could take months to sell and incur fees on, then you would have 250k for emergencies lol.
I'll help you with a quick example using my own condo. I dropped 250k on a condo with a 7.5% cap rate. That earned me 19k last year. Yes, I have gap funds for a situation that may never happen like when people spend their whole life practicing karate and end up never getting into a real fight or more on point, losing that fight because of your Karate because it gave you a false sense of security when walking away was the better choice.
For example, if something happened and I needed the $1,500/month that my unit earns, well, I have to live off of $1,500/month which may not be enough. However, had I a more liquid investment like a divident fund or S&P 500, I could not only pull out some in dividens, but I could pull out 250k in principal as well very easily and quickly. More quickly than the hassle of selling my property and then incurring enormous fees like recaputre, renovations, agent fees, federal and state taxes.
The money is there in either a cash investment or index fund/stock market. But one is liquid and the other is not. So assuming $1,500 is enough for this gap, emergency or other investment opportunity, then any investment that earns that much would be the same or better due to liquidity.
But wait, what about 5 propertys at 19k each? That's near 100k and you're out of the rat race right?
Not really, because I could not purchase all 5 at the same time. Saving cash for years is an opportunity cost. Not to mention, you forgot that even if you could purchase all 5 units right now and cashflow 100k/year, that's still less than putting that same amount in the S&P500 for instance or even a dividend fund that might pay you that much as well if you prefer monthly checks.
The S&P/401k is consistent for everybody and you won't get sued which can take all the cash in your house because you paid cash.
So even if you had $1M in cash to purchase 5 condos and retire with 100k/year. Well that's still less than the 120k/year index fund. You would still have less overall growth over time and real estate is less liquid for when you need to pull the principal for emergencies or otherh opportunities. Your train of thought is a poor way of thinking. Allowing the "idea" of rental cash to cloud your judgement when the simple math is staring at you, will keep you poor. But I agree with you, if you can diversify and do both, then do both, but I'd put more eggs in the stock market basket if I had to do it over again. I do like the cash, but it's an illusion.My advice to anyone is to have a house you live in and pay it off if your interest rate is higher than inflation or other investments or you're retiring. Then purchase a vacation condo/cabin for trips and quality of life. Invest the rest in the market.
Good debate! Some counterpoints:
- The $250K in real estate is not "locked up" and can be accessed via HELOC or sale. Real estate can be volatile, but usually not as volatile as stocks. It's unlikely that it will see a 50% price reduction in our lifetimes. The stock market will do that at least 2-3 times per century.
This is a myth. The real estate market did crash 50% in the last recession. It has since barely surpassed it's peak prices 18 years later. Meanwhile, the S&P 500 has way more than gained its peak prices like quadruple or something. Not only that, you would be averaging down in the stock market but you can't average down in Real Estate. It's called foreclosure.
Your HELOC argument is to solve a problem that you created. You wouldn't need a HELOC to pull money if you didn't spend all your money on a property. That's what credit cards are for in emergencies. Not HELOCs as far as I know.Had that money been in the market, you could pull dividends in an emergency at 0% taxable rate assuming you're unemployed.
- 2yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @K S.:
Quote from @Scott Trench:
Quote from @K S.:
Quote from @Scott Trench:
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
You disagreed with my statement "cashflow is useless until retirement" statement because you can use it for unemployment or other investment opportunities.
So if you become unemployed and your minscual $1000 isn't cutting it, that's because you took 250k and locked it up. Had you not locked up the 250k, you would not need cashflow to get you by in this situation. To say that it's a good move to lock up 250k so you can have $1,000/month in an emergency, is rediculous because had you not locked up 250k in a house which is illiquid and could take months to sell and incur fees on, then you would have 250k for emergencies lol.
I'll help you with a quick example using my own condo. I dropped 250k on a condo with a 7.5% cap rate. That earned me 19k last year. Yes, I have gap funds for a situation that may never happen like when people spend their whole life practicing karate and end up never getting into a real fight or more on point, losing that fight because of your Karate because it gave you a false sense of security when walking away was the better choice.
For example, if something happened and I needed the $1,500/month that my unit earns, well, I have to live off of $1,500/month which may not be enough. However, had I a more liquid investment like a divident fund or S&P 500, I could not only pull out some in dividens, but I could pull out 250k in principal as well very easily and quickly. More quickly than the hassle of selling my property and then incurring enormous fees like recaputre, renovations, agent fees, federal and state taxes.
The money is there in either a cash investment or index fund/stock market. But one is liquid and the other is not. So assuming $1,500 is enough for this gap, emergency or other investment opportunity, then any investment that earns that much would be the same or better due to liquidity.
But wait, what about 5 propertys at 19k each? That's near 100k and you're out of the rat race right?
Not really, because I could not purchase all 5 at the same time. Saving cash for years is an opportunity cost. Not to mention, you forgot that even if you could purchase all 5 units right now and cashflow 100k/year, that's still less than putting that same amount in the S&P500 for instance or even a dividend fund that might pay you that much as well if you prefer monthly checks.
The S&P/401k is consistent for everybody and you won't get sued which can take all the cash in your house because you paid cash.
So even if you had $1M in cash to purchase 5 condos and retire with 100k/year. Well that's still less than the 120k/year index fund. You would still have less overall growth over time and real estate is less liquid for when you need to pull the principal for emergencies or otherh opportunities. Your train of thought is a poor way of thinking. Allowing the "idea" of rental cash to cloud your judgement when the simple math is staring at you, will keep you poor. But I agree with you, if you can diversify and do both, then do both, but I'd put more eggs in the stock market basket if I had to do it over again. I do like the cash, but it's an illusion.My advice to anyone is to have a house you live in and pay it off if your interest rate is higher than inflation or other investments or you're retiring. Then purchase a vacation condo/cabin for trips and quality of life. Invest the rest in the market.
Good debate! Some counterpoints:
- The $250K in real estate is not "locked up" and can be accessed via HELOC or sale. Real estate can be volatile, but usually not as volatile as stocks. It's unlikely that it will see a 50% price reduction in our lifetimes. The stock market will do that at least 2-3 times per century.
This is a myth. The real estate market did crash 50% in the last recession. It has since barely surpassed it's peak prices 18 years later. Meanwhile, the S&P 500 has way more than gained its peak prices like quadruple or something. Not only that, you would be averaging down in the stock market but you can't average down in Real Estate. It's called foreclosure.
Your HELOC argument is to solve a problem that you created. You wouldn't need a HELOC to pull money if you didn't spend all your money on a property. That's what credit cards are for in emergencies. Not HELOCs as far as I know.Had that money been in the market, you could pull dividends in an emergency at 0% taxable rate assuming you're unemployed.
I do not know the source of your RE crashed 50% at Great Recession (GR) or that residential RE has barely surpassed their peak prices from before the GR.
I have seen numbers of property decline from the GR range from 20% to 33% nationally. I have never seen reliable source indicate significantly over 33%. This can be verified via an internet search. Of course some markets declined less and other markets (Detroit, Las Vegas, much of Arizona and florida) declined more.
According to core logic, nationally it took homes 12 years to recover from the GR. There are markets that recovered much faster and markets that may not have yet recovered (none that I am aware of, but there probably are). Home prices nationally today are far higher than at the Great Recession per core logic. They have not barely surpassed the market before the GR nationally, they have far surpassed their pre-GR values.
This information is easily available and verifiable. Be leery of using a particular market or property’s performance and extrapolating that on to the broader market. Similar warning for doing it on a particular RE investment in a particular market versus RE investments on a broader environment.
Good luck
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes2y
Let's try reframing this @Eric Justice:
Buying all-cash, reduces operational impact weight to a level that feels very stress and urgency free.
Ok, now we are accurate, because that truly is all that buying all-cash does. It lowers that Operational Expense "load" to a level that say vacancy feels so "cheap" that one does not freak out over, right. Or market rent's decline, ok, no biggie right.
Now notice where and how it "works". It's in a DESCENDING scenario.
So to say it improves returns in any way shape or form is materially untrue. It's ONLY an adjustment to risk exposure. As is an all but universal truth in investing, there is a cost to lowering risk exposure, a cost to returns.
LEVERAGE is the "secret sauce" to investing in real estate, so remove of that, it's got BIG impacts. Say a person has $350k, and buy's "A" property to be free & clear. Ok, so now there clocking $2,500mnth during tenancy, great. But, remember tax's, now tax's are gobbling up how much of that $2,500? 30%?
VS the person who used that $350k, putting $100k down on 3 properties, $50k sitting in contingency. Sure, they now have debt service of $5,500mnth on the $1m+ in real estate holdings, but they also have $7,500mnth in revenues. What is "net" from that? Nearly the same as on the all-cash, right.
BUT..... Oh and it's a BIG but.... We are talking INVESTING on real estate which means growth/returns over TIME. So when we have rent appreciation of say 4%, it's 4% on a much BIGGER #. $300 vs $100. And remember appreciation is at compounding rate.
So via LEVERAGE your drastically improving your rate of return vs all-cash. Over time, it's a multiplier factor vs all-cash, depending on how much time.
And on equity side, holly-cow, do the math's, figure out what difference would be in just 5yrs with only a 2% rate of annual appreciation on equity. It's a HUGE #.
So can all-cash investing FEEL "safe", simple, "easy", yup sure can. And it comes at a HUGE cost.
There is a middle ground between maximum leverage and 0 leverage. One could very comfortably go 50% leverage for example.
The argument that it is 1 extreme or the other is a false narrative. Let's leave the politics to own that BS world of the only choice is 1 extreme or the other.
- Rental Property Investor · Brevard County, FL · Member since 2024 · 9 posts · 16 votes2y
"Only a Sith deals in absolutes." - Obi-Wan Kenobi
Am I quoting Star Wars on a real estate forum? Yes.
Is Obi-Wan Kenobi wrong? No. - Member since 2023 · 7 posts · 1 vote2y
One of the main reasons we invest in real estate is to leverage other people's money for our gain. One of the main benefits of debt is being able to write-off your interest expense. Another benefit is increasing your return per each dollar invested. When you want to determine whether to use debt or not, you should run the numbers with an all-equity (no leverage) investment and a leveraged investment (using debt). By running these numbers, you will be able to decide whether it's smart to use debt or not.
- 2yTravis TimmonsPro MemberRental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
@Rachel Davis just won the forums. Nicely done.
My goal for real estate is to become fixed income, which is a small portfolio of paid off properties. I'm also in the stage of my investing journey where I care less about growth and more about mitigating risk. It's time to pull some chips off of the table. I am still, however, buying with leverage but have a paid off primary and am open to putting 30-40% down rather than the absolute minimum.
Nothing revelatory here - personal finance is personal. My wife and I hit our FI goal; we have time and can live off of our assets. I don't care about getting the absolute best returns anymore. Of course, that was not the case along the way.
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes2y
Quote from @Eric Justice:
@Mark Cruse you’re comparing a successful investment versus a failed investment. I would recommend trying to sell the property that you paid for with all cash. That’s not investment advice.
Either you are a very inexperienced investor who will listen to no one, or you are into click bait. Several have clearly debunked what you are claiming as fact, but let me make a last attempt.
Lets assume both are successful investments. Lets assume the one you dump 100k in is returning 8% on your money. Lets assume I put down 20% and acquired loans on 4 properties. Assume because I have a mortgage, the first year Im getting only 3% on the return.
You most likely have no more liquidity but lets focus on facts.
Fact, I have multiple forms of tax benefits way beyond you.
Fact, if you dont know how to screen or manage, all mine will make more money.
Fact, while you paid off the note, I have multiple people creating the equity for me.
Fact (most likely), because I know how to operate and add value; its a great chance within a few years my return will out pace yours even with the mortgages.
Fact, at the end of a 5 year time fame, I have 4 times the equity from natural appreciation and others paying for my asset, which is the opposite of what you did.
Over all, it depends on multiple dynamics and variables far far far beyond you declaring free and clear is best. This stance doesnt seem to be grounded by any experience or expertise on your part. I have emphatically exposed the flaw in what you are spewing.
Believe me when I say I'm not attacking you. I want you to avoid mistakes but it falls on deaf ears most likely.
Good luck!
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes2y
Quote from @Eric Justice:
It seems that purchasing property in all cash would have the best outcome for investments. The owner would not have a mortgage. The owner would have to pay property taxes. Buying with all cash gives the owner the option to lease or live in the property. Buying assets in all cash can increase savings over time. Overall, this is the most secure and reliable form of real estate investing. 🏠👍
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesWrong. Simple math says otherwise
Quote from @Eric Justice:
It seems that purchasing property in all cash would have the best outcome for investments. The owner would not have a mortgage. The owner would have to pay property taxes. Buying with all cash gives the owner the option to lease or live in the property. Buying assets in all cash can increase savings over time. Overall, this is the most secure and reliable form of real estate investing. 🏠👍
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes2y
Quote from @Travis Timmons:
@Rachel Davis just won the forums. Nicely done.
My goal for real estate is to become fixed income, which is a small portfolio of paid off properties. I'm also in the stage of my investing journey where I care less about growth and more about mitigating risk. It's time to pull some chips off of the table. I am still, however, buying with leverage but have a paid off primary and am open to putting 30-40% down rather than the absolute minimum.
Nothing revelatory here - personal finance is personal. My wife and I hit our FI goal; we have time and can live off of our assets. I don't care about getting the absolute best returns anymore. Of course, that was not the case along the way.
yes, Yes, YES!!!
Why is this not ALWAYS connected with any/all REI portfolio building talk/how-to etc.. There is STAGES to ones REI journey.
Investing is NOT a mono-channel action for LIFE!
There is the building phase. This is where leverage is SOOoo paramount and equity over COC big time.
Than consolidation. And, for many, it's a cycling action much like body builders do of growth, consolidation, growth, consolidation, evolving up along the way.
And lastly we get into LIQUIDATION stage. Now, that does not mean Sell everything, but for some it does. It simply means risk adjusting portfolio for actions of making it liquid for end of life planning. Some say f-it, let's let that last check bounce. Hey, high-5! Others want to grandkids to be spoiled brat's who grow up on trust fund and one day go on to be a politician or something, lol. High-5.
Point is, STAGES. And for that end phase, yes, that's where debt elimination is awesome. Not at start. If at start, good luck, good luck getting to just 3 properties.
Reality is, today, in SFR, generally speaking it takes 1 free & clear to cover operational expenses of 4/5. And it takes 4 free & clear to provide MEDIAN income PER PERSON. Generally speaking.
So if a couple, that means 8 for median income and 2 more to cover operational impact.
Wanna live high on the hog, ok, double that so 20 free & clear.
How can a person ever get to 20 free & clear WITHOUT having used leverage along the way????
Leverage up to build, consolidate down to coast.
- 2yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Paying cash is just shifting and manipulating your risk tolerance. None of my personal houses have leverage, that's just me. Most of my investment properties do, but some don't.
But by all metrics, and by all accounts on an asset(usually a mechanism that appreciates) leverage is always the wiser tool. Almost always.
Now, if your risk tolerance is different it's different. My view for the average BPer is to get 4-6 good properties 1-1.2 DSCRd over 7-10 years. Refi 1, sell 1, and by year 15 have 3-5 properties with all but 1 having no debt. Figure out what you want to do from there. But for 99% of folks, in 15 years, that's an achievable feat and a great position to be in. Most hate hearing in 15 years though.
- 2yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Scott Trench:
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
In response to strictly the bold, BTRs are what I think make a massive rent increase. That's more so going to realize in 2027 as 2026 it caps. No? From what I saw MF stop in 2025, BTR 2026. Rent's take a year to realize. So 2027?
- 2yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
Quote from @V.G Jason:
Quote from @Scott Trench:
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
In response to strictly the bold, BTRs are what I think make a massive rent increase. That's more so going to realize in 2027 as 2026 it caps. No? From what I saw MF stop in 2025, BTR 2026. Rent's take a year to realize. So 2027?
Good stuff here - could absolutely be right. I think that’s good caution and perspective. For me, that’s why it’s so important to be in the game and stay in the game for decades. I feel super confident that there will be long term rent growth, even relative to inflation, but I feel less confident predicting it to the year.
Buying consistently, but not aggressively, with modest leverage is how I feel most confident building wealth.
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