Let's talk Debt

64 Replies

Hello everyone, I am curious if anyone has built a successful portfolio debt free. I am not arguing leverage vs debt, leverage wins everytime hands down, no argument here, I own a calculator, pencil and paper.  My convictions are purely personal. This isn't a Dave Ramsey vs Robert Kiyosaki thing either. My family of five has no debt to anyone, we own our home, cars, and toys outright. 70% of my income is cash flow this way.  My reasons are spiritual in nature, the bible says to owe debt to no one, and to only owe one another love. It says the debtor is slave to lender. I believe these things to be true, not forcing them on anyone I just want to get rid of the argumentative points of this question so I can get some real feedback. Obviously I am willing to grow slower in my portfolio and understand that, I just wanted to hear if anyone here has done this too!  Thanks everyone for not telling me how dumb this is and how leverage is awesome, and how much more money I can make. We have done very well in our life operating in cash and the Lord has honored that and I believe he will the same in this scenario as well.  The bible says we are to be a peculiar people, so against the grain we go!  So....anybody done it

I'll take a stab at it and say No...but with an explanation...and a question or 2:

Question #1:  How long do you want to be behind, as in more money put into the property than you have accumulated getting out.  I'm talking real money...CASH.

 Question #2:  If you are buying all cash, and by definition that is the method of choice here, how long between accumulation of enough cash to go into the next deal.

Explanation:  

We'll use an example of a property we buy for $60,000, worth $80,000, and has a NCF (no debt) of 700/month, or 400/month with debt...on the $60k.

1 - If you are buying all cash, and leaving all cash still in the deal, you are behind from the start based on the amount of cash you put in.  Yes, I understand the word equity.  I also understand what equity actually means.  It means I paid $60,000 to get back $8,400/year.  Which also means I'm behind for over 7 years.

2 - Assuming your priority is No Debt over positive returns (I'm not arguing against it...in your case), you need to look at the big picture.  In the big picture, you would have spent $60,000 to get a property worth $80,000.  Now, what value does that $80,000 property have?  There are only two ways I know to access that "Equity"....sell the property, or refinance (debt...so that's out).  If you don't tap into that equity, it is nothing more than a trophy...and you are operating under conditions in Explanation #1...which is behind for over 7 years.

3 - Now, if your goal is to accumulate equity, and access it by selling it when the cash is needed, then you have to look at the numbers again, and realize that until you actually do sell it, you are losing money.  Do it more than once, and you're losing more.

@Jordan B. One thing that is obvious is the amount of research you have done, with making your decision and truly putting your spiritually first. Good for you. There is a peace of mind with being debt free., whichI think you know all about.

Originally posted by @Jordan B. :

Hello everyone, I am curious if anyone has built a successful portfolio debt free. I am not arguing leverage vs debt, leverage wins everytime hands down, no argument here, I own a calculator, pencil and paper.  My convictions are purely personal. This isn't a Dave Ramsey vs Robert Kiyosaki thing either. My family of five has no debt to anyone, we own our home, cars, and toys outright. 70% of my income is cash flow this way.  My reasons are spiritual in nature, the bible says to owe debt to no one, and to only owe one another love. It says the debtor is slave to lender. I believe these things to be true, not forcing them on anyone I just want to get rid of the argumentative points of this question so I can get some real feedback. Obviously I am willing to grow slower in my portfolio and understand that, I just wanted to hear if anyone here has done this too!  Thanks everyone for not telling me how dumb this is and how leverage is awesome, and how much more money I can make. We have done very well in our life operating in cash and the Lord has honored that and I believe he will the same in this scenario as well.  The bible says we are to be a peculiar people, so against the grain we go!  So....anybody done it

If you want to succeed without debt and by using cash, it sounds like you would be a great candidate for house flipping. It will enable you to greatly increase the amount of cash you have available. Using cash to purchase flips will help you get better deals. If you can make thousands on each flip, it will help you build cash reserves faster and eventually be able to move into rentals.

 

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@Joe Villeneuve

I can't and won't argue with your math. I've read several of your post and you are very intelligent in these matters. My response will be simple. My cash in the stock market will yield 8% if I'm lucky and keep it in untouched long enough to ride out volatility. Property A I bought for 36K cash. After keeping out cap ex, vacancy, etc I cash flow $450 with no mortgage. 15% return CoC vs 8%, instant liquidity (on the cash flow), plus I own a physical asset and get the tax deductions vs paying taxes on dividends.

So in my case I'm moving money to better investments and building a portfolio along the way. Doesn't work for people with lots of debt, but if you make 100K a year and have 30K in living expenses a year, do the math. That's one or two properties a year owned outright, plus cash flow put back in the business increasing property buying exponentially yearly.  It's a lifestyle choice that's not for everyone, but in the end far more profitable and incomparable in risk. 

So long term, hypothetically in ten years I own ten properties. These properties will make 55,000 a year in profit. Say I invested 400K in the lot of them. They will be mine and the profit has paid them off in a max 7 years, and I paid nothing in interest or closing cost (thousands saved) probably got better deals buying cash and can now profit off these as long as I want or sell them all, since I've made my money back and profit the 400K plus appreciation. 

Thanks Joe. I appreciate your wisdom and insight on this site, you have a true gift in math that's for sure!!!  

Just wanted to bump this back into rotation. Is there no one in here operating a debt free platform. Would love to hear from you if you are. Thanks everyone!

wow! no takers huh? well i like your math @Jordan B. i get your logic on this. I'm working get debt free with my rei. you, sir, are an inspiration. thank you.

Originally posted by @Jordan B. :

@Joe Villeneuve

I can't and won't argue with your math. I've read several of your post and you are very intelligent in these matters. My response will be simple. My cash in the stock market will yield 8% if I'm lucky and keep it in untouched long enough to ride out volatility. Property A I bought for 36K cash. After keeping out cap ex, vacancy, etc I cash flow $450 with no mortgage. 15% return CoC vs 8%, instant liquidity (on the cash flow), plus I own a physical asset and get the tax deductions vs paying taxes on dividends.

So in my case I'm moving money to better investments and building a portfolio along the way. Doesn't work for people with lots of debt, but if you make 100K a year and have 30K in living expenses a year, do the math. That's one or two properties a year owned outright, plus cash flow put back in the business increasing property buying exponentially yearly.  It's a lifestyle choice that's not for everyone, but in the end far more profitable and incomparable in risk. 

So long term, hypothetically in ten years I own ten properties. These properties will make 55,000 a year in profit. Say I invested 400K in the lot of them. They will be mine and the profit has paid them off in a max 7 years, and I paid nothing in interest or closing cost (thousands saved) probably got better deals buying cash and can now profit off these as long as I want or sell them all, since I've made my money back and profit the 400K plus appreciation. 

Thanks Joe. I appreciate your wisdom and insight on this site, you have a true gift in math that's for sure!!!  

Market returns and REI return % are not apples to apples. I always laugh when they are compared...asifthey are the same.

The fact that you can leverage REI, but not stock market investments, makes the two of them light years apart. It's as simple as the difference between a cost and an expense. It's the exponential return on the same cash that does it.

Einstein said it best when he described compund interest as "...the greatest invention of the 20th century".  His follow up comment was more important though when he added,

"...those that understand it, will live off of those that don't"

If you are not willing to take on debt, you might as well just invest in the stock market. What makes real estate the phenomenal asset class it is, is the ability to purchase it with someone else's money.

Though you might find yourself limited in investments in the stock market, as most companies have some form of debt.

Medium logo lf re cire box white bboxRussell Brazil, Associate Broker w/ Long & Foster | [email protected] | (301) 893‑4635 | http://www.RussellBrazil.com | MD Agent # 648402, DC Agent # SP98375353, VA Agent # 0225219736, MA Agent # 9052346 | Podcast Guest on Show #192

Originally posted by @Russell Brazil :

If you are not willing to take on debt, you might as well just invest in the stock market. What makes real estate the phenomenal asset class it is, is the ability to purchase it with someone else's money.

Though you might find yourself limited in investments in the stock market, as most companies have some form of debt.

 How do I vote more than once for this

I think that the problem is that most people don't have enough cash to buy anything out right, at least not without saving for quite a few years. Most people are impatient and want to do more now, how do you do that? Leverage. Many start off their investing with a ton of leverage and then move to no debt as they close in on their retirement years. Not that there is anything wrong with buying outright, just most do not have the patients or income to make that a reality in their lifetime.

great points by all.

Based on your no debt only I would look into house flipping.  It was stated above and I also think it's best advice to add real estate in your portfolio.  Buying and holding with all cash does not seem the best move.  

@Russell Brazil

I believe that the statement if you are unwilling to take on debt then you shouldn't be investing in real estate and stay in the market is a laughable statement. In comparing my rate of return which is by definition gain or loss on an investment over a specified period expressed as a percentage, it makes good sense for me to diversify my money into both real estate and investments. It really is simple math. I clearly stated that in looking at real estate without risk in the equation leverage wins everytime. But it is ridiculous to think you can remove risk from the equation. Again, debt free is not for everybody and I am willing to move a little slower to start with but I say after 10 years of buying properties that my capital flow back into my business will keep up with the cash out refinance plan, and I have a file box of deeds. I do agree both debt and non debt can be successful business plans without a doubt, it is merely a decision each person has to make  I would never say that debt free is the only way that works or vice versa, let's hope that we can all succeed and run successful businesses brother!  Thanks for the conversation!

@Joe Villeneuve

Something tells me we may never agree on this! Lol. But honestly I believe you to be a very wise business man and you have my upmost respect. I really enjoy reading your posts and hope to continue to learn from you guys. 

Jordan B. Your asking a spiritual question and getting carnal responses :). I have always straddled the fence on this one, but what I've discovered is the house that I pay cash for, provide less headache, less stress and have a much greater return. I hate debt, yet I have it and have built my business using it. I did start and operate a successful retail store based on a cash only principal, but I havnt been able to make it work in real estate....yet. Let's pretend for a moment that were 90, what matters? I would say peace of mind, time spent with family, friends, experiences, ect... The wealthiest person in the world would gladly give it all up for one more day. And for us Christians we long to hear, "well done my good and faithful servant, you've been faithful over little, but I'll make you ruler over much".

@Perry Ivy

Your statement about giving it all away for one more day is more true than you know. I lost my son 2 years ago and would give it all away for one more day with him. I like the turn of this conversation, debt or no debt let's be glad to have another day here on this earth to argue about petty things ;) and live in  a country where the average person can dream and build his own business. 

I switch off between leverage and no debt, mostly depending on opportunity cost. These days, I have more cash than I have deals, so instead of letting the cash sit in the bank, I have been buying my rentals with cash and not leveraging. Sure, my ROI on those rentals is lower due to lack of leverage, but the ROI across my portfolio is higher because I don't have cash sitting in the bank earning 2%.

Doesn't sound like you have any questions beyond that, but happy to provide any other information you might be interested in...

Jordan B. I'm sorry that you've had to experience the loss of a child. I had a near death experience and I recall my dad saying that it wasn't right and that kids were suppose to outlive their parents. I have an older friend that always says, live each day as though it was your last and one day you'll be right". You are in my prayers.

@J Scott

That's similar to where we are at only it wasn't just real estate that put us in a cash position. Your name has become a household name here of late, we are starting our first couple flips and have been devouring your book!  One quick question, what are your parameters in deciding to flip or buy and hold. That is a dilemma for my wife and I sometimes though our market is not prime for flipping. Thanks!

@Perry Ivy

Thanks for the prayers and kind words. I don't mention it often but that is one of my prime motivators to be in real estate. By the time I'm 40 I hope to have a lot more time for my wife and 3 children. It's always good to have a long term goal when venturing into opportunities. It's funny this life you know, it seems like the more we give away our wealth and continue to tithe our business has just continued to grow and prosper. HE is faithful in all things, those painful things that make no sense and those beautiful things that leave us amazed!

@Jordan B.

In my opinion the biggest thing that going at it debt free has over using leverage is the peace of mind. Your risk is actually not too much less than those who use leverage responsibly (note i said responsibly). The biggest risks in real estate affect everyone equally no matter if you have leverage or not. 

I.E. If the market crashes the value of your house goes down no matter how it is financed. Now responsible leverage users can ride this out just as easily as those who bought we cash. Take me for example. I bought a 4 unit building with leverage for 500K that cash flows almost 1K after all is considered (capex, maintenance, etc). If the market crashes and my building is worth less well that does not affect me because i can still make my payments no matter what. The only way i get affected is if i lost renters (which by the way affects cash buyers too). However because i leveraged responsibly, I can pay for the entire building from my personal salary if needed and would not lose any sleep. Assuming two people started from the same position to buy this building, i would have an extra 400K to use to make more money while the other person would not. They would have more cash flow though.

Your story with the 36K property makes sense but anyone who uses leverage responsibly will come out ahead at the end of those 7 years using the same assumptions. Also im sure that a 36k property is not going to appreciate much given the area that it is in. I highly doubt it is a B or A area given those extremely low prices. Therefore your COC return will be closer to 10% over the 7 years. If you consider that then you can see why @Joe Villeneuve is stating that you stick to the stock market. Investing that 70K in the market over the 7 years at a 8-10% return gives you close to the same amount. In order to invest in a place where appreciation is a big factor, you would need to accumulate several years of savings because property in those areas are much more expensive that 36K.

I admire your conviction though and if that is your path then by all means stick to it. There are plenty of positives to being debt free. However know that it lengthens the time it takes to get to the same point as someone who uses leverage.

Originally posted by @Jordan B. :

@J Scott

That's similar to where we are at only it wasn't just real estate that put us in a cash position. Your name has become a household name here of late, we are starting our first couple flips and have been devouring your book!  One quick question, what are your parameters in deciding to flip or buy and hold. That is a dilemma for my wife and I sometimes though our market is not prime for flipping. Thanks!

First, thank you for the kind words...I sincerely appreciate it...

As to your question, I don't really have a set criteria.  Historically, we've done flips, so I typically evaluated a deal first to see if it would make a good flip, and if so, didn't even consider a buy-and-hold.  These days, we are more interested in holding properties, so that's the first analysis I'll run.  

If it's a great buy-and-hold opportunity (better than 12% passive, unleveraged cash-on-cash returns), I won't even consider flipping it.  If it's a decent buy-and-hold opportunity (8-12% cash-on-cash), I'll run both a flip and a buy-and-hold analysis and just make a judgement call.  We'll consider things like how much time we have to devote to the project, the location, the time of year, our cash position, etc.  But, we don't have specific metrics for the "in between" deals...

@Nnabuenyi Anigbogu

Thank you for the in depth post, great thoughts about appreciation that we haven't really discussed. The 36K property was a recent purchase at the time of post. It would actually be considered in a B neihborhood. My area is a less populated more rural area so the only appreciation you get is forced appreciation in our market. My personal residence is a 400K property and will more than likely be the same in 10 years. Just a stagnant market, but not much volatility even after the crash. And also the 36K property was bought at 40% under market value. We do a lot of leg work to find the hidden gems!  The only thing appreciating around here is farmland. Over 40% increase in value in the last 5 years!  Thanks again!

Nnabuenyi Anigbogu
I'm a survivor of the crash of 08, not only did values drop across the board, but so did rents. Landlords had to negotiate their rent agreements and compete with the guy across town. I didn't sweat it because of my cash position, but many investors lost everything. Leverage is a scary two way street, your either passionately buying and often paying to much, or its zipping in the wrong direction and you find yourself on the highway to hell. Think of the millions of homes that were in foreclosure, a majority of them came from investors that thought tge had this leverage thing figured out. I wish you the best, but you would do yourself a favor to stroll down the 2008 memory lane.

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