Real Estate Agent · Saint Paul, MN · Member since 2014 · 95 posts · 82 votes
10y
@Brandon Ingegneri You could have a very simple business if you just had 10 houses that were all paid off cashflowing $600/month each ($1200/house with 50% expenses). If they were each worth $100,000 you would be getting 7.2% return on equity on your $1,000,000 portfolio, and an annual cashflow of $72,000. Not a bad simple business.
Now if you took that $1,000,000 in equity and spread it across 33 properties with 70% LTV the payment on each one would be about $350, so the cash flow would be $250/house or $99000 annually for a cash on cash return on equity of 9.9%. You are also paying down over $1,150 of principal every year per house, for a total of at least $38,000. So theoretically you can buy another house every year just with the equity build up and increase your net worth by an additional $4150 per year.
The question is, would it be worth it to you to manage 23 more houses for an additional $65,000 per year? Manage 10 paid off houses for $72,000 or manage 33 houses with mortgages for $137,000?
There is no right answer but for me its leverage all the way. Plus, when you own outright you give up the very valuable mortgage interest deduction.
Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 933 votes
10y
I buy 3/1 SFR rowhomes generally in the $70-$80k ARV range. I bought 2 with 75% LTV mortgages up front at 4.5% - 4.625% and bought 2 with cash, then refi'd 1 of the cash properties with a 75% LTV mortgage at 4.875% (I could have gotten a better rate - lesson learned.) I plan to refi the other cash property at year-end. My long term cash flow expectation is around $250/mo each with good years being double that.
The mortgage approach gives a yield advantage. I think more about risk. Folks in the last decade who bought all those 125% LTV no-doc "Liars Loans" for inflated home purchases thought they were geniuses. Then the bond market imploded. Many were foreclosed upon. All was good until a financial storm came.
I protect against risk with an operating cash cushion sufficient to pay the 3 mortgages for 3 months and handle a $500 repair with no income whatsoever. Is that good? Maybe: For me, it means I lost all 4 rents from currently occupied properties in the same timeframe and can't find a new tenant for any for an extended time. My longest vacancy was 3 months. I think that is safe, but am not 100% certain? (Risk scenario: 3 Of the 4 are on the same street. What if a neighboring home becomes a drug house? I have a location concentration risk.)
I have separate savings that can keep me running effectively indefinitely, but I don't want to rely on that. I keep my real estate investing funds separate from family savings and operating funds.
I think I am good with mortgages until I reach 10, the Fannie/Freddie limit. I might be done with mortgages at that point as the cost of money significantly increases and durations shrink for commercial loans, but I have about 5 years until I get to that point.
Rental Property Investor · Saint Louis, MO · Member since 2016 · 123 posts · 84 votes
10y
I am a bit more conservative. Most of my properties are paid off. I can only buy 2-3 per year. When I have a vacancy I am not as stressed because I am not making a mortgage payment. I can be more strict on my tenant screening also. When a mortgage lurking, I feel more pressured to rent my units out quickly. And that's when I can make bad decisions. I know from experience.
New Haven, CT · Member since 2016 · 90 posts · 99 votes
10y
I look at it this way. Let's say you purchase a home for $125,000 and only need 20% down to secure the loan. The $100,000 loan portion is about $450 a month with a 3.5% interest 30 year fixed.
If you had $100,000 in cash and said, I want to pay this off to avoid a headache and be safe you would save yourself $450 a month. 450 a month... that's 18.51 years before you start seeing it work for you.
Now lets say you can secure 5 $100,000 homes with 20% down and they will each net cash flow $350 a month (insert any number you think is reasonable).
$1,750 vs $450 a month.
congrats, you just made an extra $1,300 a month and have 5 properties with equity being paid by someone else.
I just don't understand the, pay off your debt as fast as you can people.
if you bring in more money than you spend, and your paying down equity, how can that even be argued?
Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
10y
I believe in leverage to a certain point, I personally have bought 1 duplex with cash and another with a mortgage, I plan on buying 8 more units with mortgages and then paying them off, at that point, I will have replaced my salary and then some, and I am not so concerned about being incredibly rich, I am fully satisfied with 50k a year and paid off investment properties. Comfort, peace of mind, and relaxation are what I am shooting for. Also, some people can't get multiple mortgages, more than 4 or so, and in my area, seller financing, RTO and other creative ways just aren't that common, so some folks have no choice but to pay off a mortgage or two or save and buy their next investment with cash.
San Jose, CA · Member since 2016 · 17 posts · 6 votes
10y
As with most topics, the answer is "It depends"
For some, leverage is the way to go to grow your business as quickly as possible. For others, you have to consider a higher cash flow that would benefit a person for years to come.
Are you looking to grow your portfolio quickly? Leverage
Are you looking for steady income with less management? Own
Are you looking for the tax benefits? Leverage
Is it difficult to find properties in your area that meet your criteria? Own then leverage when you find another.
Investor · New Rochelle, NY · Member since 2016 · 9 posts · 3 votes
10y
As Jay said, there are two schools of thought on this. Its about what you're looking for , as an individual. If you're looking to buy and hold, and want to gather up more properties, then as you pay down your mortgage, you can use the equity to but additional properties. But if you're looking to hold what you have , and not expanding, pay it down. A note free multi family is so much more easier to handle. Plus more monthly money coming your way.
Investor · Minneapolis, MN · Member since 2015 · 22 posts · 1 vote
10y
Have owned everything we have flipped or lived in with cash so far and a couple years ago that was enough for us...then I stared wanting to flip more and try to earn more. Now I've realized it's time to start leveraging if I wanna get to the next level....
Some great answers! For me it's all leverage until I hit a number that I'm uncomfortable covering if I suddenly had a ton of vacancies at once. When I hit that number, I'm going to start paying off a unit. When that's done I can add an additional property, and use the new cash flow to start the domino effect of paying units off faster and faster. Rinse and repeat until I hit my freedom number. If I were younger, I'd probably leverage my brains loose.
"If I were younger, I'd probably leverage my brains loose." Interesting you say this, because I am 23 y/o and considering leveraging my brains loose after I buy my first property either Q1/Q2 of next year.
Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
10y
@Craig Moore Ha! I was being hyperbolic. I should have been more measured with that statement. 20 years ago I would have taken way more risk, but you still have to be careful not to overleverage yourself. In 2008 I had a huge setback because I was cocky after some early success, overleveraged on some multi-families, and when the crash hit and rents cratered, my partner and I didn't have enough liquid to cover it. My partner went bankrupt and the bank snatched the properties back, gobbled my lunch and almost forced me to do the same. Huge setback, but a good learning experience. Just wanted to throw that cautionary tale out there to balance it.
So definitely be aggressive, because you can be... just don't write checks you can't cash. I have a family to take care of now, so I can't run around guns blazin' like the old days. Hence my above strategy. ;)
Investor · Houston, TX · Member since 2016 · 36 posts · 22 votes
10y
Well, being balanced makes sense.
Here is s good rule:
Take your age and use it as a percentage of safe, and subtract percentage from 100% to determine how much your portfolio can be risky.
So, take a 40 yr old investor, 40% should be paid off, and 60% of his rentals could be leveraged.
This is a rule of thumb, but a good one to consider in your real estate investing journey.
Those paying down their properties are simply transferring the cash flow from the property to the equity. With 10 properties paid off the reality is that in order to receive a descent return on your equity you wipe out the cash flow on the property.
Once a investor gets to that point if their goal is passive income they are investing at a very low return in a not so passive vehicle. Best option would be to sell everything and increase their returns elsewhere in truly passive investments.
If managing/owning 20, 30 ,40 doors is too much work for the return then 10 is also too much work.
Those paying down their properties are simply transferring the cash flow from the property to the equity. With 10 properties paid off the reality is that in order to receive a descent return on your equity you wipe out the cash flow on the property.
Once a investor gets to that point if their goal is passive income they are investing at a very low return in a not so passive vehicle. Best option would be to sell everything and increase their returns elsewhere in truly passive investments.
@Craig Moore Ha! I was being hyperbolic. I should have been more measured with that statement. 20 years ago I would have taken way more risk, but you still have to be careful not to overleverage yourself. In 2008 I had a huge setback because I was cocky after some early success, overleveraged on some multi-families, and when the crash hit and rents cratered, my partner and I didn't have enough liquid to cover it. My partner went bankrupt and the bank snatched the properties back, gobbled my lunch and almost forced me to do the same. Huge setback, but a good learning experience. Just wanted to throw that cautionary tale out there to balance it.
So definitely be aggressive, because you can be... just don't write checks you can't cash. I have a family to take care of now, so I can't run around guns blazin' like the old days. Hence my above strategy. ;)
Would you mind if I reached out to you about your journey and how I can avoid some pitfalls maybe? I'd essentially like to be "pedal to the metal" for the first 8-10 yrs. Maybe around 33-35y/o do I plan on becoming more conservative.
Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
10y
@Craig Moore Sure. I'm no expert, but I'm happy help where I can. PM away. I think the main ways to be aggressive when you're younger are with savings and allocation of your time if you are strong in deferred gratification. You can assume more risk as well, since you have more time to recover from mistakes, but I would focus more on the former two things personally.
Investor · Houston, TX · Member since 2016 · 36 posts · 22 votes
10y
It may have already been discussed, so forgive me if I'm redundant.
Two things:
1 - renter paying off your mortgage shows positive on your spreadsheet, not in your bank account, until the mortgage is paid off, or if you refi or sell. However, a crash can reduce that gain before you receive it.
2 - As we all know, mortgages are front loaded, so for the first five years, you really are paying mostly interest, and not reducing your principle. So, you have to hold your mortgaged rental property for a longer time to realize its benefit.
You have no control over the markets. Your mortgage can flip upside down while you're sleeping.
Issaquah, WA · Member since 2016 · 15 posts · 7 votes
9y
Hi all, just reading this thread as I am a newbie. I have been intrigued by the conversation as I have had the same question. I want to quit my job by next spring (if possible). My thoughts are that I buy 2 properties and own them outright to start with. This will maximize my cashflow right away and give me aprox 35-50K a year to live on. After the first year, I then can leverage the equity in those two properties and start buying more. The question that I have, is this: In my head, that strategy makes sense since my goal of livable cashflow is so short term, but can I achieve the same or better results leveraging my money? (i.e. own 2 properties outright in the near term or leverage my money and buy several properties....not sure if I can even get that many mortgages in a year?) thanks!