If you have cash, should you use it or is it better to use leverage if you can? So far, I've almost exclusively used cash to build our small portfolio. My goal for the year was to fully replace my current after tax income with an equal amount of income (after expenses) from our properties. Based on my calculations, I'm one deal away from reaching that goal, but I'm at a crossroads trying to decide which path to pursue next and would appreciate input... Option A: Use leverage and ~$70k as downpayment/closing costs to buy a multi-family four-plex for $225k, gross income: $2,750/mos, net income: $1,375/mos. OR Option B: Use cash and buy a 3/1 SFR for ~$50k, gross income: $1,440/mos, net income: $1,000/mos - this has been the model we've used to build our portfolio thus far and we have a proven niche approach for this scenario My husband is advocating that we diversify and buy a MF and also use leverage while I can since I have a very solid "9 to 5" right now and struggled to get financing when I was freetired and focused on growing the portfolio. I see his point but am hesitant to take on debt if I don't have too since the cashflow really isn't a whole lot more on the MF. Any thoughts?

@Isiah Ferguson @Ericka Grant Isiah you are NOT cash flowing on your duplex! you are receiving your money back at $1020 a month for 99 months. (81/4 YEARS!) your money is loosing value in that time frame. in 81/4 years that $99,000 will not buy near as much as it will today, so now you will need to wait even longer to have enough buying power to equal what you have already invested. In addition you are spending money to keep it in there. every dime in expenses is YOUR money going back into the property! As a young investor your goal should be to make your money grow, not shrink it!! now lets say the market falls. your investment is now worth $75,000. now you gotta wait another 24 months to get your $99,000 back. total 101/4 years. after that long I would have been looking at a cash out REFI, and taking tax free loan pay down back out. My tenant would have been paying the loan and all the expenses because when I bought the property I allowed some room to drop the rent. yes in that event my cash flow will go down but that's NOT profit. you are still waiting for the first dollar of profit. While I have been getting 10 years of loan pay down. If you are leveraged then you only had $25,000 in there to start, so instead of loosing $24,000 dollars you lost about $6,000 and the bank lost the remaining $18,000, assuming you sell at the lower price. Which would you rather loose? 24k or 6k? once again the money in RE does NOT come from a paltery few hundred dollars a month cash flow, a late fee here and there or a few pennys saved by managing your own property. You guys need to look up some of Ben Lybovich's posts on here. >>>Now a word of caution<<< Too much leverage and the tenant's rent wont meet all expenses especially if rents fall or values drop , you have to sell, or long vacancy's. pay too much, leverage too much and you will loose it all. Cash flow to me is the same as the margin of safety. if its cash flowing $100 dollars a month I can breath a little easier and hope the rent market raises. below $100 and im getting nervous unless I can raise the rent. Remember the numbers you start with should improve with time. if 3 years pass and now the cash flow is $300 a month I feel really safe. ( it increases as rent goes up) when its $500 dollars a month im gonna look at refinancing, 1031 or something. and if my equity (bought and paid for by my tenant) and appreciation have risen then ill take some cash out and look for another property. OOPS guess what just happened. my tenant just bought me another property!! At ten years The guy who paid cash is still saving money for another property and waiting to get his investment dollars back, and by now he will have to buy a cheaper property if hes going to pay cash because his dollars are worth less. <<< THERE ARE MORE VARIABLES HERE THAN WHAT IVE MENTIONED ABOVE, AND THE DOLLAR AMOUNTS ARE MADE UP AS EXAMPLES ONLY!! YOU GOTTA MAKE YOUR OWN BUISNESS MODEL BASED ON YOUR GOALS, AND RISK TOLERANCE!!<<< Now about the Bank. I show all rents all expenses and all profits on my taxes. after 2 years (sometimes less) and with portfolio loans the banker is able to add a part of the rent income from the property I am trying to buy as income for the loan. as you grow your ability to get loans grows as well. I watch my over all leverage as much or more than my individual property leverage. I try to get portfolio or commercial loans with 7-10 year arms and a 25 year amortization. these loans are way less trouble to obtain than a conventional loan, but usually a higher rate. I keep cash reserves on hand enough so the bank knows I can stand a vacancy or a new roof or something the rest goes to investing. Cash flow ( my own returning money included.) Pay those loans down at the end of your investing career not the beginning! Okay so im in a different boat than you guys. Im 63. I want to retire someday. when that happens I want to live on my rental income. okay now Ill try to get some stuff paid off, or refinance to lower payments. why? I know full on its not prudent, and I am loosing opportunity. but at 70 or so Im not going to care if its my money coming back to me or not. in fact at that point its kind of my heirs money cos they will get it when I check out of this world. if I put the same amount of money in an IRA it will eventually run out (around age 92) and they get nothing if I live too long. with a cash based retirement if I live to 93 I go on welfare, eat beans and live in a culvert. If its a rental that's paid off I still can take cruises go to the beach and, drink beer cos the money keeps flowing in, and yes its the money I put in there!! When I pass my heirs can sell without CG or refinance and they are off and running free to invest prudently again! if its all in an IRA they get whatever is left. If it's in real estate they stand to get a more valuable asset than when it started, plus all the money I invested in it. That's my story and Im sticken to it!! RR

There are different mindsets: Mindset of the poor - poor people don't have a plan for their money. They spend money. Mindset of the middle class - the middle class manages their money, saves, and seeks security. Mindset of the wealthy - money is to be invested. The majority of wealthy people use other people's time and money to make them money. The doomsday prophesies about how you can lose everything if it leveraged is a chicken little story about the sky falling. Don't get over leveraged and keep a reserve. Invest for cash flow. Then it doesn't matter if the market goes up or down you can weather the storms.

@Isiah Ferguson "With leveraging, lower cash flow per door after expenses doesn't quite make sense to me yet" The reality is equity(cash) does not increase cash flow it decreases cash flow which is a concept few novice investors actually comprehend. When you view real estate investing as a long term plan you will understand it is basic math. When you put cash into a property you are only saving the amount the interest would be on a loan. At todays rates you would be maybe saving 5%. If instead of paying cash for a property you put the minimum down on multiple properties your over all cash flow and return on investment is increased by using other peoples money. Your tenants would be paying the loan costs, including principal, and you would gain what ever appreciation takes place on multiple properties instead of one single property plus the positive cash flow. If you look at leverage as a way to spread your cash (making it work both harder and smarter) it would be similar to compounding interest. Over time you compound your cash investment and end up with Multiple times what you would have made by simply purchasing one property at a time with cash. Instead of saving 5% on your interest payments you would be earning 10-15-20% on your cash through appreciation, cash flow and tenant paying off your property. Paying off your properties is also a slow process to wealth growth and not desirable. Your tenants money needs to be pulled out and reinvested when ever possible to again multiply your investment returns. Leaving it in the property is again only saving you 5% on a loan instead of earning you the 10-15-or 20% (or more) it could be earning.

@Ericka Grant Another thing that may interest you is getting a business line of credit and leveraging the equity in your properties to do so. I just put my properties in Indianapolis into a business line and they gave me 60% of the value of each property on the line. It was a lot easier than applying for 4 separate loans. This way you don't need to use the line if you don't want to and there won't be a mortgage payment, or you can use the line to buy more houses and only have one monthly payment according to the amount you are using.

Use Leverage or Stick with Cash?

Michael Beeman

Casey, IL · Member since 2017 · 175 posts · 308 votes

9y

@Ericka G.

I am always an advocate of using leverage whenever it involves building a portfolio. However, these 2 deals are not "even" I'd rather buy 4 of the SFR for 50k a piece that rent for 1440/mo, than spend money on a 4 plex, that for some reason is only renting for 900/unit, but literally costs more per unit. The deals are not even.

Have you considered a compromise? Maybe put more like 50% down on 2 different SFR properties that are 50-60k and renting for 1400/mo. You don't incur a ton of debt, you make more money overall, and I would bet, that your husband would probably like that as well. Although, I am a big fan of multi-family. According to the numbers you gave me, SFR is what is hot in your area. I hope this helped, Good Luck!

16 Reply

Jeff Sprunger

Lockport , NY · Member since 2014 · 265 posts · 124 votes

9y

stick to the "proven" model you've developed and know works.

5 Reply

Stanley Parsley

Investor · Chandler, AZ · Member since 2015 · 409 posts · 214 votes

9y

opm opm opm

I love other peoples money

this way my money can always be there incase of the worst scenarios

double or triple check your numbers just to see what the investment will cost and how it will perform under differing conditions

there is not a one all in real estate there is also no guarantees in the market so do a lot of home work before diving in

enjoy

10 Reply

Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

9y

@Ericka G., if you'd borrowed from the start - you'd ALREADY have reached your goal!

AND, would be worth a lot more to boot! [Yes, I disagree with Jeff as far as BEST use of your cash].

My biggest question to you is: what are those two options REALLY worth? A = $325k? 2 = $80k?

(ie. If instead they're both roughly market value, then I don't like either of them! Get my point?)

Congrats on your progress so far, but your MOST successful deals will be the ones where you are patient enough to find ~30%+ as-is discounts, which gives you an extra profitable exit strategy!...

2 Reply

Ericka G.

OP

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

Michael Beeman This is why I love BP, I just had a lightbulb moment when you said "these deals are not even" - I hadn't been looking at it that way but you're absolutely right. Why would we take on debt to pay more per unit in a MF than we'd pay for a SFR? That makes me think that we need to keep waiting for the right MF deal...this is the best one I've seen so far in our city sadly. One thing I should have mentioned that also makes the MF attractive is that it is in our town whereas our SFR model has worked best out of state.

6 Reply

Ericka G.

OP

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

Brent Coombs I hadn't thought of it that way, but another good point to consider...and when I do, the MF comes up short. The Fourplex's asking price is $225, we offered $210k (looks like one owner is unloading a set - other identical fourplexes of his have sold for $190-215k in the past year). They have multiple offers so asked for best and final by EOD Monday. If we get it at $225k I think it is worth $225-250k max. Honestly $225k feels like I'm overpaying based on the comps and the fact that the schools are trash in the area. The single family homes, on the other hand, we almost always are able to get under market value with a bit of patience. The last $50k house we bought is worth $80k+ now...I'm thinking that this is another reason why that path might be the better one at the moment.

0 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

Aside from the fact that your net income numbers are inaccurate (far to high based on real projected real estate investment expences) it is very clear that you do not fully understand the value of cash.

When you put cash in a property you are essentially sentencing it to death. By placing no value on cash you are losing a great deal of potential income that would have placed you in a position to match your income far sooner.

Rental properties have two separate income generating streams. The property and the equity or cash invested. Cash is at the lowest valued to investors at 10% return. If you have 50K in a property the First $416 of the monthly income is generated from the cash and is deducted as a expense. At best your cash otherwise is only saving you the very small amount of interest you would be paying on a 50K loan.

For this reason cash purchases are the slowest and most uneconomical approach to investing. When you can borrow at 5% tying up cash valued at 10% in a property makes very little financial scenes. You spread your cash as thin as possible to own as many properties as possible each generating a return from Other Peoples Money.

Money must be forced to earn it's keep not left to die in a rental property. The true value of your money lies in it's ability to attract other peoples money to work on your behalf.

20 Reply

Dean H.

Rental Property Investor · Salem, OR · Member since 2016 · 202 posts · 305 votes

9y

Ericka Grant Ericka your husband and you are in exactly the same situation as my wife and I. I know many will preach leverage but although I never say never at this point in our lives we knowing what we have. We really like single family, We look at it as multiple savings accounts that as things arise in our future retirement we can sell one now and then to enjoy the fruits, if it was a couple of multi family that would make a bigger hit on our portfolio. Our future involves buying, rehabbing and renting sf hopefully forever in increasingly nicer areas until enough is enough and we are about half way there. Cash flow is paying for a couple of project houses a year now and that speed works for us. This is our system and I know the experts will tell you we are wrong but this wrong cashflows nice for us!!!

4 Reply

Shiloh LundahlPro Member

Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

9y

@Ericka G. it sounds like you are doing well the the SFRs. In reality, when you have more than one SFR they act like a duplex in that you can spread the vacancy risk out among other properties. It is convenient to multi family properties when you are managing them yourself and you want to make their management more convenient. However, when they are managed my a property manager that charges per door it may not matter that that they are spread out. Additionally, SFRs seem to have more exit strategies than multi family units do. Usually investors are the ones that want the multi family and they want to get the property at a discount as mentioned by @Brent Coombs.

I understand wanting to diversify and expand into more areas of real estate. How would it be to focus on your goal until you reach it and then venture into other areas of real estate? By the way, I'm not anti multi family, I have 3 duplexes but I got them at a depressed value (all between 33k and 53k) and the cash flow is good.

480-206-1209 Podcast Guest on Show #287

3 Reply

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

9y

The best part about real estate investing is the ability to leverage other people's money.

You buy a house with someone else's money (the bank) and then you pay off the loan with someone else's money (the tenant) Best business plan in the world!

24 Reply

Angelo Mart

Professional · Parsippany, NJ · Member since 2013 · 384 posts · 262 votes

9y

LEVERAGE all day. I utilized all Cash on my last deal and before I knew it my entire bank account was drained until I did a Cash Out Refinance after six months

7 Reply

Darren Budahn

Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes

9y

If you want to expand the portfolio I would definitely use leverage in your situation. Based on the limited information you gave, the SFR looks it would produce a higher return. But as was mentioned above, I would never be looking to pay retail for any property. Just curious, where are you finding $50,000 SFR's that rent for $1,400?

2 Reply

Ericka G.

OP

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

@Thomas S. I was waiting for someone to call out my expenses...you're right that they aren't listed very accurately. According to more formal calculations (including vacancy, CAPEX, repairs, etc) the net income on each is:

Option A (Fourplex @ $225k): $1,041/mos or $260/unit/mos

Option B (SFR): $657/mos

While I see your point on spreading cash thin to own as many properties as possible generating a return from Other Peoples Money...the reality is that I've had very little luck finding other people/banks willing to give me money despite 730+ credit, ample cash reserves ($250k+), and a six figure job. I am able to get financing on the quad but they are acting like i'm "risky" b/c I freetired and worked for myself for almost a year consulting/building our portfolio...so now that shows as a gap on my employment history. I hate banks.

So, I see the OPM posters and it looks cool, but in reality, no one is trying to give me money. I also am hesitant to take on a ton of debt spread thin...what happens if the market tanks, all of my tenants move out, and/or I lose my job? I'm still on the hook for all of those mortgages, whereas with cash deals, as long as I pay my taxes, I'm fine if a house is empty (though they never are). How have you navigated the "risk" side of being heavily leveraged? I don't want to let fear keep me from using leverage, but the lofty concept of it doesn't match my reality - I'm genuinely trying to understand how others use it to close 100 deals when I can barely get a bank to loan me money for 2 or 3, hence why we've used leverage for 3 deals and cash for 4 deals thus far.

7 Reply

Ericka G.

OP

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

@Dean H. Yay! Glad I'm not the only one on here who likes (and see success with) the cash for cheap SFR model. Leverage is both tempting and scary...

2 Reply

Ericka G.

OP

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

@Shiloh Lundahl I love your idea to use the method that has been working to reach our goal for 2017 for that one last deal (we are sooo close!) and then branch out and use leverage to build from there. That will satisfy my husband's desire to diversify and help me manage my anxiety about taking on debt and jumping into the MF pool for the first time. We can still likely do both this year, but switching the order is a simple fix that would give me more peace of mind.

True MF deals seem very scarce in Atlanta these days but I find my solid little SFR deals in our niche market monthly. Patience is a virtue I'm still working on.

@Darren Budahn I've learned the hard way not to share my exact target locations in Atlanta and elsewhere, but will share that we're able to collect higher than market rents by focusing on an employment niche that value proximity to the airport and a few other secret ingredients that we can then charge a premium for. Word of mouth has been huge in this niche...I have a constant wait list of folks to get into our properties, so I include vacancies in my calculations, but never really have them.

0 Reply

Dan Bryskin

Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes

9y

@Ericka G.

Congratulations on doing well :) Deals - why not to get both? Don't be afraid of leverage, embrace it:) Let me comment on the money. You are eligible for 10 home loans. Why would't you take them? 9 to 5 gives you w2 income, lenders will love you. Even with 5% on the bank loans, after you count inflation at about 2%, you get money for 3%. Add a tax deduction for the interest, and your real rate is 2%. It is not hard to generate returns in excess of 2 or even 5%, why would't you? Here is what inflation does. Over a life of the 30 year loan, depending on the rate of inflation it will pay 30-40% of the mortgage for you. Your P&I remains fixed, but at 2% inflation rate, next year you are paying it with cheaper dollars. Rates are going up, you may not see money as cheap for years. Cost of financing is just a cost of doing business, I try to keep as much cash as I can and get whatever I can financed. Good luck.

4 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

"How have you navigated the "risk" side of being heavily leveraged?"

Personally I would be much more fearful if it was my own money at stake. Although I have never had any concerns about the turn in economy resulting in disaster I sleep far better at night knowing my investment capitol is spread thin enough using OPM not to worry about a loss.

The reality is that regardless of the economy people will always need a place to live and the worse it gets the more people will be looking to rent. For myself, having a extremely high level of risk tolerance, I tend to have trouble staying awake. Risk is simply a state mind. The mind simply needs to be controlled to do your bidding.

8 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

Ericka Grant My two cents: use leverage to the point where your earnings are tax-free. There's always a tipping point where writing off mortgage interest and depreciation can balance out the income a property generates. It moves over time (interest payments on mortgages decrease over time) but if you can get close you're on the right track. However, I can imagine someone using all-cash to get a discount (I've done it before) and ensure their downside is "making less money" rather than "losing money".

4 Reply

Ralph R.

Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes

9y

Ericka Grant In order to build wealth your money has to work for you. By paying cash for your property you are shoving it in the mattress and using more money to keep it there (your rental expenses). Your afraid of things that are very unlikely to Happen. I bet you have a better chance of winning the lottery than you do of all your houses going vacant at the same time. If that were to happen It would also be happening to other people. I promise you if very many landlords have all vacant houses at the same time you will have way more pressing concerns than unpaid debt. for one thing your houses will be worthless. Everybody is aware Ramsey advocates paying cash for everything. Kyosaki (rich dad poor dad) advocates using leverage. Google the 2 and see who has more wealth. You must manage leverage too. Enough to make money but not so much leverage you can't stay afloat long enough to weather a problem that's more likely to happen. One vacancy not 6 at once cap ex etc. Another foolish notion is that cash flow is profit. Its the tenant paying you your own money back at a very slow rate. How long to get your $50k investment back at $600 dollars a month?? And you spent 3 or 4 hundred a month in expenses to keep it there. Remember it's not profit until your initial investment comes back to you. If you pay cash up front AFTER a few years you start getting profit when you've recovered your investment. When I leverage I start making money the first month. The tenant pays a little of my down payment back as CF (my own money coming back to me)and he pays some principle on my loan. principal pay down is profit. In my current situation after 3 new loans this year I get 600 a month back in principle reduction from all my property's and I just took out enough on a refi to purchase another property. The 3rd new property in 14 months. This 600 a month will increase every month until I re start a loan. When after many years you do get your money back how much buying power will it have lost?? This is true even on a leveraged property. You lose buying power on your down payment. Too much equity is bad not good. True wealth is achieved with value add and appreciation forced or otherwise. There is no profit on cash flow. The tenant is merely holding your property for you paying expenses payments and cap-ex etc. you make profit when you buy and sell.or refinance. There's no tax when you take money out of a property as a re finance. You also profit on the dollars you invested that were not yours. For An over simplified example Say your total gain on a property was 7% after you sell it and your tenant paid every bill from the day you purchased it. Your loan interest was say 5%. You just made 2% on the dollars you borrowed. If the tenant paid all expenses you made 7% on your money minus the time value loss. You could have 4 leveraged like this or one paid for. If you were a bank who would you lend money to the guy who owns $400,000 worth of property with $100,000 dollars of debt,good credit and collecting $4000 a month rent with a 7% gain for a gain of $280 a month or the guy who has $100,000 dollars of property good credit and collecting $1000 a month rent that's going to make 7% after he gets his money back. ($70 dollars a month) Both scenarios cost $100,000. Which one is more attractive? RR

8 Reply

Ericka G.

OP

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

Andrew Johnson the tax point is another good one in favor of leverage...based on everyone's feedback I think I'm going to start exploring leverage to help me get into deals that I otherwise wouldn't be able to do without wiping out my cash, plus leverage is good for taxes and diversification while rates are still low...I'll continue to pick up the small "too good to be true" cash deals cash flow $600-$1,000+ after expenses when I can too. I will follow the deals and let fate decide from there...

0 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

Ericka Grant It also has a lot to do with your marginal tax rate. Making $20K annually on a property is far different if it's your only income vs. a lawyer who is a partner at a law firm making $400K. The fictitious lawyer also likely has cash reserves and can stomach a higher risk/reward ratio (hence higher leverage). Then again, go down this road further and you get into AMT and the impact on depreciation. Is this the part where I say: "Consult your CPA!"?

3 Reply

Patrick Hein

Investor · Plattsmouth, NE · Member since 2017 · 7 posts · 9 votes

9y

Consider this. If you are using your money to buy things outright, YOU and only you are at risk. It is a lot harder to steal something from litigation if it is not yours. Being incorporated (unless in Nevada) does not protect you completely. If you have capital or assets that you or the company own, the lawyers will eat you alive if they can and take it all.

Nobody wants your debt.

6 Reply

Isiah Ferguson

Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes

9y

@Ericka G. I completely understand your matter of doing all cash deals. Me & my fiancé make the same "mistake" and cash out on a duplex for 95k and 4k in repairs back in November 2016. Our monthly cash flow has been great at 1,020 per month which calculates about maybe 13% ROI yearly after taxes and insurance. Our main focused was cash flow at the time but I think we have the concept of REI wrong a little I'm not sure. The more I educate myself in this game leveraging is starting to make more and more sense for the simple facts of appreciation, cash flow, OPM/banks, & taxes. With leveraging, lower cash flow per door after expenses doesn't quite make sense to me yet when the goal is to acquire enough cash flow too cover your expenses etc. Appreciation isn't always guaranteed and I had the same issues with bank too. No one wanted to lend me money because I didnt have a W2 job at the time because I got injured playing professional sports and I was receiving workers comps but I knew I wanted to build in this business. Leveraging is a little scary but I think if the numbers are correct at purchase and expenses are calculated correctly, and with reserves, you can protect yourself. I also think it ball down too your exit strategy, worry less about cash flow at the moment and build your business. The cash flow and appreciation will come if you buy right from the beginning then you can enjoy cash flow later as you scale up and this is why I'm looking to do a cash out refinance and get my money back. We still figuring things out because having a property free and clear feels so much better than having mortgages I bet but I think we have to look at This as a business that has to be grown. idk I'm still a newbie but thats how what I see now. what you think @Ralph R.

5 Reply

Ericka G.

OP

Investor · Atlanta, GA · Member since 2015 · 366 posts · 283 votes

9y

Isiah Ferguson your point "With leveraging, lower cash flow per door after expenses doesn't quite make sense to me yet when the goal is to acquire enough cash flow too cover your expenses etc. Appreciation isn't always guaranteed and I had the same issues with bank too." Is exactly what I've been struggling with on wrapping my head around leverage...but the points other folks are making about taxes, growth potential, and the risk of having all cash houses if sued are all making me think that it is definitely time to start making better use of leverage. Now the question is how...Have really not been impressed with any of the banks I've dealt with so far

1 Reply

Dan Bryskin

Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes

9y

@Isiah Ferguson, @Ericka G.

Guys, you need to understand a difference between good debt and bad debt. 30 year single family loans are the best money you are going to get. You go hard money, commercial, portfolio loans and what not - that can get dicey. Higher interest rates, need to re-qualify every so often, cross collateralization of portfolios. Sure they are tools, but the terms will never be as good as government guaranteed 30 year paper. Power of leverage is simple. Somebody lands you money at say 5%. Can you make 2-10% on their money? You can, great. It adds to your cash flow. You can't - what the heck are you doing in this business? Next question is cost of money. 5% bank loan will cost you 2%. Why? Well, 5% is tax deductible, so you are saving at least 1/3 after state and federal taxes. Next is inflation. Official target is 2%, but inflation in this country, imho is heavily under-reported. Real rate is much higher. Let's look at real cost of money: 5% - 1/3 for tax benefit - 2% inflation = 1.3% You can't generate returns a few percent higher then 1.3%? Sell your real estate !!! Another thought. You owe the bank 100k - it's your problem. Say you owe small bank $2,000,000 - it is their problem :) What's your borrowing capacity? $500,000? $5,000,000 ? What can you do with that cash? Can you generate another 40-500k in income? Why would't you do that?

4 Reply

Use Leverage or Stick with Cash?

Use Leverage or Stick with Cash?

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