IS THERE POWER HERE AT ALL ?????
Investor · Charlotte, NC · Member since 2017 · 321 posts · 157 votes
I always hear people conversing about leveraging thier entire portfolio which is a great way to go. But is there power in NO leverage ? I was just concern of what people thought of dumping staright cash into rental properties. Does anyone believe in NO leverage ?
Leverage is great, until it is not. Today it is fantastic. In 2009 there sure as heck was value in all cash. My method and philosophy has always been use conservative leverage to grow, and all cash for wealth preservation. Put into action, this means use leverage to grow the portfolio sufficient such that the income it generates if all the units were free and clear could sustain your lifestyle plus some reasonable margin (2x for me). Once you get to that point, the leverage has done its job for you, you have control of all the assets you need, it is then time to "flip the switch" from growth mode into wealth preservation mode ... that means plowing all the profits and excess funds into paying off those mortgages in a snowball manner. When you are done paying them off, then you are done, you can do as you like after that, but I don't believe in cash out refinancing the properties after that because I don't believe in risking something you have and need in order to buy something that you don't have and don't need. I may be a bit unusual in this regard, but this has been my operational philosophy and it has worked out quite well for me.
@Isiah Ferguson Unless you have a mountain of cash moldering under your mattress I'd say you could make even more cash by leveraging (but not over-leveraging) existing properties in order to buy more leveraged cash flowing properties.
However, if you are satisfied with the current income of your debt free properties and have no aspirations to expand and scale the business then having a fleet of them isn't necessarily a bad thing. I'd like to be at that point around the time I decide to no longer be active in this business, whenever that is.
Purchasing all cash with quick close can get you much better deals as well. Then you can decide whether to pull cash out. But remember to find lender first who would do a cash-out refi on a rental property as it can be more expensive financing and harder to find. When loan rates go higher or loan costs are excessive, paying all cash makes more sense. For right now, we've maxed out on 30-year fixed-rate loans at these low rates and will be content to keep them for the length of their terms if need be.
@Isiah Ferguson Just to clarify - acquiring with cash almost always nets a better deal. It's whether or not to leave it there or pull it back out that I think you were referring to with your original post.
@Ryan Murdock @Anthony Gayden Thanks for the feedback. It's just more appealing to me to have a cash flow of 1'000$ after expenses in a free and clear property of 100k than have 250$ cash flow from being leveraged. But i see both sides of the coin. Leveraging can help you scale up quicker in units. I think best would be a good mixture of both leverage properties and cash.
Isiah I believe there is HUGE power in cash only.
Just a warning - this is my first post on biggerpockets. I found the show a couple weeks ago on Soundcloud and have listened to about 60 episodes so far.
I am a cash only buy/hold investor and have 2 duplexes in a smaller northern Minnesota community. Properties were purchased nearly 4 years ago and there has been no interruption of occupancy. The properties gross 37k and 30k/ net/year and my total investment is 163k.
In the next year we will add a third property paid for from the proceeds of our first two properties. That was our strategy from the start. Following that strategy we will continue to purchase properties with the rental proceeds when sufficient funds are available. Thus my goal of 3 duplexes in 2-5 years.
Thanks
As mentioned above it is easier to purchase properties with cash. Personally if it isn't a cash deal I likely am not interested. To get the returns I want there has to be something wrong with the property. If it is a good deal that can be financed it will get snatched up quicker by someone more desperate than me.
Having no debt is also good for when there aren't investments available. My buying criteria is limited and it wouldn't do me any good to be paying on a loan with a bunch of cash in my pocket. The debt service will just be eating into the cash every month.
Leverage is king when investment options are unlimited but the market is cyclical and it is not always a good idea to buy.
I will add in that I am a cash/equity investor. Have built my portfolio with minimal debt and I may add more just to finish some flip jobs quicker. We are flipping 2.5 houses right now and are pretty much doing them one at a time.
Isiah, I'm struggling with this same issue. We are currently building our rental portfolio, trying to stay relatively conservative on the leverage to stay safe, but enough that we can spread our funds around and can buy more properties. However, the purpose for our portfolio is to have sufficient passive income in retirement to make sure that my future medical expenses will be covered. So I can achieve a final income number by holding a large number of leveraged, modestly cash flowing properties, or a far fewer number of free and clear maximally cash flowing properties.
It's a challenge to figure out what is the best strategy for us. Should I snowball the smallest mortgages or should I refinance them and take out equity to buy more? I understand the issue of putting your money to work, but at some point, holding an asset free and clear might be the best and highest use of that money for me!
I always hear people conversing about leveraging thier entire portfolio which is a great way to go. But is there power in NO leverage ? I was just concern of what people thought of dumping staright cash into rental properties. Does anyone believe in NO leverage ?
But people who like leverage will say that they can borrow at better rates than the collective return, thus it is a 'safe bet' to take on debt. Debt is a double edged sword. The great recession wiped out a lot of people because their debt wasn't as 'in control' as they thought. The power in no leverage is safety from the financial obligation of debt. Nothing wrong with that. It's just not where some (like me) want to be.
Isiah, I'm struggling with this same issue. We are currently building our rental portfolio, trying to stay relatively conservative on the leverage to stay safe, but enough that we can spread our funds around and can buy more properties. However, the purpose for our portfolio is to have sufficient passive income in retirement to make sure that my future medical expenses will be covered. So I can achieve a final income number by holding a large number of leveraged, modestly cash flowing properties, or a far fewer number of free and clear maximally cash flowing properties.
It's a challenge to figure out what is the best strategy for us. Should I snowball the smallest mortgages or should I refinance them and take out equity to buy more? I understand the issue of putting your money to work, but at some point, holding an asset free and clear might be the best and highest use of that money for me!
Thanks for the feedback. It's MOST definitley have been a challenge for me as well as far as picking a side. I'm somewhat torn between the 2, leverage and all cash. For some reason I think a fewer number of properties free and clear maximally cash flowing properties looks like the better choice. Free and clear is the ultimate goal in some regards anyways, correct ?
Hi Isiah, depends if you are talking about cash for making offers or parking cash long terms.
Cash for making overs is great if you can and will give you a lot of leverage
Cash for long term generally does not make sense unless you want to be very conservative.
I'm talking about cash for cash flowing asset and also can be a place to park cash becaus eyou can always sell at anytime.
Isiah, I'm struggling with this same issue. We are currently building our rental portfolio, trying to stay relatively conservative on the leverage to stay safe, but enough that we can spread our funds around and can buy more properties. However, the purpose for our portfolio is to have sufficient passive income in retirement to make sure that my future medical expenses will be covered. So I can achieve a final income number by holding a large number of leveraged, modestly cash flowing properties, or a far fewer number of free and clear maximally cash flowing properties.
It's a challenge to figure out what is the best strategy for us. Should I snowball the smallest mortgages or should I refinance them and take out equity to buy more? I understand the issue of putting your money to work, but at some point, holding an asset free and clear might be the best and highest use of that money for me!
Thanks for the feedback. It's MOST definitley have been a challenge for me as well as far as picking a side. I'm somewhat torn between the 2, leverage and all cash. For some reason I think a fewer number of properties free and clear maximally cash flowing properties looks like the better choice. Free and clear is the ultimate goal in some regards anyways, correct ?
Different people have different goals, so there is no general 'ultimate goal'. There is no right or wrong answer, and a lot depends on your overall portfolio and asset allocations.
I'm pretty debt-averse and have some free and clear, some leveraged. Depends on the rate/term.
Paid off an 8% a 6.125% and 6% conventional fixed rate mortgages. Also commercial with their hassle, adjustable rates and calls.
Not even I am paying off residential fixed rate mortgages under 5%. I would borrow more at same.
If I buy with cash or pay off someone early, it's because I get a discount. I wouldn't tie up my cash to save less than 5%. Good discussion!
Leverage is great, until it is not. Today it is fantastic. In 2009 there sure as heck was value in all cash. My method and philosophy has always been use conservative leverage to grow, and all cash for wealth preservation. Put into action, this means use leverage to grow the portfolio sufficient such that the income it generates if all the units were free and clear could sustain your lifestyle plus some reasonable margin (2x for me). Once you get to that point, the leverage has done its job for you, you have control of all the assets you need, it is then time to "flip the switch" from growth mode into wealth preservation mode ... that means plowing all the profits and excess funds into paying off those mortgages in a snowball manner. When you are done paying them off, then you are done, you can do as you like after that, but I don't believe in cash out refinancing the properties after that because I don't believe in risking something you have and need in order to buy something that you don't have and don't need. I may be a bit unusual in this regard, but this has been my operational philosophy and it has worked out quite well for me.
Every property has two separate income generating streams....the property and the equity. Leverage investors properties produce cash flow, cash investors properties only partially feed the equity leaving no true positive cash flow from the property.
So does ALL cash deals equal immediate massive cash flow ? Is leveraging about cash flow or scaling up your business ? Is it better to focus on 1 aspect or both leverage and all cash deals ? Personally, the clarity I'm starting to see is to do both all cash deals and leverage as much as I can.
@Isiah Ferguson to keep it simple - if you were to go to the bank and finance a property at a rate of 6%, that is the rate which you will be earning on your cash investment. For example, if you purchased a property for $120k, put $20k down, your loan would be for $100k. If your interest rate was 6% your interest expense in year 1 would be roughly $6k. If you paid all cash you would earn a rate of return of 6% and your annual cash flow would increase by $6k. This would be a big change to cash flow as you mentioned above.
The question is whether 6% is a good return for you or whether you would rather take on debt to increase your return over 6% by purchasing more properties?? Debt will ALWAYS increase your return on investment but it is also the people who are over leveraged who come crashing hard when the market reverses. Is your goal to get the best return on investment or are you looking to get a good return and sleep comfortably at the end of the night?
To a new investor who is growing the question seems obvious - leverage up as quickly as possible. To a person who is looking for comfort and a retirement annuity cash investing may be all that is needed to eliminate risk and live a happy life.
It is good that you are in a position to question this. I would focus on how much money you need to earn and whether it is worth taking on additional risk.
Debt will ALWAYS increase your return on investment
Really? Please explain. I take out a $100k mortgage at 6% on a property that free and clear would have a total return of 4%. Did I increase my ROI? I cash out refinance $100k on a property, then I put that $100k cash in a bank account that earns 0.01%. Did I increase my ROI?
people use financing because (a) they need it to afford more investment (enabling) or (2) to improving the ROI of their investment (enhancing) in case the anticipated yield of the investment (cap rate) is higher than the mortgage rate.
In one case, financing is enabling the transaction, in the other case, it is enhancing the transaction.
Financing can have catastrophic effect on your ROI if the net yield of the investment (including repairs, vacancy, market value change at disposition) is lower than financing rate. Overoptimistic (reckless) use of financing with unmatched tenors or high rates is conducive to ruin.
So when investing in very high risk real estate, or low cost real estate where it is not possible to get an low mortgage rate, it can make sense to go cash only. You may leverage once you can demonstrate to your lender and yourself your ability to achieve scale and stability.
For less risky real estate investment, where loans have a low fixed rate and servicing inclusive of principal repayment is covered by cashflow, financing enhances the ROI.
In short, it usually enhances the yield, but you must run the numbers. There is a potential for ruin, so you need a margin of safety.
People use financing because (a) they need it to afford more investment (enabling) or (2) to improving the ROI of their investment (enhancing) in case the anticipated yield of the investment (cap rate) is higher than the mortgage rate.
In one case, financing is enabling the transaction, in the other case, it is enhancing the transaction.
Numbers do matter: financing will have catastrophic effect on your ROI if the net yield of the investment (including repairs, vacancy, market value change at disposition) is lower than financing rate.
Optimistic use of financing is conducive to ruin (you may call this reckless after the fact). You need to be especially wary of features such as refixing rates and balloon payments.
For less risky real estate investment, where loans have a low fixed rate and servicing inclusive of principal repayment is covered by cashflow, financing always makes sense as it enhances the ROI.
When investing in very high risk real estate, or low cost real estate where it is not possible to get an low mortgage rate, it can make sense to go cash only. You may leverage once you can demonstrate to your lender and yourself your ability to achieve scale and stability.
To know which case you look at, you must run the numbers. Leverage entails a potential for ruin, so you need a margin of safety by stressing the numbers.