Right now at age 38? Leverage. Ask me again in 15 or 20 years and my answer is likely different. It's not that different than other investments IMO. People tend to be more aggressive (more risk with higher upside) when you've got time to make up for some mistakes and more conservative when you're older. I'm no exception.
Leverage affords you opportunity. Unless you have HELOCs on the free and clear and use that as leverage....
What's your thoughts on keeping all your funds tied up?
My thoughts on that are if my cash flow is great at 1500 to $2000 a month per unit And I have X amount of units and can buy a new unit every 20 months cash and increase my yearly income by 15000 on a 10 month Fiscal year what's the problem with that Versus maybe leveraging or cash out riefi and only make hundreds A few 100 a month or break even
I would choose to maximise my returns by investing my money where it will earn it's keep. There is no way I would bury it in a property, where it is at risk in a market correction, and only earning/saving the current mortgage interest rate.
You should only hoard your money in real estate once you have all the money you will ever desire and no longer have any use for it.
IMO real estate investing all but doesn’t work w/o leverage.
Most of my properties have been refinanced such that the debt exceeds my purchase price. If not I’d likely still have a single 8 unit that made me enough to afford a small apartment for myself to live in some nowhere Texas town
The more you borrow, the higher the returns but the greater the risk.
A 50% mortgage would provide far better returns than paying all cash and it's extremely low risk.
I can give you very high level calculation to understand both scenario...
Lets say you buy 100K house with 1000 rent... lets compare all cash against leverage...
All cash Investment
- Yearly return = 12000 (Rent) + 2000 (Appreciation) - 3000 (Tax + Insurance + Capex) = 11000 = 11%
- Yearly Return = 1000 (Rent Cash flow) + 2000 (Appreciation) + 3000 (Amortization) = 6000 = 6%
- Now when you leverage investment at 20%, you can buy 5 house from 100K
- Yearly Return of 5 Houses = 6000 X 5 = 30000 = 30%
- There are more tax benefit in this deal also as your positive cashflow is lower...
If you are planning to buy multiple houses, Leverage is always better...
Originally posted by @Kevin Tuttle :
My question is would you rather own the home or property outright with No mortgage or would you rather have a mortgage
IT depends on your goals, where you are in your life and your risk tolerance. When you are just getting started, having a little leverage should improve your overall returns, but it also increases risk.
By observation, it looks to me as most of the old timers who have lived thru a few downturns are running relatively low debt levels. Yes some of it is their properties have gone up in price to equity, some of it is they have paid some things down, and some of it looks like retirement planning as older more experienced investors move towards retirement and seem to value cash flow over numbers of doors.
We personally like moderate leverage, but we are starting to think in terms of slightly fewer doors that are paid off in 15 years vs having as many totally leveraged properties as possible.