More properties larger debt vs fewer properties zero debt
Member since 2021 · 15 posts · 16 votes
More properties larger debt vs fewer properties zero debt
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Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
5y@Robin Brown Depends on your personal goals. When I started out I borrowed as much as I could for as long as I could. The first 11 properties I bought were 100% financed. Now, after buying and selling over 1,000 properties for my own inventory, of the last 118 properties I bought only 2 were bought with mortgages. I bought the other 116 properties with zero financing and 100% cash. It all depends on you, your goals and where you are in your investing career.
26 Replies
- Member since 2020 · 13 posts · 5 votes5y
Wow, I will definitely be checking back to see the responses on this. I have been thinking about this as I start my retirement countdown
- Investor · Ontario · Member since 2015 · 486 posts · 250 votes5y
Hey @Robin Brown
I feel like this really depends on the investor but mostly the age of the investor. When you are starting out debt can be used as a powerful tool. Access to good debt allows the investor to keep expanding and buy more properties over their career. Having more properties when you are younger allows you to gain market appreciation and mortgage paydown on a larger portfolio over time. Opposed to having the properties paid off in cash or having a bunch of equity locked up in them. Eventually when you get closer to retirement you can sell off some of the properties to pay off or pay down the rest of your portfolio. This will allow you to have less risk in retirement and have more cash flow. This cash flow will also be taxed less in retirement as you are no longer making a W2 income that is likely to be much higher than pension income.
I feel like I should take my own advice and refi a few properties as I am a younger investor with equity lol. - Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes5y
@Robin Brown Depends on your personal goals. When I started out I borrowed as much as I could for as long as I could. The first 11 properties I bought were 100% financed. Now, after buying and selling over 1,000 properties for my own inventory, of the last 118 properties I bought only 2 were bought with mortgages. I bought the other 116 properties with zero financing and 100% cash. It all depends on you, your goals and where you are in your investing career.
- Member since 2021 · 15 posts · 16 votes5y
@Jason Shackleton I guess I need to learn more about good debt. I guess the good debt is a higher risk reward on the rare massive housing market crashes (which is something that doesn't seem to affect property in Aus - we have been rising for the last 25 years).
@David Krulac Woah that's insane!! Surely you would have a team behind you. I hear about all this 100% financing which is something I am trying to grasp my head around slowly, as Australian Properties (in Melbourne) are a little ridiculous. A small 3 bed flat (one of 10 on the property I think) that we had been watching closely just went for 880K - around 640kUSD. So getting 100% finance I am sure is possible here, but need to do more research if there is actually a way to also get it to produce positive cash flow. Not keen on taking a property that I have to feed each month.
I guess my goal is to have some income producing properties that myself (partner) can self manage, I already run four small businesses that I am trying to grow and really love working on. 118 properties would be a HUGE cash flow generator for sure but I think it would chew away time from the businesses I would love to build and fall in my overall passion :) - Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes5y
@Robin Brown The first property out of the gate was not $800K. The first property was $27K, P+I was $193. USD and roommates paid $100 a month per room. Two roommates meant I live for free. You can hear more of the story on my Bigger Pockets Podcast #82
- Member since 2021 · 15 posts · 16 votes5y
@David Krulac That is incredible. I have just started plodding through the BP pods, I think I am starting ep 6 today. Still a while before I get to #86 but I look forward to that.
I guess that is one of the major differences in the market though down here in Australia. My partner's single bed apartment is worth 340kAUD. Which isn't worth selling as it's almost at the exact same value it was when she purchased it 7 years ago (320K)
I did a quick search of some properties in some country towns with populations under 5k and the best I saw was to buy the land only for 65k. Then I looking into the smallest town in Australia which had a population of 250 (now only 4) and surrounding suburbs I found a full house for 81K. But as far as becoming a rental it seems a bit far fetched with such a low populations.
Here in a suburb of Melbourne, possibly 30/40mins from the CBD by car I might be able to get a townhouse for 500K possible a multi family home for maybe 1mill if lucky. - 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Robin Brown:
@David Krulac That is incredible. I have just started plodding through the BP pods, I think I am starting ep 6 today. Still a while before I get to #86 but I look forward to that.
I guess that is one of the major differences in the market though down here in Australia. My partner's single bed apartment is worth 340kAUD. Which isn't worth selling as it's almost at the exact same value it was when she purchased it 7 years ago (320K)
I did a quick search of some properties in some country towns with populations under 5k and the best I saw was to buy the land only for 65k. Then I looking into the smallest town in Australia which had a population of 250 (now only 4) and surrounding suburbs I found a full house for 81K. But as far as becoming a rental it seems a bit far fetched with such a low populations.
Here in a suburb of Melbourne, possibly 30/40mins from the CBD by car I might be able to get a townhouse for 500K possible a multi family home for maybe 1mill if lucky.in your market it might be better to be doing fix and flip and make positive returns in that manner instead of rentals..
Keep in mind there are areas of the US were one can still buy homes for under 50k and even under 20k
the state David lives in is one of those were you can buy a home for under 20k even today.. not in great shape but usually just a little paint and buffing and its livable. these low value assets are hard to finance so most pay cash.
The west coast of the US from San Diego to Seattle is more in line price wise as where you live.. and in some areas prices even higher than OZ .. so most folks that buy higher value assets will leverage them..
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Engelo Rumora Engelo bought the cheapest home in AU a few years back If I remember correctly he paid 15k for it. something like that. He would be a good one for U to talk to if your looking to come to the US at all to invest
- 5yMike D'ArrigoPro MemberTurn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
@Robin Brown it depends on a number of factors. How much cash flow do you need to meet your objectives? When do you need the cash flow? If you're young and don't need the cash flow until sometime in the future, my preference would be to build the portfolio as quickly as possible through financing and let your tenants pay it down. Of course you want to watch your debt coverage ratio's and make sure the cash flow can cover the debt service.
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes5y
@Jay Hinrichs not buying properties at the $20K price range. Today the median price in my favorite county(which is the fastest growing county in the state) is $379,900. And the SFH I just sold in the last 10 days was $499,900. I can't remember the last time I bought a $20K house, but the very first house I bought was more than that, as well as almost all the bought since then. True its not the Bay area prices but prices are up here also.
- 5yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
It depends on the numbers and your preference. I have mortgages on some of my rentals. Only one did I pay cash for, the others all have/had mortgages. By having mortgages, you can use your money to buy multiple properties. You don't want to over extend yourself, but the banks will prevent you from borrowing too much though you need to make sure you have enough savings for the unexpected.
- Member since 2021 · 15 posts · 16 votes5y
@Jay Hinrichs Ooo this is excellent! Looking forward to hearing from another Aussie around here!! And when I get to his Podcast!! Thanks for that I will totally look out for any of his posts/content!
- Rental Property Investor · Des Moines, IA · Member since 2020 · 56 posts · 36 votes5y
@Robin Brown it depends on risk tolerance. As lots of people here say most people plan on using a high amount of leverage when they first start. Then start paying them off for a more stable retirement.
Personally my wife and I's plans I basically for the first 5 years to use leverage to buy as many properties as we can. Then after that point start paying them off snowballing the cash flow. Which In the end will boost our cash flow. Which at the same time giving us a more stable portfolio. And also some options of a source of cash if we need it.
- Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes5y
Personally, I think it's pretty foolish to have a lot of properties fully paid for in cash. Let me explain:
Let's start by asking, "Why do people want properties owned free and clear?" I'm sure there are a variety, but it seems like the biggest reason why is to have security, or be debt free. The second reason is perhaps to just increase cash flow.
If we take the first reason, security/debt free, is paying off the property the best use of funds? Paying off the property is perhaps the worst possible thing you could do. The reason why is because your return on equity (ROE) decreases with each passing month. For example, one of my properties rents for $1200/month and cash flows $450/month. When I first bought the property, I had $20,000 in equity, so my ROE was 27% annually [(450x12)/20,000], give or take since it's changing monthly as rents and equity increase. 2 years later, that property appreciated and I now have about $65,000 in equity and it rents for $1250/month and cash flows $500/month. My ROE is now [(500x12)/65,000] = 9%. This will continue until the property is paid off and the ROE will continue to go down.
If you want security, but we see that paying off the property is a poor use of funds, what else can we do? Perhaps take the money you would put towards the property and apply it to the stock market. You still have the liquidity to pay off property if you want, but you can start making a return on your cash. You can put it into index funds/ETFs for high diversity with modest returns, or you can learn to value business and pick stocks for greater returns, if you manage to master that skill. Secondly, you can start selling covered calls to generate cash flow if your picking individual stocks. Doing this, you get a greater return on your money and generate more income and handle both the main reasons to pay off property.
Here is my strategy - I aim to have money in the market equivalent to the debt I have on property. I'm currently working towards this goal. Should something ever happen, I can quickly pay off the property using stock or sell stock to weather the storm. Once my stock portfolio is built, I can sell stock as a down payment for a bigger property, the cash flow feeds my stock portfolio, I sell stock to buy a property, build the stock portfolio to get the equivalent values I want, and the cycle repeats.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @David Krulac:
@Jay Hinrichs not buying properties at the $20K price range. Today the median price in my favorite county(which is the fastest growing county in the state) is $379,900. And the SFH I just sold in the last 10 days was $499,900. I can't remember the last time I bought a $20K house, but the very first house I bought was more than that, as well as almost all the bought since then. True its not the Bay area prices but prices are up here also.
David I was referring to more Rural Western PA not the philly / lehigh market.. did not mean to insinuate that was what your currently buying. I have been funding quite a few of these lower value assets the last year in those markets.. price points sub 20k to 60k
see how long that lasts.. these are all out of area buyers that are gunning for those properties.
- Real Estate Agent · Fayetteville, NC · Member since 2020 · 86 posts · 91 votes5y
It entirely depends on what you want. With a smaller portfolio of paid off properties you have to deal with less leaky roofs, HVACs going bad, and other headaches that can arise while still hitting your cashflow goal. With financing, you own many more properties and use primarily other people's money to pay off your home for you over a long period of time. However, there is typically less cashflow. I would recommend using a performance metric such as ROI to determine what the best course of action is for you. When investing, you typically want your money to be as effective as possible, but that's not to say there are non monetary things that add value to your investments. Hope that made sense, let me know if you have any questions!
- Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes5y
@Jay Hinrichs Yes Rural Pa. whether western Pa., or other areas in northern and central Pa. outside the metro areas are lower priced. Appreciation is low to zero and there is no population growth in those areas. In one town there a friend told me how when he graduated from high school in 1964 they had the same number as when his grandson recently graduated. What that says is there is no economic growth there, high school grads are moving out, the school population hasn't grown in 56 years and the general population hasn't grown in 56 years. Is that a place to invest? Not for me. There are people who live there, there are people that rent there, but there is little to no growth. In another small town another investor I know bought a 4 unit building for $25,000. In that building a 3 br rented for $425. Yes expenses are cheaper, but so are the rents. In another town an investor went to get a building permit, and the town officials didn't know how to do it because nobody had gotten a building permit for a new build in over 30 years, they couldn't tell the investor the last time it happened.
You can generate cash flow in places like that but don't count on any appreciation. Maybe with remote working, there might be more interest in these places, but maybe not unless there are other attractive reasons to move there besides its cheapness.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @David Krulac:
@Jay Hinrichs Yes Rural Pa. whether western Pa., or other areas in northern and central Pa. outside the metro areas are lower priced. Appreciation is low to zero and there is no population growth in those areas. In one town there a friend told me how when he graduated from high school in 1964 they had the same number as when his grandson recently graduated. What that says is there is no economic growth there, high school grads are moving out, the school population hasn't grown in 56 years and the general population hasn't grown in 56 years. Is that a place to invest? Not for me. There are people who live there, there are people that rent there, but there is little to no growth. In another small town another investor I know bought a 4 unit building for $25,000. In that building a 3 br rented for $425. Yes expenses are cheaper, but so are the rents. In another town an investor went to get a building permit, and the town officials didn't know how to do it because nobody had gotten a building permit for a new build in over 30 years, they couldn't tell the investor the last time it happened.
You can generate cash flow in places like that but don't count on any appreciation. Maybe with remote working, there might be more interest in these places, but maybe not unless there are other attractive reasons to move there besides its cheapness.
thats about my read on most of the rural rust belt.. keep in mind most investor on BP of course like to regurgitate this mantra
" I am a cash flow investor Appreciation is gambling " LOL not sure who coined that term but it sure is prevalent on this site.
the stuff I am funding for others rents are more in the 700 to 900 range.. from what I can see..
And when it circles back to the original question.. I believe these assets are best served with minimal debt. and held for ever !!
But Hey you never know right.. some of the lower value stuff I was funding 5 years ago for 20 to 40k is now 50 to 80k today..
I look at my work in Detroit in 2002 when I first started loaning there. houses values were 150k and rents were 1000 and buyers lined up out the door to buy them.. I am not sure that those values have come back yet to those levels from the 08 meltdown.. but they did bounce from the bottom..
ON my personal stuff my average exit price is about 650k for the product we own build and sell !! so right there with you on what you like and I personally like.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
Originally posted by @Robin Brown:
What is everyone preference regarding having the option to own a handful of properties out right verses having a much larger portfolio with the debt that comes with it? Or do some people opt for a mix of both?
Early on most have no choice and need mortgages at the best terms possible.
Acquire if the getting is good. It comes in waves and droughts so keep your powder dry. Some years I'll do a dozen, some none.
Even if you don't 'need' to leverage, each deal should be evaluated case by case.
I will still utilize debt when cash doesn't help get a discount or help acquire a new property that doesn't check all the lending boxes.
By utilizing attractive long-term debt when it's a good fit, you will still have the resources to buy cash when it's to your advantage.
- Member since 2019 · 10 posts · 5 votes5y
@Robin Brown I don’t see why people feel the need to have a 100 doors if you can get the same off 10 doors.. whatever brings more cash flow. Don’t leverage yourself into no cash flow just for the sake of saying you have another door.
- Rental Property Investor · Everett, WA · Member since 2015 · 458 posts · 386 votes5y
@Robin Brown We have used leverage to scale our portfolio. Originally, I was extremely debt averse and was working to aggressively payoff all debt. While I am still averse to having consumer debt, I have become much more comfortable with mortgage debt. We live in a high cost of living area, saving to purchase property outright would have dramatically limited our ability to grow. Given the speed with which properties have been appreciating in our market, we would have never been able to save fast enough.
While I am always mindful with leverage, I see it as a valuable and necessary tool for investing. Additionally, with all the money printing going on currently, I see debt as another tool protect against inflation. None of this works unless you can ensure you have high enough profits to service the debt and sufficient liquidity to manage unforeseen events. The last 18 months have been an opportunity for all investors to test our contingency plans and comfort with the current structure of our portfolios.
John
I will gladly take the extra headaches of additional calls from my property managers for now, although once someone has enough money that they can comfortably live their lifestyle however they want, I definitely understand removing as many headaches from one's life as possible.
If you purchase a $100k property in cash that appreciates 3 percent a year while inflation goes up 3 percent, then you really didn't make any money, at least from an appreciation standpoint. If you purchase the same $100k property with a mortgage with a 20% down payment ($20k), then your property appreciated $3k from a $20k investment which means you had a 15% return on the cash invested and outpaced inflation by 12%.If the same property cash flows $800 per month ($9,600 per year) without a mortgage then it returned 9.6% compared to the $100k investment. If it only cash flows $300 per month ($3,600 per year) with a mortgage then it returned 18% compared to the $20k cash investment.
If you purchased the property in cash, you don't benefit from mortgage pay down. Meanwhile, a 30 year mortgage should return about 6% in mortgage pay down each year compared to a 20% cash investment.
These are the main reasons why purchasing with leverage is so much better.
- Member since 2018 · 1k+ posts · 1k+ votes5y
"I assume the debt should always be covered by tenants. . . "
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As others have said, it all depends on your risk level comfort. Given the pro-tenant eviction moratoria we've had for the past 18 months, I question your assumption. Those with leverage and without section 8 tenants or conscientious tenants are losing their shirts. Those without debt have been in much better shape.
I just wonder how many mom and pop landlords are going to quit the business after being abused for so long.
- Banker · New York, NY · Member since 2021 · 91 posts · 19 votes5y
Hi, @Robin Brown
I would say it's a matter of ROI, not a matter of having a large portfolio, or debt. ROI is the priority when choosing investment strategies. What is your current situation?
- Real Estate Broker · Los Angeles, CA · Member since 2018 · 307 posts · 146 votes5y
Depends on your goals? I have a client that has zero debt on $15M in real estate cash flowing fairly well. He will use debt to acquire more property and then aggressively pay it off. He wants cash flow.
Depends on the goal.
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