Real Estate Leverage
I'm so confused. I watched so many you tube videos but still I haven't gotten the answer. Is there any specific book that would answer the following questions?
1. How does investors use leverage to buy rental properties? I always hear people saying mortgage debt is good. Don't use your own money. How? Homes are so expensive plus interest rate is so high. Rent isn't that much.
2. Investors/wealthy people don't take out salary. They take out loan. How does that work? Let's say their business is $1 million, they take out $100,000 loan (income), what do they do the next year?
Let's say you have $500,000. Which one is the best option and why?
1.Buy 1 property for $400,000 cash (no mortgage, positive cash flow after expenses)
2. Buy 2 properties 400k each with 225k down for each property (interest rates are so high - it will eat up all the rent).
3. Buy $950,000 home, pay $450,000 cash, $450,000 mortgage. LTR will cover the mortgage and other expenses. STR might be profitable.
Most Popular Reply
Don’t buy real estate unless the numbers make sense. You always want to at least break even on any property unless you have a lot of cushion cash to save yourself.
There's lots to go over here. Let's connect and I may be able to shed some light on the situation.
My vote is for
4. Don't buy real estate in the current market. Take advantage of high interest rates and buy first trust deeds currently paying around 9% or some other investment that actually pencils out and makes sense. All the best.
Lots to go over here. I'll answer a portion of it -- in general a lot of the cookie cutter advice you see on BP does not apply to all markets. It takes about a 47% down payment to realize cash flow in the Washington DC area. I also like to ignore people saying to use other people's money when it's your first deal. Other than your parents, what person in their right mind would give a brand new investor tens of thousands and expect to get it back? Once you get a few deals under your belt and have a proven track record, then it becomes attainable to invest with less $ out of your own pocket.
Interest rates arent as much of a factor as much as the high cost of homes. Rents are increasing they just arent outpacing home prices. Benefit to buying and holding right now is appreciation vs cash flow. Rates might drop, but home value continues to climb. So (as a roundabout answer), mortgage debt IS good in the way that when you pay it down, you're basically putting your money into a savings account that has a higher yield than a traditional market account.
Don’t buy real estate unless the numbers make sense. You always want to at least break even on any property unless you have a lot of cushion cash to save yourself.
1) mortgage debt is good if someone else is paying for it. In order to cash flow you need to increase your equity in the property so that financing is not eating up all the cash flow. Or you need to buy the property at such a huge discount it cash flows after repairing and refinancing it. BRRRR is spoken a lot on this forum however it is harder to do this successfully in certain parts of the country and not tie up at least some of your own money. Also the more rentable units you have significantly helps you complete the BRRRR strat.
2) I don't know exactly how they do it but they I believe wealthy people have so much credit cashflow and assets banks are fine giving them cash on these accounts. The borrower gets a non taxable disbursement of cash from the bank, their cash flowing asset then services the debt. I think wealthy people have access to large lines of credit which function the same as cash. Its not income its financing.
You could do something similar if you have a house rented with a HELOC on it. You buy a new car with the line of credit and your tenants rent, services the principal and interest due on the heloc each month.
3) So if you buy something for 400k, with no leverage and your yearly cashflow is 50k your cap rate is 12%
If you buy two properties with 200k down and cashflow 30k on each property your cap rate is 15%
If you buy 4 properties with 100k down and cashflow 20k on each property your cap rate is 20%
Leverage helps you get a bigger return on your original 400k buying multiple properties rather than just one.
Mortgage debt is not necessarily good debt 3-4 even 5-6% debt is good debt 8% debt is neutral to bad, there’s a reason old people tell you to take a 15 year old and try to avoid debt which is rates were double digits for most of the 70 and 80’s and no one wanted debt, debt at 3% made everyone want debt, but the amount of debt you are paying is the critical factor, in other words if you take on 8% debt and you get a 5% return you’ve lost money an 3% mortgage with a 5% return you’ve made money. Obviously there are other factors such as appreciation (skeptical there’s a ton of that left) mortgage interest deduction tends to be underrated. But my baseline advice is if you want to buy a primary under let’s say 700k and live there for 5+ years it’s probably a fine time to buy, if your less than 3-4 years outside of a few areas where price to rents remain somewhat reasonable I’d probably rent. And I’d probably not invest right now in real estate expect for maybe a few areas of dc that have had huge drops in value, though even there is definitely downside risk in addition to the upside.