Possible to grow without taking on debt?
Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
Would anyone recommend taking on properties only as you can afford to buy them cash? Or is taking on debt in order to secure new properties recommended.
Currently I do not like debt because of the obvious cost of borrowing money, however I know I could have many more properties if I went the loan route.
Leverage is your friend in real estate. Think of it this way. If you have to save your way to buy a $100k property how long will it take you? Conversely, you can use leverage and put down $20k and take control of a $100k property. While your cashflow maybe a couple hundred per month, you will also enjoy paying down of the debt over time.
Instead of buying 1 100k property cash you could buy 5 houses with 20k down each and make perhaps $1000/month cashflow. In addition presuming you had a 30yr loan. In 30 years you'd have 500K in paid off assets.
Which is better? One builds wealth faster using leverage and time.
Leverage is your friend in real estate. Think of it this way. If you have to save your way to buy a $100k property how long will it take you? Conversely, you can use leverage and put down $20k and take control of a $100k property. While your cashflow maybe a couple hundred per month, you will also enjoy paying down of the debt over time.
Instead of buying 1 100k property cash you could buy 5 houses with 20k down each and make perhaps $1000/month cashflow. In addition presuming you had a 30yr loan. In 30 years you'd have 500K in paid off assets.
Which is better? One builds wealth faster using leverage and time.
I see your point! Sounds like taking on the debt would definitely allow me to grow my cash assets much faster. Is that what most people involved in REI are engauging in?
I agree with @Dax Desai. You can do it without debt it's just going to be sloooooww.
That being said, what is your goal? Does 1 SFH fully paid off allow you to meet your goal? If so, go for it.
@Bradley Marion I am also debt averse. While it has slowed my pace in buying rentals it substantially reduces risk. The way I see it instead of buying 5-10 units a year I buy 1-2. This allows me to dollar cost average into the market over 10 years or so. Reduces the risk of buying too many at the wrong time.
Also, to your last question. For sure, most people are using leverage to purchase. The only people I know who do everything cash are smaller local investors that really only need 2-10 properties for retirement. And even those likely started out with mortgages, they have just paid them off and now have the cash to purchase outright.
@Bradley Marion I am also debt averse. While it has slowed my pace in buying rentals it substantially reduces risk. The way I see it instead of buying 5-10 units a year I buy 1-2. This allows me to dollar cost average into the market over 10 years or so. Reduces the risk of buying too many at the wrong time.
Low-debt is a viable strategy. However I don't consider real estate dollar cost averaging the same as the stock market. If for example the SP500 PE average is 30 this year, and drops to 24 next year it would have a dramatic effect on the price of the stock.
Conversely if you own real estate you are more inclined to be concerned with the actual cash flow as opposed to the valuation overall because your timeline is much longer (generally). In addition you are paying down debt over time. While it is possible you may pay $100K this year and $80K next year for the same property, such wide swings aren't typical as it is with the stock market. In addition if you are cashflowing at $100k, you are not really feeling any pain when you could've bought it at 80K. Overtime things will average out in your favor. I would consider the 100 down to 80 a dramatic and less likely movement in price.
I have a commercial property I put in $200K on with my share of the debt at 800K. While my yearly cashflow share is 30% or $60k, my net worth is increasing with the debt paydown. My NetWorth is increasing each year with debt paydown until ultimately I'll have 800K on the assets side of my balance sheet if I make no other investments. If I were to save to 800K, the odds are I would never be able to accumulate that much money without debt.
This is my personal view. I'm not judging no-debt strategies. The one thing you have me beat on is risk. Leverage inherently has risk associated with it. As an investor I believe you have to take on some risk to make more money.
Yes it has been slow, I mean very slow acquiring property with cash only. My goals are just to grow my business with minimum risk. I work full time so I am not a "full time" investor but I do put a lot into the properties I own and make sure everything runs smoothly. I just want to build equity really. @Nick Cachaldora That sounds like a solid plan! I am not trying to get rich per-se but just want good stable income without having third parties (Banks/Lenders) to answer to if I can not fill a vacancy or something like that. Getting foreclosed on would be my biggest fear I'd say
Thanks @Jacob Sampson I was thinking that' what most people do. I bought my first one as my own house (paid cash), then my job took me out of state so it became a rental since I spent so much to get it into great shape
@Bradley Marion I am also debt averse. While it has slowed my pace in buying rentals it substantially reduces risk. The way I see it instead of buying 5-10 units a year I buy 1-2. This allows me to dollar cost average into the market over 10 years or so. Reduces the risk of buying too many at the wrong time.
Low-debt is a viable strategy. However I don't consider real estate dollar cost averaging the same as the stock market. If for example the SP500 PE average is 30 this year, and drops to 24 next year it would have a dramatic effect on the price of the stock.
Conversely if you own real estate you are more inclined to be concerned with the actual cash flow as opposed to the valuation overall because your timeline is much longer (generally). In addition you are paying down debt over time. While it is possible you may pay $100K this year and $80K next year for the same property, such wide swings aren't typical as it is with the stock market. In addition if you are cashflowing at $100k, you are not really feeling any pain when you could've bought it at 80K. Overtime things will average out in your favor. I would consider the 100 down to 80 a dramatic and less likely movement in price.
I have a commercial property I put in $200K on with my share of the debt at 800K. While my yearly cashflow share is 30% or $60k, my net worth is increasing with the debt paydown. My NetWorth is increasing each year with debt paydown until ultimately I'll have 800K on the assets side of my balance sheet if I make no other investments. If I were to save to 800K, the odds are I would never be able to accumulate that much money without debt.
This is my personal view. I'm not judging no-debt strategies. The one thing you have me beat on is risk. Leverage inherently has risk associated with it. As an investor I believe you have to take on some risk to make more money.
Great point @Dax Desai! I completely agree with this, the risk is a big factor if you want to wager it or not. Sounds like you have a solid plain. Maybe something more like a 50% down deal over 10 years would be something I might enjoy more (with the option to pay off early) than the traditional 30 year loan. I can't stand the idea of thinking about owing somebody for 30 years personally, makes me cringe
I get your debt aversion. I was exposed to Dave Ramsey a long time ago and I am a big believer in not having consumer debt.
Debt is your friend in real estate. Period. If you buy a property at 100% of value cash and I buy it at 60% value with a loan your risk is much greater than mine. Don't be afraid of debt tied to an asset, just make sure you buy below market.
@Dax Desaiwhile you make a solid argument for leverage you must also realize some markets swing more than others. Many properties in Miami still have not recovered from 2006 highs. I own two units in a building that was a condo conversion in 2005. They sold for $165,000 at the time. I purchased them in 2012 and 2014 for $56,500 and $90,000. They are worth around $140,000 now. While all I really care about is cash flow its nice to know I can sell one if I need cash. 10 years with no recovery of the original sales price is scary.
I understand the last crash will probably not be a normal occurrence, but 1,000's of people in Miami were way over leveraged and lost everything. With around 50,000 units slated for completion over the next 5 years and condo inventory already over 20 months of supply, it seems like its happening all over again. Some risk is OK, but too much is gambling.
There is no "correct" answer.
It's a personal preference.
The more you can leverage (higher risk), the greater the potential reward. The flip side of that coin, of course, is potentially catastrophic results of a downturn.
Everyone will (and should) have their own risk preference based on their personal circumstances and goals.
@Robert G. That is a good way to look at it. I think risk vs reward is certainly a key. Market fluctuations make me nauseous. I am from the Midwest where there was very little market fluctuations even during the 08 phase, we did not see the swings like on the coasts. However I would like to buy properties to keep for life and into retirement so I don't give a rip what they are worth after I buy them
Both @Account Closed
make solid points and the difference in there approaches show why this industry is so fun. There are so many ways to do it. Also, it's not and either/or you could try putting 50%-60% down so that you are pretty safe but can still take advantage of some leverage. That also allows you to send all your employees (tenants) out to work and help you pay down the debt.
More important, IMO, than exactly how much you should put down, is that you buy properties that ACTUALLY cash flow. That rarely occurs. Rent - 30%(vacancy and maintenance) - PITI (on a 15 year note) = reasonable expectation of long term cash flow. I do regular 20% down so in my case with the above numbers the actual cash flow needs to be at least 12% CoC ROI.
Thoughts?
@Jacob Sampson Employees (Tenants) - That's funny, So cash flow? I am not the business major I should have been but I thought all rentals that paid the mortgage and had profit left over were "cash flow" positive
If your property pays the mortgage and has $200/month left over but your long term average for vac & maint. is $300/moth then your property is not cash flowing. It is cash flow negative by $100/month.
Now, to make it more complicated, if on average you buy down principle by $200 a month then, assuming the property holds it's value, your property is technically profitable by $100/month but cash flow negative $100/month.
Principle buy down falls into the profit side of your finances. So all cash flow is profit, not all profit is cash flow. If you are long term buy and hold, you WANT true cash flow.
The calculations, that I gave in my previous post, are not possible in very many markets, but if you can make those work you have a large margin of error.
Check out the rental property calculation tools here and learn what the inputs are and why they are used. Most folks don't think to factor in vacancy, repair, and capex. Some don't even think about property taxes!
I don't think one should equate leverage to risk. Back to my example, if you pay $100,000 for a property, I pay $60,000 for using leverage and the market corrects 50% you have lost $50,000 and I have only lost $10,000!!
The REAL risk in real estate is overpaying.
@Jacob Sampson - That does make things complicated. I just figured all rental property that is decent has a positive cash flow. I never thought about the buy down of principle that you are referring too but yeah I know I want all of my property to be long term buy and hold so I would want to know the true cash flow
@Brandon Cravens - I appreciate the pointers for the tools available on BP, I did not even know they had those. I know the calculations get confusing quickly, I don't even know how to calculate CapEx and I own a few rental properties
Check out the rental property calculation tools here and learn what the inputs are and why they are used. Most folks don't think to factor in vacancy, repair, and capex. Some don't even think about property taxes!
I don't think one should equate leverage to risk. Back to my example, if you pay $100,000 for a property, I pay $60,000 for using leverage and the market corrects 50% you have lost $50,000 and I have only lost $10,000!!
The REAL risk in real estate is overpaying.
With all do respect this example makes no sense. You are saying if you put $60,000 down, finance $40,000 (for a total purchase price of $100,000) and the property loses 50% of its value (now worth $50,000) you have only lost $10,000?? I assume you are suggesting $10,000 of your cash down payment, but what about the $40,000 loan?? Your loses are identical whether you pay cash or finance.
Check out the rental property calculation tools here and learn what the inputs are and why they are used. Most folks don't think to factor in vacancy, repair, and capex. Some don't even think about property taxes!
I don't think one should equate leverage to risk. Back to my example, if you pay $100,000 for a property, I pay $60,000 for using leverage and the market corrects 50% you have lost $50,000 and I have only lost $10,000!!
The REAL risk in real estate is overpaying.
With all do respect this example makes no sense. You are saying if you put $60,000 down, finance $40,000 (for a total purchase price of $100,000) and the property loses 50% of its value (now worth $50,000) you have only lost $10,000?? I assume you are suggesting $10,000 of your cash down payment, but what about the $40,000 loan?? Your loses are identical whether you pay cash or finance.
No. Person A buys a property that's value is $100k and he pays cash. Person B buys an exact duplicate of that property but he pays $60k and uses a 100% loan. The market corrects 50%. Person A will have to take a $50k loss to dispose of his property. Person B can dispose of the property for a $10k loss.
Person A has much more risk than Person B.
Check out the rental property calculation tools here and learn what the inputs are and why they are used. Most folks don't think to factor in vacancy, repair, and capex. Some don't even think about property taxes!
I don't think one should equate leverage to risk. Back to my example, if you pay $100,000 for a property, I pay $60,000 for using leverage and the market corrects 50% you have lost $50,000 and I have only lost $10,000!!
The REAL risk in real estate is overpaying.
With all do respect this example makes no sense. You are saying if you put $60,000 down, finance $40,000 (for a total purchase price of $100,000) and the property loses 50% of its value (now worth $50,000) you have only lost $10,000?? I assume you are suggesting $10,000 of your cash down payment, but what about the $40,000 loan?? Your loses are identical whether you pay cash or finance.
No. Person A buys a property that's value is $100k and he pays cash. Person B buys an exact duplicate of that property but he pays $60k and uses a 100% loan. The market corrects 50%. Person A will have to take a $50k loss to dispose of his property. Person B can dispose of the property for a $10k loss.
Person A has much more risk than Person B.
Again, makes zero sense. How is person B paying $60K for a $100K property with financing while person A pays $100K with cash. Your example is one sided to prove your point.
Check out the rental property calculation tools here and learn what the inputs are and why they are used. Most folks don't think to factor in vacancy, repair, and capex. Some don't even think about property taxes!
I don't think one should equate leverage to risk. Back to my example, if you pay $100,000 for a property, I pay $60,000 for using leverage and the market corrects 50% you have lost $50,000 and I have only lost $10,000!!
The REAL risk in real estate is overpaying.
With all do respect this example makes no sense. You are saying if you put $60,000 down, finance $40,000 (for a total purchase price of $100,000) and the property loses 50% of its value (now worth $50,000) you have only lost $10,000?? I assume you are suggesting $10,000 of your cash down payment, but what about the $40,000 loan?? Your loses are identical whether you pay cash or finance.
No. Person A buys a property that's value is $100k and he pays cash. Person B buys an exact duplicate of that property but he pays $60k and uses a 100% loan. The market corrects 50%. Person A will have to take a $50k loss to dispose of his property. Person B can dispose of the property for a $10k loss.
Person A has much more risk than Person B.
Again, makes zero sense. How is person B paying $60K for a $100K property with financing while person A pays $100K with cash. Your example is one sided to prove your point.
I don't know what you don't understand. We were talking about debt being risk. Person A bought without debt and has a lot more risk than Person B.
Perhaps you don't think you can buy a $100k value property for $60k?
Check out the rental property calculation tools here and learn what the inputs are and why they are used. Most folks don't think to factor in vacancy, repair, and capex. Some don't even think about property taxes!
I don't think one should equate leverage to risk. Back to my example, if you pay $100,000 for a property, I pay $60,000 for using leverage and the market corrects 50% you have lost $50,000 and I have only lost $10,000!!
The REAL risk in real estate is overpaying.
With all do respect this example makes no sense. You are saying if you put $60,000 down, finance $40,000 (for a total purchase price of $100,000) and the property loses 50% of its value (now worth $50,000) you have only lost $10,000?? I assume you are suggesting $10,000 of your cash down payment, but what about the $40,000 loan?? Your loses are identical whether you pay cash or finance.
No. Person A buys a property that's value is $100k and he pays cash. Person B buys an exact duplicate of that property but he pays $60k and uses a 100% loan. The market corrects 50%. Person A will have to take a $50k loss to dispose of his property. Person B can dispose of the property for a $10k loss.
Person A has much more risk than Person B.
Again, makes zero sense. How is person B paying $60K for a $100K property with financing while person A pays $100K with cash. Your example is one sided to prove your point.
I don't know what you don't understand. We were talking about debt being risk. Person A bought without debt and has a lot more risk than Person B.
Perhaps you don't think you can buy a $100k value property for $60k?
What I don't understand is why you are assigning different purchase prices to Buyer A and Buyer B? For a comparison to make sense all things should be similar other than the variable, which in this case is cash or financing.
Check out the rental property calculation tools here and learn what the inputs are and why they are used. Most folks don't think to factor in vacancy, repair, and capex. Some don't even think about property taxes!
I don't think one should equate leverage to risk. Back to my example, if you pay $100,000 for a property, I pay $60,000 for using leverage and the market corrects 50% you have lost $50,000 and I have only lost $10,000!!
The REAL risk in real estate is overpaying.
With all do respect this example makes no sense. You are saying if you put $60,000 down, finance $40,000 (for a total purchase price of $100,000) and the property loses 50% of its value (now worth $50,000) you have only lost $10,000?? I assume you are suggesting $10,000 of your cash down payment, but what about the $40,000 loan?? Your loses are identical whether you pay cash or finance.
No. Person A buys a property that's value is $100k and he pays cash. Person B buys an exact duplicate of that property but he pays $60k and uses a 100% loan. The market corrects 50%. Person A will have to take a $50k loss to dispose of his property. Person B can dispose of the property for a $10k loss.
Person A has much more risk than Person B.
Again, makes zero sense. How is person B paying $60K for a $100K property with financing while person A pays $100K with cash. Your example is one sided to prove your point.
I don't know what you don't understand. We were talking about debt being risk. Person A bought without debt and has a lot more risk than Person B.
Perhaps you don't think you can buy a $100k value property for $60k?
What I don't understand is why your are assigning different purchase prices to Buyer A and Buyer B? For a comparison to make sense all things should be similar other than the variable, which in this case is cash or financing.
Oh. My point is that debt does not equal risk, overpaying is risky, not debt.
Would anyone recommend taking on properties only as you can afford to buy them cash? Or is taking on debt in order to secure new properties recommended.
Currently I do not like debt because of the obvious cost of borrowing money, however I know I could have many more properties if I went the loan route.
To me its all about leverage. I have raised and used a lot of private funds. Have had loans in both my wife and my name. Money is cheap today. So the leverage is using cheaper I like to call it making money off borrowed money. For me, my goal was free and clear properties. Then again when I first started my mind set was buy 4 properties at time. Fix and flips selling 3 and keep the 4th free or almost free slowly building my portfolio.
Now jump to today ,my real estate partner and I are trying to buy 100 to 200 unit Apartment building. So leverage ,and cheaper money will be a big factor. Debt is okay if leveraged properly. I guess that what I was trying to get out.
Hope that helps
Alex