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.

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Dax Desai

Investor · Houston, TX · Member since 2011 · 26 posts · 37 votes

10y

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.

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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
@Marcus Johnson - Yeah I can see the comparison. It is an interesting point
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Marcus Johnson
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
10y
Also, is it not true that 100% of foreclosures are homes that have a mortgage?
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Sean Gover
Rental Property Investor · Corrales, NM · Member since 2016 · 114 posts · 28 votes
10y
The risk scenario that a previous poster was presenting basically is saying that when you take a loan on a property vs paying all cash then the loan provider is assuming a large part of the risk. If you pay all cash then 100% of the risk is on you. If you take an 80/20 loan then 20% of the risk is on you, unless you are leveraging other properties you have to acquire the new property.
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Adam Bontrager
Investor Relations Manager · Cleveland, OH · Member since 2015 · 117 posts · 50 votes
10y
While I typically try to live as debt free as possible, when it comes to real estate, debt is an incredibly useful tool. Run the numbers for both using and not using debt and you'll quickly see that using debt as a lever can greatly increase your profitability. With interest rates as low as they are right now, it's a great time to lock in a loan for your real estate property.
With that being said, I caution anyone about over leveraging. Back in 2008 when the real estate bubble burst, far too many people had loans for 90+% of their property's pre-burst market value. When their property's values plummeted, these owners were underwater and owed far more than their property's were now worth.
Don't go too crazy but using a reasonable amount of debt can be a great boost to your growth.
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David Wissler
Real Estate Agent · Lancaster, PA · Member since 2016 · 1 post · 1 vote
10y
Just remember how Dave Ramsey went bankrupt. He was a millionaire that lost it all because he leveraged too much in real estate. If you know how to evaluate properties with with CAP rate, ROE, etc. and you try to minimize your leveraging you probably will not get burned. Plus, even in a down market the appreciation rate on property values will most likely be slightly above inflation rates unless the market collapses. Also, the rental market is usually the inverse to a Buyer's market. If it is a Seller's market and prices are high then your rental will have more demand and rental prices will rise because people are having trouble getting the home they can afford. If you are in a Buyer's market then the rentals will not be as good. Knowing what market you are in will dictate if you should be flipping or expanding your rental portfolio.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
One other thing about leverage: the higher up the chain you are, the riskier it becomes. Leverage on $50k houses is not the same as leverage on $500k houses, even if the percentage is the same (or higher on the cheaper house). All communities have a high, low, and mean price point for housing, and the more standard deviations you are towards the high end of that curve the riskier leverage becomes. On more or less all of my houses, they are at/near the floor when I bought them, so there's really nowhere for them to go (other than be stuck in a completely frozen market, not going to happen here except under Armegeddon). If you own houses in a much higher price point, I think you have to temper that strategy by having some cushion equity to protect against market downturns (and lower your mortgage to ensure cash flow), or you have to be super vigilant and know when to employ your exit strategy - and at higher price points, you better have one.
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
10y
@Bradley Marion
Its a matter of individual choice. For me the first 11 properties that I bought were all essentially 100% financed in one way or another. 900+ deals later I hardly ever finance, so I've come complete circle which has to do with needing financing at the beginning and now not needing financing.
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Jennifer Lee
Real Estate Broker · Gibsonia, PA · Member since 2013 · 828 posts · 260 votes
10y
i have been in same mindset as you @Bradley Marion for 13 yrs of investing. it was slow going. and to my benefit.
but now we hit a wall ;) so have to look into financing to move forward. sooner or later we run out of cash ;)
but I like my strategy, I have properties that are free and clear. so my have a lot options in exit strategies for my portfolio.
cash or financing :)
my philosophy is, Cash Flow positive, and PROPERTY SHOULD BE SELF SUSTAINING, pay for itself to be considered into my portfolio
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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
@Adam Bontrager - Seems like it is a good tool to use to get ahead and I will be interested to see how I can use it some day to work in my favor. I hope to be to the point I can finance all of my own deals some day and have plenty left over
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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
@David Wissler - Knowing how Mr Ramsey went from everything to basically nothing is a huge motivation to be safe with my debt / income ratio!
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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
@JD Martin - Higher price points certainly make for a riskier environment. I am going to keep that in mind going forward, and an exit strategy? I had never thought about one of those
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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
@David Krulac - I want to go full circle in that regard so I can finance anything I want at any time. It is just taking me forever in the beginning, I appreciate the good advice
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
10y
@Bradley Marion
It took me a long time too. The 12th property that I bought was all cash. I bought a house for $50, it was one of the worst properties that I ever bought and wrote about it in the Bigger Pockets book "Real Estate Rewind", available here as a free download.
The 13th house was back on 100% financed. It took a long time to get to the point of no financing needed. Be patient, grasshopper!
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
Originally posted by @Bradley Marion:

@JD Martin - Higher price points certainly make for a riskier environment. I am going to keep that in mind going forward, and an exit strategy? I had never thought about one of those
If you've never thought about an exit strategy, I would advise you to halt buying anything until you consider this component of investing. There are untold numbers of reasons you might want/have to sell, and you need to have considered the benefits and consequences of doing so in all kinds of scenarios. There will always be an exit, whether it be from you moving on to other forms of investment, ridding yourself of a problematic property, selling to take advantage of other opportunities, disposing of assets before death, etc, and you should already have a game plan for such. The people who criticize leverage are generally thinking about the 80-100% leveraged individuals in high-priced units clearing $100 per door that bought in up-markets and have no plan for getting out, and they are right to criticize such because it shows a lack of foresight.
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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
@Jennifer Lee - Sounds like a fantastic strategy! How do you always know if it will be positive cash flow to be in your portfolio? I would like to know how to do those numbers up front. Yeah financing will help you get ahead for sure! I have hit that wall long ago haha and I can't do anything about it. Anyway I don't have any exit strategy because all I want to do is own more and more outright profitable properties, that's what makes me sleep good at night
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
10y
@JD Martin
That's an excellent point. I was just talking to somebody today, and they reminded me of something that I said a long time ago. "Its much easier to buy property that it is to sell property." Meaning I could buy several properties today of I wanted to, buy selling several properties TODAY is much harder.
When I started my exit strategy was Buy and Hold, so selling wasn't a big priority, though I did sell some. I just sold the second property that I ever bought 2 months ago.
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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
Originally posted by @JD Martin:

Originally posted by @Bradley Marion:
@JD Martin - Higher price points certainly make for a riskier environment. I am going to keep that in mind going forward, and an exit strategy? I had never thought about one of those
If you've never thought about an exit strategy, I would advise you to halt buying anything until you consider this component of investing. There are untold numbers of reasons you might want/have to sell, and you need to have considered the benefits and consequences of doing so in all kinds of scenarios. There will always be an exit, whether it be from you moving on to other forms of investment, ridding yourself of a problematic property, selling to take advantage of other opportunities, disposing of assets before death, etc, and you should already have a game plan for such. The people who criticize leverage are generally thinking about the 80-100% leveraged individuals in high-priced units clearing $100 per door that bought in up-markets and have no plan for getting out, and they are right to criticize such because it shows a lack of foresight.
Well I am not buying anything because as I stated originally I an not trying to finance anything and I only have 2 properties building me wealth right now so it will be a long time before I could be able to buy another.
However my exit strategy has always been to buy good properties. Keep them forever, retire, and die off leaving them to my heirs
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
Originally posted by @Bradley Marion:
However my exit strategy has always been to buy good properties. Keep them forever, retire, and die off leaving them to my heirs
That's a scenario more than an exit strategy. What if you were incapacitated and needed the cash? What if a market downturn ruined the value of your properties? What if one part of town became a war zone? What if the property taxes of a property outstripped its value as a rental? What if the maintenance of a property became too onerous?
I get where you're coming from. In my perfect world, I will leave all the properties to the kids, or will sell them off before I kick and leave them good inheritances. In reality, I can think of a dozen scenarios in less than 2 minutes that might force me to reconsider for some or all of my properties. Knowing what you would get rid of, what you would keep, what would be grounds for refinancing, what would be better left to seizure, etc. is all part of your exit strategy. It doesn't have to be a tome, or even written down, but it should always be part of investing.
PS: Exit strategy doesn't mean you ever plan to sell. Just like knowing how you would get out of your house if it was on fire doesn't mean it will ever burn to the ground. But you don't want to be pondering if that window is ground level or 3 stories up when you have to jump.
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Jennifer Lee
Real Estate Broker · Gibsonia, PA · Member since 2013 · 828 posts · 260 votes
10y
@Bradley Marion
due diligence, is how you know if it will cash flow positive. and I lower expectations, I'm super conservative.
even though I buy cash, I run my number like I have a mortgage.
also I always buy with exit strategies in mind.
YOU MAKE YOUR MONEY WHEN YOU BUY.
having said that, since I buy cash, I buy 1 every 1-2 yr. bc I buy things that ppl tell me "there is no way you can cash flow that"
and 2 yrs later I tell them its making me 10-15% LOL
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Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
10y
Originally posted by @Brandon Cravens:

@Bradley Marion
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.
Can you explain why a cash buyer would pay 100% of the value while a buyer with a mortgage would be only paying 60% of value?
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Jay Dean
Investor · Manvel, TX · Member since 2016 · 133 posts · 54 votes
10y
Bradley - In a lot of ways, you and I are on the same page. I get why leverage works on the upside but agree there is a higher risk.
My thought / plan is this - Buy using all cash. Better buying position / negotiating tool. My first opportunity was with a seller that had two previous buyers fall through because they could not get financing. When I found the deal, she had been on the market over 75 days and was ready to sell. She settled for well below asking.
Once you have bought using cash, rented, and establish a baseline of say 6 months, consider talking to a commercial banker about a "50% cash out" loan. Use this opportunity to get at least one more unit, increase your total income stream, and create a tax write off (interest) without over extending yourself. If you never leverage more than 50% and have a rainy day fund set aside, you should still be very stable while earning more.
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Peter MckernanBusiness Member
Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
10y
I agree with @David Wissler his account of Dave Ramsey, and he seems to be a pretty smart guy from how he has grown his business from where he was (at the bottom financially) to becoming a multimillionaire. This same circumstance goes for Robert Allen he was worth more than Dave Ramsey and filed for bankruptcy around the same time.
@Bradley Marion this goes to show that with risk there needs to be a high level of calculations on your part when increasing debt. The market and your read on the market is the best option you have. Do your research and make sure you get in at the right time, and do not step in when the market seems too hot, and properties are selling for much more than you as a knowledgable investor within that area knows they should be selling for.
If the research is done, calculations are done, and all the due diligence is performed you should be able to enter a market and capitalize.
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Chris Reitzel
San Diego, CA · Member since 2015 · 22 posts · 8 votes
10y
Grant Cardone said something one time that has completely changed my view on debt, and I think everyone should hear it and think on it.

The difference between a rich person and a poor person, is that a rich person never acquires debt that is not making them money. Poor people always acquire debt that cost them money.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
Originally posted by @Chris Reitzel:

Grant Cardone said something one time that has completely changed my view on debt, and I think everyone should hear it and think on it.

The difference between a rich person and a poor person, is that a rich person never acquires debt that is not making them money. Poor people always acquire debt that cost them money.
Exactly. Never borrow money for depreciating assets, or (worse) no assets at all. Borrowed money should always make more than it costs. A business that borrows $1 mil to make $2 mil in profits is smart; one that borrows $1 mil to stay in business is bankrupt.
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Bradley Marion
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Real Estate Investor · Dayton, OH · Member since 2015 · 31 posts · 6 votes
10y
@Chris Reitzel - That is a really good philosophy. Borrowing money to make money = good idea where borrowing money for all other reasons is foolish. I like that mindset. Also @Jay Dean the idea of never being more than 50% in debt on a property is something I like. That way you can still get the use out of leveraging money, while still having a sizable reserve account on the books. Even enough to pay the property off outright in the bank might still be wise to pay for a roof or foundation issue or any other number of issues that could come up
@Jennifer Lee - I see what you mean by doing the research before buying! Do you buy places that need rehabbed for low low price then fix them up to make your profits? Just wondering because it seems that most nice ready to rent properties fetch top dollar
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