Cash flow vs leverage

11 Replies

We needed cash flow fast, to pay our bills, since my husband 'medicalled out' of his airline flying career. We had enough money in savings to buy five rental properties in two years and so we paid cash for all of them (almost, but that's another post). We now cash flow more than enough to pay our bills, put the appropriate amount in reserve for each property and even to replenish our savings. Should I be thinking now about using some of the equity ($500,000+) we have to continue to grow or is this 15% return we're getting on our savings plenty good enough? I know the magic of leverage, but why would I go into debt and add to the stress/trouble if we're doing fine right now?

Well, you answered your own question. First, yes, using debt for any business does help increase the growth rate as long as the capital used is used in the direct method of increasing capital earnings. However, you you said you're doing fine now. So you really answered your own question.

What are your goals?

unless there is something odd about your market where you can't buy a property that will cash flow positively after servicing debt, why wouldn't you leverage yourself into more cash flow? You can be as risky or conservative as you want. From a purely cash flow standpoint for my properties on a 30 year mortgage, principal + interest + taxes + insurance + allotment for repairs/vacany = 60% or less of rent. Your mileage may vary, but I am better off leveraging myself into more cash flow generating, appreciating real estate. $500,000 equity could give you another $400,000 in real estate. By your post, you have little debt, so run the numbers. Cash flow from $500,000 of almost paid off real estate vs cash flow from $900,000 in real estate with approx $400,000 in debt? Once you figure out what you want, it's easier to figure out how to get there.

in your situation if it "ain't broke don't fix it" unless you want to keep growing!

I myself don't have the money you have to outlay cash to buy 5 houses so I have to leverage myself! Plus I am 27 so for these houses to support myself at age 66 I need to grow them large enough to outlive in dilation. My husbands job is also stable so the uncertainty and stress doesn't exist so I am fine leveraging.

Figure out your long term goals! If your current "empire" is cover your current and future expenses with a large buffer no need to change. If you want to have more fluff or don't feel it would cover it than you do need to grow!

Only you can truly answer your question because eag persons strategy is *so* based on their personal goals!

So rarely does one's questions on these blogs/forums get answered with a resounding common response! I just wasn't seeing the forest for the trees, I guess. We had a goal to cover our expenses left to bear from his lost income and we've done that and then some. So, now I need new goals! We are so comfortable and so happy right now in our new found business that unless I'm just leaving a gazillion dollars on the table, I think my new goal is to just keep on keepin' on! Thanks for your input.

You certainly don't have to go into debt or do anything with that money if all your bills are getting paid. It just depends on what you want to accomplish- are you fine with what you have and not as comfortable with leverage, or would you like some more cash flow coming in, or do you feel like all that equity is going to waste....? There is no right answer. But the answer to you question as to why you would do it is- to create more cash flow than what you are currently receiving. But maybe you don't want or need more, then in that case, don't do it. But that is why you would, if you did. I'm a huge fan of leverage and I would dump it all into snowballing it for more cash flow. But not everyone is comfortable with that. You could shoot for in the middle- just invest some of it, not all, and see how it goes. Or don't invest any of it, or invest all of it. All your call and doesn't hurt either way.

Thanks, #Ali... I'm closing in on 60 yrs of age and having to make mortgage payments for the rest of my life is just abhorrent to me. I left about $100,000 in savings and bought the properties very well, so we have a good amount as backup if something goes awry. The properties are diverse and I've never had a vacant month. There is no way I would have returned 15% on the money sitting in stocks and mutual funds so it feels very much like we did the right thing. I didn't really know how much I would be leaving on the table by not leveraging these babies, but in the end it doesn't really matter since we are watching the world go by in our catbird's seat!

The problem will be getting a loan with low liquidity and your husband being retired.

The banks and lenders look at equity, liquidity, and the annual income from your job / business.

Based on age on what you have said you might want to keep what you have and just push rents up every year to make more.

Thanks, @Joel, but wouldn't they consider the rents from the houses as income? We bought the first one in 2011. I always thought rental house mortgages were based on proven rents, is that not correct?

duplicate

And that's what matters! :) If you are happy and financially fine, why mess with it at the risk of making yourself uncomfortable. Like you say, if push comes to shove you can liquidate the equity later if you need it.

Lifestyle design is all that matters!

Originally posted by @Walt Payne:
Originally posted by @Stephanie W. :
We needed cash flow fast, to pay our bills, since my husband 'medicalled out' of his airline flying career. We had enough money in savings to buy five rental properties in two years and so we paid cash for all of them (almost, but that's another post). We now cash flow more than enough to pay our bills, put the appropriate amount in reserve for each property and even to replenish our savings. Should I be thinking now about using some of the equity ($500,000+) we have to continue to grow or is this 15% return we're getting on our savings plenty good enough? I know the magic of leverage, but why would I go into debt and add to the stress/trouble if we're doing fine right now?

Your situation Is similar enough to mine that I will share the conclusion I came to about myself. And that is that you can do whatever you are comfortable with, and also that it doesn't have to be an all or nothing situation. For example I decided to keep a few "core" properties mortgage free. Then I will get 50% LTV on the rest. That is conservative enough for me to feel secure enough to retire on it at any time, yet allows for some growth. Maybe a slow and stable growth would let you have security and growth that feels right, and leaves no regrets. Just a thought.

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