Take me to dumb school....Investment Property Equity

Property Manager · Alpharetta, GA · Member since 2018 · 163 posts · 117 votes

I'll keep in brief. What is the general philosophy regarding paying off an investment property?

I'd really like to hear the opposing sides. More equity means lower payment and higher monthly cashflow...my beer math tells me that. Somehow I feel that sitting as equity is not the best use for the capital. Is it common to refinance regularly to pull out as much liquid or possible? Do folks even regularly hold on to paid off investment properties?

I'm curious to learn thanks.

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Eddie Soto

Temecula, CA · Member since 2016 · 2 posts · 1 vote

David,

I've had to think about this a lot lately. I think the common theme here is risk tolerance....how much or little do you have? I've chosen to keep some equity in my properties with the intention of paying them off, sort of as security. Other properties I am willing to refinance and cash out to buy more property. So you could say I have some but not an entirely risky strategy.

For me I look at the survivability of the new debt. If, in a worst case scenario, there is a downturn in the market, would I be able to pay for all the expenses associated with my properties? There are, of course, many factors that go into figuring out how you would be able to survive such a downturn but that depends on what you invest in and your potential mitigation and exit strategies.

In preparation for the bad times, I like to have good cash flowing properties that I would have no problem lowing the rents if needed. The equity I have in other properties keeps yet more cash flow available since I have no leverage on those. For me it's more a debt balancing act opposed to an "all in leverage strategy."

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Alex Deacon
Investor · Pittsburgh, PA · Member since 2015 · 1k+ posts · 1k+ votes
8y
@Account Closed there is no wrong answer. To leverage your capital and your equity is the only way to grow faster and larger but there are inherent risks. You dont want to bite off more than you can chew. Paying off a property and then buying another and then paying that one off is a safer strategy. I like leverage but I have been doing this 25 years so I am aware of the upside and downside of each deal.
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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
8y
Originally posted by @Account Closed:

I'll keep in brief. What is the general philosophy regarding paying off an investment property?
I'd really like to hear the opposing sides. More equity means lower payment and higher monthly cashflow...my beer math tells me that. Somehow I feel that sitting as equity is not the best use for the capital. Is it common to refinance regularly to pull out as much liquid or possible? Do folks even regularly hold on to paid off investment properties?
I'm curious to learn thanks.
I have seen people do both extreme. Leverage to the neck or play it extremely safe and pay your property off.
I think it all depends on your risk management strategy, your goals, and current need.
If income oriented, focus on cash flow.
If growth oriented, leverage to grow.
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Christopher Smith
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
8y
What rate of return could you earn on the leveraged funds, and how risky is the venture that would be dedicated to.
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Eddie Soto
Temecula, CA · Member since 2016 · 2 posts · 1 vote
8y
David,
I've had to think about this a lot lately. I think the common theme here is risk tolerance....how much or little do you have? I've chosen to keep some equity in my properties with the intention of paying them off, sort of as security. Other properties I am willing to refinance and cash out to buy more property. So you could say I have some but not an entirely risky strategy.
For me I look at the survivability of the new debt. If, in a worst case scenario, there is a downturn in the market, would I be able to pay for all the expenses associated with my properties? There are, of course, many factors that go into figuring out how you would be able to survive such a downturn but that depends on what you invest in and your potential mitigation and exit strategies.
In preparation for the bad times, I like to have good cash flowing properties that I would have no problem lowing the rents if needed. The equity I have in other properties keeps yet more cash flow available since I have no leverage on those. For me it's more a debt balancing act opposed to an "all in leverage strategy."
Best
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