Better to Have $25K in Cash and No Debt OR.....

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Better to Have $25K in Cash and No Debt OR.....

Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

It seems like the folks that are actually succeeding at a high rate in real estate have lots of cash, little debt, a strong savings rate, and excellent credit. The folks that are buying while lacking in those areas succeed in spite of those shortcomings and are the exception.

Something I've been thinking about a lot lately is the concept of "Real" Net Worth - Net Worth that directly contributes towards financial freedom by producing cash flow or that is accessible easily like cash or cash equivalents. 

So, who would you rather be:

Option A: Guy with $25,000 in cash, no debts, and no other assets, and a $50,000 per year salary.

Option B: Guy with a $300,000 home, with a $260,000 mortgage, a $30,000 car with a $20,000 loan, $10,000 in his IRA, $15,000 in student loans, and $5,000 in his checking/savings account. $65,000 per year salary.

Both have good credit. Both are 30 years old.

Guy A has $25,000 in net worth.

Guy B has $50,000 in net worth.

Call me crazy, but I think that Guy A is in better position to invest in real estate. He has no debt, cash for the down payment, and wealth that he can access penalty free. He has no fixed debt expenses that he's bought himself into, and can flexibly deploy his cash in the manner he sees fit. I'd take his financial position all day long over option B if I'm interested in early financial freedom. Guy A has Real wealth, compared to the "Fake" wealth of Guy B, wealth that actually decreases his ability to purchase assets, compared with cash equivalents.

The point is that it seems to me that the guy that is unable to accumulate accessible wealth is at a huge disadvantage in this business to the point where much of his net worth is rendered useless in his pursuit of early financial freedom. 

Seems to me like Guy B needs to sell his home and his car, and pay off his debts, then use the proceeds to buy something that will actually stand a chance of bringing about early financial freedom.

Love to hear some perspective on this.

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Andrey Y.
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Scott Trench:

It seems like the folks that are actually succeeding at a high rate in real estate have lots of cash, little debt, a strong savings rate, and excellent credit. The folks that are buying while lacking in those areas succeed in spite of those shortcomings and are the exception.

Something I've been thinking about a lot lately is the concept of "Real" Net Worth - Net Worth that directly contributes towards financial freedom by producing cash flow or that is accessible easily like cash or cash equivalents. 

So, who would you rather be:

Option A: Guy with $25,000 in cash, no debts, and no other assets, and a $50,000 per year salary.

Option B: Guy with a $300,000 home, with a $260,000 mortgage, a $30,000 car with a $20,000 loan, $10,000 in his IRA, $15,000 in student loans, and $5,000 in his checking/savings account. $65,000 per year salary.

Both have good credit. Both are 30 years old.

Guy A has $25,000 in net worth.

Guy B has $50,000 in net worth.

Call me crazy, but I think that Guy A is in better position to invest in real estate. He has no debt, cash for the down payment, and wealth that he can access penalty free. He has no fixed debt expenses that he's bought himself into, and can flexibly deploy his cash in the manner he sees fit. I'd take his financial position all day long over option B if I'm interested in early financial freedom. Guy A has Real wealth, compared to the "Fake" wealth of Guy B, wealth that actually decreases his ability to purchase assets, compared with cash equivalents.

The point is that it seems to me that the guy that is unable to accumulate accessible wealth is at a huge disadvantage in this business to the point where much of his net worth is rendered useless in his pursuit of early financial freedom. 

Seems to me like Guy B needs to sell his home and his car, and pay off his debts, then use the proceeds to buy something that will actually stand a chance of bringing about early financial freedom.

Love to hear some perspective on this.

 Interesting questions. It depends on what each guy's goals are. A $300k home is a mansion in some states, and that guy can be driving a Lexus LS (maybe a slightly used one). He might be throwing parties in that mansion, or living with the girl of his dreams. I can't believe I am saying this, but option two might be better in a lot of cases. Who is in a better position to buy real estate, PROBABLY the first guy, but $25k cash isn't much. Maybe the 2nd guy is so comfy, he is more clear-headed to put together a creative deal or syndication than the first guy! $5k to spend vs. $25k to spend is basically the same, IMO.

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  • Andrey Y.
    Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Scott Trench:

    It seems like the folks that are actually succeeding at a high rate in real estate have lots of cash, little debt, a strong savings rate, and excellent credit. The folks that are buying while lacking in those areas succeed in spite of those shortcomings and are the exception.

    Something I've been thinking about a lot lately is the concept of "Real" Net Worth - Net Worth that directly contributes towards financial freedom by producing cash flow or that is accessible easily like cash or cash equivalents. 

    So, who would you rather be:

    Option A: Guy with $25,000 in cash, no debts, and no other assets, and a $50,000 per year salary.

    Option B: Guy with a $300,000 home, with a $260,000 mortgage, a $30,000 car with a $20,000 loan, $10,000 in his IRA, $15,000 in student loans, and $5,000 in his checking/savings account. $65,000 per year salary.

    Both have good credit. Both are 30 years old.

    Guy A has $25,000 in net worth.

    Guy B has $50,000 in net worth.

    Call me crazy, but I think that Guy A is in better position to invest in real estate. He has no debt, cash for the down payment, and wealth that he can access penalty free. He has no fixed debt expenses that he's bought himself into, and can flexibly deploy his cash in the manner he sees fit. I'd take his financial position all day long over option B if I'm interested in early financial freedom. Guy A has Real wealth, compared to the "Fake" wealth of Guy B, wealth that actually decreases his ability to purchase assets, compared with cash equivalents.

    The point is that it seems to me that the guy that is unable to accumulate accessible wealth is at a huge disadvantage in this business to the point where much of his net worth is rendered useless in his pursuit of early financial freedom. 

    Seems to me like Guy B needs to sell his home and his car, and pay off his debts, then use the proceeds to buy something that will actually stand a chance of bringing about early financial freedom.

    Love to hear some perspective on this.

     Interesting questions. It depends on what each guy's goals are. A $300k home is a mansion in some states, and that guy can be driving a Lexus LS (maybe a slightly used one). He might be throwing parties in that mansion, or living with the girl of his dreams. I can't believe I am saying this, but option two might be better in a lot of cases. Who is in a better position to buy real estate, PROBABLY the first guy, but $25k cash isn't much. Maybe the 2nd guy is so comfy, he is more clear-headed to put together a creative deal or syndication than the first guy! $5k to spend vs. $25k to spend is basically the same, IMO.

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  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
    9y

    @Scott Trench I would think option B would be completely broke trying to carry that debt with 65k in income.

    I think the best route is to have no debt that isn't making you money other than a primary residence.

    There are other factors also, what is the investing plan? DTI matters if planning to use leverage.

    I know my wife and I have focused on ridding ourselves off all debt other than real estate which we accomplished a couple years ago.

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  • Justin Fox
    Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
    9y

    Option A of course. I don't think guy B is looking to invest in real estate, or at least not any time soon. I mean, his PITI is probably 50% of his take home pay...

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  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    9y

    @Scott Trench,

    I'm going to say, "it depends - on the debt, and on how the assets are held".

    Debt on "depreciating assets" and unsecured debt like student loans and consumer credit are tremendous liabilities. They eat up cash flow and produce no returns.

    Low equity in one's own home along with a high monthly PITI payment is likewise a drag on one's financial resources.

    If, however, one's home is a residential multi-family (BP'ers call that "house hacking"), then the picture takes a different dimension which will be determined by the ownership of the MFR. If it's in the investor's name, well, my position is that such is a major no-no - many BP'ers disagree. If it's in a business entity structure, then things look a bit different and a good bit better.

    Anyone who "has real wealth" is a potential lawsuit target. "Control everything, own nothing" is my mantra. On paper, I should look very unattractive as a lawsuit target. That doesn't say I can't be the beneficiary of a trust which, upon my passing, goes to my heirs without probate as directed in my Will. That trust can be the keystone of a very respectable fortune without actually showing up on my "personal balance sheet".

    "Guy A" is in a great place to get started, though his weak credit history may pose a challenge.

    "Guy B" can be in a great place to get started if he gets educated on how to attract and engage private lenders so he can do deals to clear up his "bad" debts. Likewise, for "Guy A" with weak credit history and "no other assets".

    ... from my perspective.

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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Hey Scott, I am with you.  I have a friend of mine who uses two personal balances sheets...one for the bank and one of "invested assets" (and he excludes his personal residence, retirement accounts AND his business worth from the invested assets BS because he wants to see financial freedom assets and cash flow without them).

    "It seems like the folks that are actually succeeding at a high rate in real estate have lots of cash, little debt, a strong savings rate, and excellent credit. The folks that are buying while lacking in those areas succeed in spite of those shortcomings and are the exception."

    I would disagree with "little debt" and "the exception" portions of the comment above.  How BP investors invest is a very small subset of how most real estate is purchased in the country by institutional investors, developers and sponsors, who are leveraging OPM.

    Try to think if you know any Guy As...may be hard pressed to think of one.

    This stuff depends on people's individual goals.

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