Use Debt, Pay Cash? Counter Points? Here is an Answer!
I've been reading the Andrew Syrios and Engelo counter pointing and here's what I think... But first.. My dogs..
I believe learning is the key to everything, learn everything you can, and keep learning. This is how you will discover your ability to create your own strategy. Follow the rules without being bound by them, as Bruce Lee once said.
As has already been stated, there is Good Debt and Bad Debt. One helps you build wealth, a business, a portfolio, accumulate assets, and the other simply takes money from you.
Not everyone agrees with this (or has to), but I do and here's why - in fact I don't even call good debt, good debt, I call it an investment.
You have a couple of choices to get money, so unless you started off with money... You save, you borrow - from a bank or from people, you earn it at a W2 job, or start a business - which could also include either of the first two - save or borrow.
I know Ramsey and his peers claim they don't use debt for anything and that debt is bad. But I think you have to understand their goals as well as your own to get clarity on which is best for yourself. They might never use debt to buy multi family investment real estate, but my solid bet is they have deeper pockets than most of their listeners. And who knows if they have ever used debt to get where they are! Easy to say "never use debt" when you have the cash, but still, only you can answer which is the best path to take. I think the advice of never borrow money is good for the people contributing to the $1.X Trillion in consumer credit debt, the people with either no financial and spending education, and the ones having issues with uncontrollable spending. No budget, no restraint.
Borrowing for investment RE – Borrowing allows us to buy 100% of something with using only around 20% of our own money. We receive 100% of the control, use, and tax benefits. All while we also get 100% of the appreciation. Apply that to whatever you’re doing in RE, flip, hold, BRRRR, make the debt work for you. Invest in yourself, buy well, and let someone else – the bank – pay for the place and then let tenants pay the bank back. Do a few of these at once and have several paid off in 30 years, or even staggered 30-year payoffs. Or does it make more sense to save cash for those same 30 years? Not to me, not unless I had the income to buy $350k or several million-dollar properties a few times a year, and had a near 0 risk tolerance, but by then, we’d be having a different discussion. I think the issue with debt is that people overextend themselves – duh, similar to people with credit card debt issues. Similar behavior. When times are good and the banks are handing out money, I think it becomes easy, psychologically and physically, to keep the party going by any means. I also see a risky eagerness with many new investors, who don’t have a lot of cash saved, but are eager to get in. I’m not discouraging that kind of motivation at all, but I am saying cover yourself. If you’re using too much debt and the numbers are strained, best to revisit with a new plan, which might include, bringing in more cash. Figure out what your tolerance is given your finances, and risk profile you’ve created, and look at the many variables in the market you’ve chosen, demographics, class of property, and where we might be at in the cycle, and more.
Saving and using Cash – It’s nice making cash offers. It’s a great option to have and can be used in strategy in hot markets. And unless you’re worth a lot, need a place to park your cash, and like the idea of the returns RE offers while your cash sits – beats the bank, debt might be a better answer. The issue I have with saving and paying 100% cash is that unless one can save a lot of money in a short amount of time, one might be taking the long and slow route. Whether you are saving for a buy and hold, flip, BRRRR, some other value add, the longer your money sits in the bank accumulating until you have 100% of the costs, the longer you are out of the game, the longer your money is getting cheaper, and unless you have luck on your side and you happen to buy after saving for who know how long and the area you finally buy in takes off, the longer real estate appreciates ahead of your savings. I know a lot of new investors who started by buying and holding, and in a high-priced market like LA, imagine how long it would take to save $1m? If you're 20, you might have cash to buy when you're 60! Or if you had taken a loan at 20, you'd own it by 50 and could have bought more on the way. Meanwhile, you’ve gained decades of tenants paying the loan back, or in other ways of looking at it, a team of people helping you save. You’ve also taken advantage of appreciation and the tax benefits, which are almost definitely going to beat your bank account, and possibly your Index Funds.
Real Estate has and may always be cyclical. Do you want to let buying at a discount in a down cycle pass just because you didn't have 100% of the purchase saved? I wouldn't. But it doesn't necessarily mean I'd overextend myself to buy everything I can during that time. Find your risk, set your goals.
If you have a set income from a W2 job or steady income through your business, the way I see it, you can either save on your own, or you can borrow and let someone else pay it back. You can also go a step further, double up and pay in the money you'd be saving in addition to renters paying back debt. All while you're receiving the government subsidies. That's a way to speed things up! Of course, getting that money out if you need, isn’t exactly fast. Which is why you are here and learning as much as you can, so you can start with a plan, that is likely to adjust as you get smarter and gain experience.
I mentioned starting a business because it can be a way to scale your income almost infinitely, however it often takes time, education, dedication, and often times requires money - whether your own or borrowed. There is always a way to reach your desired outcome, you find the way and make it work.
And for many, the real estate IS their business and the skill they want to hone to create the financial life they imagine. To this, I say borrow smart.
Other investments can also speed up your rate of saving, but they all take TIME. Investment debt is pretty quick to come by.
The point is not to tell you what to do, but to give you something to think about.
I like the extremes of both of the other articles, and both contain common sense. However, for me, I use debt, but I use it in a way unique to me. Real Estate IS my business and I believe by making smart, well thought out decisions, debt can be a blessing. Use it unwisely and it can ruin your life.
We are taught by our parents, school, to want to know “how to” do things, rather than learning how to think. Learn everything you can from everyone you can, learn from their experience, and go create your own.
Develop your own philosophy, learn the tools available, set your risk parameters, create opportunity, and never stop learning!