Pay down debt vs leverage equity

This blog comes about as a result of a recent conversation I had with my brother, who is also a real estate investor. We have two very different mindsets when It comes to real estate investment, and our ultimate goals. Mid conversation, I of course was convinced that my own strategy was superior. However, sitting on the plane back home, I am mulling over the potential merit to his argument. I’ll summarize here:

My brother’s strategy: Acquire a limited amount of assets (in his case a few apartment complexes) and systematically pay down the debt linked to these buildings. His ultimate goal is to own the buildings free and clear so that he has no debt service and can pocket nearly all of the monthly rent, minus normal operating expenses of course.

My strategy: Fully leverage all properties by taking as much equity out as possible to fund the purchases of more properties. I typically see very high rates of return on my investments, between 10-20%. So, to me, it absolutely makes sense to pay 6% on a commercial note on property “A” to fund the purchase of property “B” which is going to bring in a return of 15%.

Which strategy you go with, in my opinion, largely depends on your place in life. After all, making additional investments, even if they promise to offer you more of a return than simply paying down debt on another property means additional work. It’s possible that either the investor does not want to take on additional work or they are operating at capacity, and would need to hire help . If help were needed to manage the additional properties, either an employee could be hired, or the more sensible solution would be to hire a property management company. Management companies typically charge between 5 and 10% of gross monthly rent for their services, in addition to leasing fees when necessary.

With this in mind, I began to look at each of our situations. I own a Philadelphia real estate brokerage which specializes in Philadelphia property management; whereas he is a full time attorney, who also invests in real estate. When I bring on an additional property, I already have the infrastructure in the place to take care of that property’s management needs, considering I manage a good number of properties on behalf of clients. In his case, at a certain point, he will need to hire help out and that is going to cut into his bottom line – potentially leaving him in a break even situation.

Questions and comments are welcome, I’d like to hear from other investors about the strategies which have served them well, and the strategies which they are considering implementing.

www.jg-realestate.com