How much cash is in your properties? Buy and hold vs cash flow..

[Shannon Leahy]

I once met a real estate investor who said the trick to successful real estate investing is to keep as little cash in the property as possible; you don't pay a loan off as quickly as you can, rather, you keep it lean so that you are always cash flush and are able to then purchase more properties. He argued that the small profits over many properties add up a lot faster, and that money trapped in properties is useless. Obviously there is a danger in that way of thinking, as we saw in the 2008 real estate crash- people who were over leveraged lost everything. I'm a small potatoes investor but am curious to hear from folks who have larger real estate portfolios- what is your comfort level for keeping cash in your real estate investment? Is cash flow king, or is it all about buy and hold, letting time do all  the work?

[Chad G.]

@Shannon Leahy

The "people who were over leveraged lost everything" in 2008 were speculators that were hoping to flip their properties as market values rose. They usually had ARM loans that ballooned so they couldn't afford the payment anymore. It doesn't really matter much if you are underwater on your loan if you are a buy & hold investor and your rents cover the mortgage and other costs. It will eventually work itself out in the long run, but this generally has more to do with "buying right" and making good decisions than extracting equity per se.

Another possible reason to take equity out of a property is as a legal deterrent. If you are sued, the first thing they are likely to look at are your properties with a high amount of equity. If you are leveraged, these will not be of much use to them.