Any resources to learn about debt-free investing?

Question

New member here. I'm a military spouse and currently a stay at home mom, but we are interested in learning about real estate investing. I'm of the "I hate debt" persuasion. Are there any real estate books or experts (with websites, blogs, etc) that talk about investing in real estate by using only cash? I know there is no shortage of info about using debt to your advantage in real estate transactions. I'm interested in other opinions.

I'd appreciate any info y'all have.

Yousif Abudra · Answer

@Kate Johnson

Kate,

It's a bit disappointing to see the responses trying to convince you to utilize debt when you specifically asked a question on investing without it.  Debt-free investing in real estate is unconventional, and traditionally reserved for those who: a) are restricted from using debt, or b) use it as a competitive advantage such as we do.

As many BP members know (and will scream from the rooftops) debt is an efficient use of financing to maximize your cash on cash return.  By  choosing to not use debt, your choice of using cash should be strategic  enough to allow you to achieve returns you could not achieve using  debt.

Specifically:

• Property condition - properties in poor physical  condition, that have code violations, or structural/pest issues are  viewed poorly by lenders.  Many times they will refuse to lend on such  properties, or appraisals will not come in high enough to justify the  loan amount.
• Vacancy rates - multifamily  properties with low vacancy rates (<50%) will almost never qualify  for a loan.  Acquisition using cash, leasing up the property, and  selling it to a traditional financed buyer is one of the most effective  methods of value-add investing in the MFH space.  Because financed  buyers can generate a higher cash on cash return percentage (due to  their financing), they can generally afford to pay more, resulting in a  larger spread for the seller.
• Competitive bidding  - All-cash buyers generally benefit from lower (sometimes much lower)  purchase prices and/or better deal terms, as their bids present  significantly less closing risk to the seller.  Additionally, cash can  be an effective strategy to acquire properties in situations with  multiple competing buyers, or at property auctions.

In each  of these situations, cash provides either the only way to acquire an  attractive asset, or delivers a distinct advantage over financing.  For  the highest returns, acquire value-add assets that require cash, add  the value, and sell to a financed buyer in a short time period.  Rinse and repeat.

As a bonus: you will avoid all of the appraisal fees, loan fees, interest, and paperwork as well.

If you are interested in learning more - happy to chat further.

Best,

Yousif

David Dachtera · Answer

Hi, Kate,

"Investing" and "debt free" are pretty much diametric opposites unless you are independently wealthy. (Have your own private gold mine?)

Here's a little something most people don't know about debt...

Look up the word "arbitrage". Basically, it's borrowing money at one interest rate and lending it out for a higher interest rate. That is, "debt".

The banking system wouldn't work without it. Banks borrow from "the Fed" for somewhere around 0.25% and then make home loans and equity line loans for anywhere from 3% to 9% or more. ... or, they lend it out to credit card holders at rates up to 22% or even penalty rates as high as 39% or more. ("Usury", as we like to think of it, is an obsolete concept.)

For REI, savvy investors are recruiting private money (IRAs, 401(k)s, etc.) and paying 12% to 18% for short term funds which are paid back out of the proceeds of the rehab or fix-and-flip. The lender is secured by a first-position lien. This benefits the investor because it funds the deal. It benefits the lender because otherwise they'd get single-digit ROI on Wall Street or, possibly, even lose anything from part to all of their money.

I have one colleague in my local investing group who, in effect, pays his private money source 20%. He borrows for six months at a time for 0% interest, 10 points, no payments. He does that twice a year. Net return to the lender is 20%. His profits range usually $30K to $75K+.

There are ways to make it look to the seller like you're paying all cash: purchase with no financing contingency. That doesn't mean there's no lien on the property when everything closes, it just means there was no financing contingency. That's the usual "all cash" transaction unless someone literally puts their own cash - or a partnership / joint venture puts its own cash - into a deal with no lenders recording liens.

Dunno if that helps.

My advice to you is to learn about debt so you won't fear it, and learn how to make leverage work to your advantage.

... and stop looking for "risk free" investments. They don't exist.

Account Closed · Answer

@Kate Johnson Whats wrong with debt..if someone else is paying it off?! Every time i do a cash out refi i take a vacation..and my tenants pay for it ;)

David Dachtera · Answer

@Yousif Abudra

The way @Kate Johnson described her situation, the only way I can see her doing anything "debt free" is with a money partner - someone who provides all the funding in return for a share of the profit.

The whole "debt free" thing is typically an indication of fear or being morbidly risk-averse. There are, of course, no risk-free investments and no such thing as a zero-risk business or venture.

I also disagree on appraisal fees. Buying without an appraisal is potentially financial suicide, and I would never recommend it without a substantial equity cushion - 70% or more. At least a CMA would be better than nothing.

My $0.02 ...

David Dachtera · Answer

@Kate Johnson,

Here's an alternate you might consider, also...

Invest in property for income and use that income to pay down your personal residence. When that debt is gone, the income will remain. In the meantime, you've started your investing business instead waiting until everything is safely landed on "Someday Isle" (I'll ...) and your financial future is procrastinated to a time when it may not ever happen.

"Someday, I'll have my home paid off."

"Someday, I'll be debt free."

"Someday, my children's college fund will be fully funded."

"Someday, I'll have all my ducks in a row."

... but "someday" never comes, safely procrastinated in the future.

Instead of finding reasons to do it later, find ways to do it NOW!

Brent Coombs · Answer

I wouldn't dare try to talk you out of paying off your mortgage. But, dare I suggest that it's been a better investment than renting while saving? My main point is: so would be your future rentals!

Why would you treat rentals as more risky than your primary - when you were quite willing to borrow for your own home? Especially as it's not you who'd be paying them off!

If Dave Ramsey is (still?) spruiking the idea that as soon as your own home is paid off, you must leave all your future savings safely in the bank until you can 100% pay for each investment property with cash, then, I would point out my paragraph two to him as well! Cheers...

Kate Johnson · Answer

Brent, I do agree with you.  We would want our mortgage paid off before investing. In a couple more years when our kids are in school, I should start to work again and that should wipe the mortgage out very quickly.

And the conversation you describe with Dave Ramsey would be kind of boring because he would 100% agree with you.  He doesn't recommend buying properties (for cash) until your primary residence is paid off.

Brent Coombs · Answer

@Kate Johnson, I reckon you've got it backwards if you reckon it's absolutely fine for everyone to have a mortgage on their primary, so long as every other property investment is paid with cash!

Can you guess why that's backwards thinking? (I would say the same to Dave Ramsey too)...

Kate Johnson · Answer

Thanks for the responses.  I just know for me and my family and the way we are raising our kids that we hope to steer clear of debt (we do have a mortgage, but that is it).  Just a different outlook than some folks based on our faith, our upbringing, and our risk tolerance.  I do understand the numbers behind using debt though, so it is going to take discipline if I really want to make a choice to stick to a debt-free investing plan.

Not sure when we would be able to get started. We think we would like to be out of the military before we do, so this is a long way off.  I've realized that I need to spend time learning now when I have the time.  I've started reading here and started listening to BP podcasts and other RE podcasts.  So far everything I have encountered is based on strategies that involve using debt, for all the mathematical reasons that I do understand.  Obviously there are parts of investing that can't be quantified on paper, and it is more of those reasons that can't be mathematically quantified that we'd take a debt-free approach.

I checked out that Cook and McCloskey resource.  I will definitely look more into it.  They have a lot of information on their website.  Thanks, @Ruth Bayang.

Any resources to learn about debt-free investing?

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