Leverage- can you have it both ways?

Question

Goal 1: Pay off mortgage on the home you live in. (With no plans to borrow against it in the future.)

Goal 2: Begin, grow and accelerate real estate investments using leverage. (The monthly cash that previously was paying the mortgage on your residence now goes into real estate investments *and* you are using leverage to fund / accelerate your rental properties.)

Do the above goals conflict with each other?

In my mind this protects the downside (of losing your home because you can't pay the mortgage) and allows you to take more risk and invest in properties faster.

Mark Costa · Answer

Thanks Thomas. What is an “income fund” exactly?

Mark Costa · Answer

That’s a good point, Brent. I was thinking of leverage as ‘all or nothing’ and 30% equity may provide peace of mind while still allowing your properties to grow faster.

Re: trusting my ability to find “proper deals” - my answer is NO! :) But I’m brand new at this and just educating myself for the first time... so far the main criteria to finding a ‘proper deal’ I’m aware of is to make sure you but your property at a discount. (20% - 30% discount seems right but I’m sure practicing this is much more difficult than it sounds.)

Thomas S. · Answer

Leverage is seldom a problem provided you by right and assuming you are not investing in SFHs. SFHs will be much higher risk for buy and hold investors unless you have a significant number of doors.

Those investors concerned about leverage are either small investors with few doors or are not buying with adequate cash flow.

If you are a ultra conservative very low risk tolerant investor you could pay down a income property mortgage but that is obviously going to reduce your return on your investment to a ceiling of the prevailing mortgage rates. Obviously that is a very low number removing most of the motivation behind investing in real estate. INcome funds will produce higher returnes.

A wiser move than paying down a mortgage is to take that cash and invest it outside of real estate in something like a income fund. This allows you to have all the financial security and easy access to your cash, which real estate does not, as well as affording you much higher returns than simply having dead equity.

The same would apply to paying down your own home mortgage, all you save is the mortgage interest. Pulling it out and making it earn it's keep in a higher income investment is wiser. This assumes of course that you want your cash working for you as opposed to simply being debt free.

Brent Coombs · Answer

@Mark Costa, note: You can pay off a 30 year mortgage over 15 years if you choose to make payments as if it was a 15 year mortgage, but, the converse does not apply!

As for over-leveraging, so long as you retain around 30%+ equity in properties whose rent more than covers all expenses (including up to 70% LTV), would you really (need to) worry about that level of debt?

ie. Don't you trust your ability to find proper "deals" in the first place? Cheers...

Mark Costa · Answer

@Brent Coombs Thanks! That’s an interesting way to look at it and makes sense...

The “fastest” way to get there is obviously to use all the cash and leverage you currently have access to and get as many properties so you can start the snowball...

I’m just trying to figure out my personal investment philosophy and how that factors... I don’t want to throw it all out the window and end up over leveraged.

I guess the decision of whether to get 15 yr over 30yr mortgages has the same effect? Results in slower growth over the short term.

Brent Coombs · Answer

@Mark Costa, it largely depends on how good you are at finding real deals. Why? Because how you're describing your goals, you'd rather forego having a low (say) 3.75% home loan, in favor of higher interest rate investment mortgages!

Which means: you'd better be good at finding real deals, seeing as you want to pay more for the privilege! Good luck...

Steve Vaughan · Answer

I like having free and clear properties, but I did it in reverse of your scenario because my primary loan rate is fixed at 3.375%.  My math brain couldn't get passed paying down a super low fixed rate first when I had 6%+ and commercial investment loans.

Your way will be slow as I'm sure you know.  Maybe you're not talking about much of a mortgage?  Here median homes are $300k.  How much of a mortgage are we talking about paying off first and at what rate?

A really good plan I heard about is buying 5 rentals with leverage, then start paying them off.  I heard about that 6x too late. LOL