Leverage vs Debt Free

[Pasquale Zingarella]

I am currently under contract for my first investment property-a quadplex which I financed after 25% down.

I am looking to understand from experienced investors their preference between leveraging equity vs being debt free...especially for someone like me who is just starting.

I do understand each deal will be different and it will depend on the compared returns. However, I am hoping to understand how people balance risk aversion by paying off each property before moving onto the next OR leverage to a certain point then use the cashflow from multiple properties and pay each off one by one.

Thanks everyone!

[Greg Scott]

After years of looking at this, I believe the prudent leverage makes real estate LESS risky than owning free & clear.  Why?

• You can buy more properties which spreads risk
  • This increases your cash flow to help with repairs
  • With more properties, if one is vacant, it is less of a hit to your cash flow
  • It spreads the risk of a major catastrophe like a tornado taking out your business
  • If you find you need cash, you can sell one property off rather than 100% of your properties off
• With a 75% LTV your depreciation is more likely to offset all of your cash flow so you pay ZERO in income tax. On the other hand, a fully paid house, will almost certainly trigger income tax. This means more money in your pocket and makes it more likely you can weather any ups and downs
• A property with a 75% mortgage is less of a lawsuit target.  Lawyers will go after the insurance but there isn't as much incentive to go after the property....unless it is free & clear
• When the recession hit, lots of mortgage holders got bailouts.  Nobody that was free & clear got a bailout.  If they didn't pay their taxes, they got foreclosed.
• In an appreciating market, isn't it better to have more assets rather than fewer?