Debt - Really Good or Bad?

[Sean Honeycutt]

Okay, if this is the wrong forum I apologize.  

Anyway....

I keep reading articles saying that you get better returns if you take out a mortgage.  Of course it makes sense that a $300/month profit on a $20,000 investment is a higher rate, but you still owe $80,000 (assuming 20% down) so you're still not really making a profit at all mathematically.  That profit doesn't start until the debt is eliminated, unless I am really missing something big.

Also, the idea of tax deducting interest is great if you have to have interest, but is it not better to just not have interest to pay at all?  

Now understand, I get that almost all of us will have a mortgage at some point in time.  It may be exceptionally wise to take $100,000.00 and put 20% down on 5 different investment properties instead of buying one with all cash even.  That gives you risk avoidance as the odds of all five being vacant at once is a lot lower than having your only unit vacant.  Also with five properties, you can spread the cost of repairs out through the profit on five leases - but you're still in debt, you're paying interest which is costing you money regardless of tax deducting it.  Not that you shouldn't take the deduction.

So I guess the first question is:  If you have the chance to prepay your mortgages a little bit each month, and get out from under them saving 10s of thousands of dollars over the life of the loan - isn't that far better than the little money you'll save on your taxes each year?  

And the second question is: Should you really be looking at $3600 a year profit on a $20,000 down payment as your return, instead of looking at $3600+(Principle payments for the year)/$100,000 (full purchase price) as your return?  

Again, only doing this for a couple of years, so I might be missing something. 

[Cole Simpson]

Hey Sean, 

So the reason people say that is because you are not paying your debt, your tenants are paying your debt.  So yes you are 80k in debt to use your example, and for the next 30 years that house will make you 300 a month and if you have a good capital expenditure and vacancy plan, you will never have to put more money into that.

The reason why real estate is unique is because it lets you "own" a 100k property for 20k, leverage is an incredible tool if used properly. 

Now all of this is dependent on your risk tolerance, but that is the thought.