Paying off vs Cash flow

[Gary Hurst]

My wife and I differ on this. She wants to pay off each house and I'd rather use our cash to purchase more property. Example She has 50K and can pay off two of our houses which will of course increase our cash flow. I'd rather use that cash and purchase 2 or 3 additional houses. That would probably cash flow about 600 per month for 3 or 400 for 2, plus the equity capture of at least 10-15K sometimes more per house. With her example our cash flow will increase from 400 for the two to 1100. We have 10 residential and 1 commercial property now we have 5 paid off. I want to tap that equity and purchase more residential or partner with someone to purchase apartments. What do you think or what argument can I use to swing her my way?

[Bill Jacobsen]

I don't know if there is a right or wrong answer. It is true that the more debt you have the more risk you have. It is also true that you may make a greater return on your money with more debt. There are some who will not take on any debt and there are others who will take on as much debt as someone will give them.

I do not want debt to be over 50% of my real estate portfolio. Also, I want expenses including debt service to be no more than 75% of the revenue from each property. I am only going to use debt if the CAP rate of the property is more than 3 percentages points above the interest rate of the debt.

These are the tests I use and I am not saying they are right for everyone.

Good Luck.

Bill