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Updated about 11 years ago, 12/10/2013
Paying off vs Cash flow
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?
Check out this recent thread on BP: http://www.biggerpockets.com/forums/88/topics/108833-need-advice-on-investment-property
It deals with your question pretty well and includes numbers you can show your wife. :)
@Gary Hurst to some degree it's a question of risk and goals. Paying off mortgages removes risk. By using leverage to buy more property, your are increasing your risk, but building a bigger business. If your goal is to build a large portfolio of property, most people need to use leverage to get there.
I would discuss your overall goals with your wife and then map out a plan to get there. Maybe she doesn't like the risk associated with taking on more debt and doesn't share the same end goal. Or if she does share the same goal, maybe you guys need to have a discussion on what it will take to reach that goal.
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
Leveraging can be a double edged sword. It can enable you to build a real estate empire, but it could also bankrupt you. It all depends on your goals. Right now, I am weighing my options. My loans are all on ARMs which we all know rates are going up. However, I'm young and am wanting to grow quickly. I usually apply extra principle payment to the loans each month, but keep most of the cash flow for reserves and more buying. Good luck!
Great advice here, but to address the main question, you do want to keep your wife/partner happy, yes she is a partner, a compromise may be in order. Pay for the cheapest property and use the rest to buy again. You already have 5 paid off? That's great! Then you have 6, plus you get to grow the business.
@Charles Morgan has a great idea. Perhaps you could pay off one house and put a down payment to purchase another? I remember in my first year in real estate I decided to pay off my first rental before I bought another. I sorely regret that decision, and really its my only regret with REI so far.
Awesome stuff! Its a cultural thing with the wife (no debt). We have made a deal she gets to pay off as much as she wants for the next two years to give her that monthly income she wants. Then we will retire and I get to play real estate investor. Thanks guys for all the great numbers.
Originally posted by Bill Jacobsen:
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
Great measurements! How long do you usually get on your loans 15, 30 years?
In answer to Justin. I have a ten year loan(no payments at all for 10 years) to a private lender, I have some 30 year loans and I have used a HELOC.
Hope that helps.
Bill
You are talking about the process but it seems that you and your wife are not on the same page as goals. Sit down and plan out the next 20-30 years of your life in as much detail as you can. This would be estimating the amount of time your business consumers and how you cashflow will change going forward. There is no right answer but you and your wife need to be on the same page with your future goals. Once you are in agreement on that then your financial decisions will be able to be viewed in relation to your common goals. This should keep both of you on target and happy :)
I've flip flopped on this. Given our litigious culture (imo), free and clear ownership is too risky.
I like to take a mixed approach. Some properties with mortgages, some properties without. Then I can have the best of both worlds. Of course I buy really cheap ($25k-$30k) so generally I could not get mortgages on them anyway.
Originally posted by Craig E.:
Yes that's a risk but one that can be countered with the proper management and insurances. I feel like the chance of losing everything due to being sued is much less than the risk of losing everything cause one had too much debt.
I definitely agree with a healthy mix. I'd like to have my first 2-3 paid off before I start taking out loans against them.
I used essentially all leverage when I started out but have went the opposite direction these past 6 years. Most of my portfolio is free and clear with only a few of my Multis being leveraged. I do plan on using more leverage in the future but as of right now I'm not losing any sleep. I also think a mixture of both would be a sound strategy if you are trying to build a lucrative portfolio.
Nice Investing
@Gary Hurst , it sounds like you have resolved your issue with your wife. You apparently still intend to invest and expand your real estate holdings. I have found at this point the single biggest factor to expanding my portfolio is the 20% down to acquire new properties. Before the new tighter lending policies, we would hold properties until they acquired a 50% equity, then use the equity as security on the 20% down and finance 100% on the purchase of anew property. Using that pattern we moved from one property to 8 properties over about 15 years. We only paid the 20% down out of pocket on the first house. We did sell a house or 2 to get equity out, but leveraging allowed us to increase our numbers. If we waited until the first house was paid off we would only have 1. You need a reasonable amount of leveraging of your properties to grow. Good luck
