Pay off or buy more?

[William Alvarez]

Hey guys, I am new to BP, but am very impressed with the amount of experience and knowledge on this forum. I have two rentals that are paid off and cash-flow $1250 each. I recently acquired another one that should produce the same monthly income. I put 20k down. These homes range between $85-120 in the Houston area. My question is should I continue to try and payoff the rentals with my business income as fast as possible, or just let the house pay for itself. My original goal was to payoff a few and then let the paid off income snowball into the new ones until each one was paid off and repeat. It seemed like a good plan to me, but I see on here that a lot of BP'ers seem to acquire as many as they can. My method seems like a slow one. Is there any benefit one way or the other? Any advise is welcome.

[Duncan Taylor]

@William Alvarez,

This is a marathon, not a sprint. I believe in using leverage in smart ways, in low risk ways, the way Warren Buffet does and like you are doing.

On paper you can convince yourself using maximum leverage will generate the maximum real returns, but that theory often leads to trouble.

First, if your rentals are paid off you have flexibility others don't. For example, let's supposed that once in a lifetime deal that will make you a billionaire overnight came along and all you needed was a couple hundred thousand dollars. If you are fully leveraged you will have a much harder time getting your hands on that money.

But, from a more practical position. People start buying rental properties for one of two reasons. One they really do intend to be an investor and create long term generational wealth. They want to change their stars and the stars of their descendants. Or two, they think they will be an investor but what they are really doing is just creating a new job to replace the old one they say they hate.

Neither of those are wrong. But, if you are the first one, the real investor, trying to create generational wealth, you use leverage when appropriate and for the shorted period of time required.

If you stay on your current path, then in a few years you are going to find yourself owning 10 fully paid for rental houses. If you absolutely hate not being in debt, you can always refinance those and become like the majority of the others out there, house rich but cash poor.

You cannot borrow your way to real wealth. If you could, no one would've been hurt in the recent down turn.