Growing Wealth, but accumulating more debt?????

[David Levesque]

One thing Brandon preaches a lot is growing your portfolio. Buying 1 small multifamily opens the door to buying another and then another, until eventually your portfolio reaches over $1M. Ideally, you should be making deals that earn you positive monthly cash flows until you reach that financial freedom sweet spot. 

One thing I can't wrap my head around is the fact that the more properties you purchase, the more debt you go into (assuming you are taking out a loan to purchase each property). If I were to purchase 5 properties over 3 years for $200k each, which yield $1k each in monthly cashflow, I am essentially going into $1M of debt at the end of the 3 years to take home $5k a month. I will have $1M of assets on the books but also (roughly) $1M of debt to go along with it. I was always taught that debt is bad and that you should look for ways to always eliminate as much debt as you can. I want to start getting into multifamily rental properties but cannot wrap my brain around getting into that much debt even if it means a more comfortable lifestyle with the increased income. Can anyone tell me what the next step would be to start paying off some of these mortgages after you've acquired that financial freedom? is there an end-game strategy, or next step, to really start milking some equity out of these properties? 

Thanks!!

[Benjamin Magnie]

Hey David. My opinion is that Debt is not innately good or bad. Not all debt is the same. And not everyone has the same goals in life or is in the situation. Robert Kiyosaki has a great definition of good and bad debt in Rich Dad/Poor Dad that goes something like "Bad debt is debt you have to pay off yourself. Good debt is debt that someone else pays off for you" (meaning the renters). 

You mentioned the hypothetical of having 5 200k houses and after 3 years, having 1 mill of debt and 1 mill of assets. If its me, I would not purchase 200k homes that I thought would be worth that same 200k in 3 years. One of the best things about real estate, is FORCED appreciation. If I'm going to buy that 200k house, its because I think if I put in 30k in upgrades, Im expecting that in 3 years it better be worth 250k+. So id be making a goal of in 3 to 5 years, of having those 5 houses be worth 1.3 million while owing under a million.

I also wouldn't purchase properties unless I felt confident that rents were going to continue to increase, so that I could increase my cashflow in the future, which increases the worth of my properties and gives me more opportunities to refi and pull out yet more money for another deal. 

Personally speaking, I love debt. To me, debt means growth and new opportunities. But I never have and never will buy, or recommend my clients buyer, properties that don't have good future potential for rent increases and appreciation. Is that helpful?