Loan Pay down and breaking even on cash flow

[Carlos Lopes]

I feel like I’ve been posting a lot lately! 

Something I've been thinking about is the benefits of loan pay down. So I've been listening to bigger pockets a lot, and am learning that a BRRRR method is a good method for making money. But let's say you buy a property for fair value, and it just barely cash flows or you just break even. On this forum and podcast, most people make it sound like that is completely unacceptable and you should get rid of the property.

Hypothetically,  let’s say you have a property that barely cash flows and isn’t appreciating much in the long term. The property isn’t really making you passive income, but it’s also not costing you anything to own.  If you have a long term 10 plus year outlook, wouldn’t loan paydown still be a positive for keeping the rental? I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home. In my mind this is the worst case scenario. 

So where I’m getting at is, if your goal to replace your W2 with passive rental income isn’t working out, at the end of the day you’d still have passive equity being built that you could withdraw some day. Isn’t this a win? Thoughts?

[V.G Jason]

Quote from @Carlos Lopes:

I feel like I’ve been posting a lot lately! 

Something I've been thinking about is the benefits of loan pay down. So I've been listening to bigger pockets a lot, and am learning that a BRRRR method is a good method for making money. But let's say you buy a property for fair value, and it just barely cash flows or you just break even. On this forum and podcast, most people make it sound like that is completely unacceptable and you should get rid of the property.

Hypothetically,  let’s say you have a property that barely cash flows and isn’t appreciating much in the long term. The property isn’t really making you passive income, but it’s also not costing you anything to own.  If you have a long term 10 plus year outlook, wouldn’t loan paydown still be a positive for keeping the rental? I mean at the end of the day if you kept the house long enough and rented, you could still walk away with a paid off home. In my mind this is the worst case scenario. 

So where I’m getting at is, if your goal to replace your W2 with passive rental income isn’t working out, at the end of the day you’d still have passive equity being built that you could withdraw some day. Isn’t this a win? Thoughts?

You'll get crucified by the folks that say make your tenant pay it for you. Truth is if you're really seeking financial freedom, then no debt is the route. It's all about goals. You'll see people tell you if you have $500k to invest, rather than buy 1 property go buy 5 properties with $100k down. Or if you have limited means, go put down 3.5%-5% and house hack and then do it again next year. Or if it doesn't cash flow Day 1, don't buy it. These three myths are exactly why people get burned.

I shouldn't have to explain why but I will. 5 houses with $100k down won't be $500k, once you factor closing costs & reserves. Try 3 houses, 4 if you want to stretch yourself. Scaling is appropriate if you know how to measure your risk. Risk isn't like a stock, you're not looking at beta you're looking at quality of neighborhood you're purchasing, interest rate, rental liquidity, etc. 

House hack at 3.5%-5%. Go do that, see where the math leads. You'll never get out from underneath with rates at 7%. Try 15-20% down + every 3-7 years. 

Another loud and proud statement here is cash flow negative is a big no. Paying cash down is a disservice to leveraging debt. Technically, math wise they're absolutely correct. You're truly better leveraging $300k at 7% and keeping your $300k invested elsewhere aside. Cannot argue with the math. You're better off on paper today buying a house that gives you you're $200 in cash flow versus one that gives you -$100. That's correct match wise. But this isn't it just outright math, this is to a degree speculation risk tolerance, and behavior. Cash flow negative or ATM is absolutely okay if you're buying a good area. And I think you should ONLY buy in a good area for a variety of reasons, but the main reasons will be the real way you evaluate risk in real estate transactions.

Behaviorally, and depending on your goals, it's absolutely asinine to leverage through the gills. If you lose your job, if your significant other does, or if you both? Child gets sick or parents get sick and you have a large bill? True financial freedom is no debt.

The concept here is to buy a **** house that makes you $200/mo, cross your fingers it appreciates in 3-5 years, cash out refi and buy another house with it. The real concept should be buy a good house in a good area, pay it down to where it's a low monthly payment in a 3-7 year time frame through recasting + pre paying mortgage. Take that increase in DTI and use it to invest elsewhere. I'd take 1-2 really good houses over 4-6 **** houses. If you're able to scale and take that mechanism to buy 3-5 quality houses, you may be able to sell 1 to pay off the others and just make nothing but cash(outside of taxes, insurance, property management).

Look at what you're doing as a portfolio, and how it's all going to work.