"Tell Debt Do Us Part, Or Maybe Longer"

[Eric Bateman]

This is my first post on the BP Forum and I am fairly certain before the ink drys most members already know the answer. But with over 20 years behind my belt in Real Estate Investing and Flipping the question is still a perplexing one to me. 

In the Almighty quest to gain financial freedom thru the trenches of passive real estate investment, when do you forgo the modest cash on cash ROI of a debt free portfolio verses the lucrative lure of the "Leveraged Growth Model" everyone seems to be so in love with. The model of owning 0-30% of several assets instead of 100% of a fewer amount. Yes I can hear it now, "OPM" Eric the ROI is infinite because you are leveraging other peoples money. This is the American way. More is better, bigger is better. Having lived thru a few market corrections I am not certain that the average cash flow of $100-300 per unit is going to see me thru this storm. In fact I was fortunate to see a few of my friends get their A's handed to them having lived in Vegas. It is one thing to put your cash flow back into paying off the principal sooner but then there goes your savings to take advantage of the Market Down Turn. If you are living off that cash flow, finally out of the rat race, where will the funds come from as well to take advantage of the next crash? I have yet to hear of a sustainable option that makes the 2 voices stop in my head. So I turn the question over to the Brilliant Minds of BP. Is it "Tell Debt do us part" with a leveraged portfolio or "Slow and Steady wins the race" with a debt free portfolio?

I welcome any comments, especially from those all wise experts who are Veterans. 

Thank you

Eric

[Ned Carey]

It is  a personal choice. Debt is about risk and reward. Many people like free and clear portfolios, they say they sleep better ant night. But I know lots of landlords that are leveraged and sleep fine. 

The advantages of debt are not the simple math of cash on cash ROI. If 10 properties appreciate 10% that is a much higher return than 1 property appreciating 10%. Additionally 10 properties that you depreciate every year is a larger tax savings than depreciating 1 property a year.

A factor that needs to be considered regarding the above is what class of property are you buying? Low end properties may not appreciate as much as lower cash flowing but nicer areas.

One thing that I don't understand is that when this comes up people act like it is an either or situation. You don't have to maximize your debt. Instead of 80% or higher LTV, why not go with 50% LTV and get some of the advantages of leverage without as much risk? A very important factor about debt risk is your debt service coverage ratio. How much is your NET income relative to your debt service.

The fact is many paths lead to success. The question is which is the right one for you. Only you can determine that.