Why not snowball the debt on real estate investments?

[Robbie Taylor]

I love the forums and the podcasts, but one constant I see is that people are looking to add more properties or refinance properties for cash to buy more properties etc.

Why don't more people start snowballing down the debt on their first properties with the cash flow from the 2nd and 3rd purchases and so on?  Is there a downside to owning free and clear?  If I look 10 years in my future I think I'd rather have $10,000+ a month in cash flow while managing a portfolio of 7-12 free and clear units (depends on your area) than managing a 40 unit portfolio with debt, responsibility, and moving parts.  Is it just all about personal goals or am I missing something big here?

[Thomas S.]

The reason not to pay down a income property mortgage is due to the high opportunity value of cash to investors.

Investors must understand that every property actually has two separate income generating streams. First is the property, second is the equity in the property. Novice investors believe that paying down a property increases cash flow. In fact equity has the opposite effect it actually decreases cash flow to the point that the property itself becomes a liability as opposed to a asset. The property generates no actual income of it's own and becomes a expensive money pit.

Here is why.... For every 100K in equity, valued at 10% opportunity, it is generating $833 of the properties monthly income. When you deduct that amount every month from the rental income you see how the property quickly becomes negative cash flow producing to the point of liability. If the 100K is spread around multiple investment properties, with minimum down, the return on the 100K is increased allowing all investment properties to generate positive cash flow. 

Equity in a property is dead cash that has been retired and is no longer earning it's keep. It would be financially beneficial for a investor, with free and clear properties, to sell everything and place all the money in mutual funds. The end result would be higher returns with no work. 

Equity kills cash flow and disrespects the value of cash. Cash buyers are the quintessential conservative investors and receive the lowest possible returns of all real estate investors.