To lever up or not?

Question

I'm sitting at a crossroads in my business and I'm looking for different points of view on which road to take.

Currently I own two 2/1 SFHs that are rented.  Rents are $585/month on each and I have about $22k in each of them.  Essentially I own them free and clear and have some nice cash flow coming in along with a good ROI.

My question is, what should I do next?

A. I could purchase 2 more houses like this for cash this summer and own 4 houses with no mortgages.

B. I could use leverage to buy 1, maybe 2,  2 to 4 family building(s) with mortgages.  This would give me 4-8 more doors.

I know most people take out mortgages to start and then you hear, "once you get one paid off, things really start getting good" and such.  I'm in a fortunate position to start off with no mortgages.  Should I stay in the 'good' place and self finance purchases with cash flow or ramp up with leverage as I still have good cash flow coming in from these 2 properties to pay down faster/get more mortgages?  I'd like to hear your opinions on this.

Michael Rossi · Answer

Bob,

I have my rentals divided into different LLC's.  All but one of my LLC's contain rentals with debt (typically 10-12 rentals per LLC).  Obviously, taking on the debt and buying a large number of rentals was key to allowing me to live off my rentals.  After less than 5 years on this path, I was able to semi-retire and am now enjoying a nice life.

On the other hand, one of my LLC's is dedicated to paid-off rentals.  I bought the first one about 5 years ago for cash.  After about 3 years, I had enough cash to buy another for cash.  The 2 paid-off rentals over the past 2 years have thrown off enough cash that I can now buy another (assuming I find a GREAT deal).

My point is that I LOVE THE PAID-OFF RENTAL BUSINESS!  As you buy each subsequent rental, the cash flow really dramatically accelerates.  The down side is that if you're in a hurry to get out of the rat race by building up a significant cash flow, the paid-off rental business is slow (unless you're already a multi-millionaire and can pay cash).

Since you asked for opinions, here's mine (and worth every penny you paid for it).  If you're not in a hurry to quit your job, I would work really hard to find GREAT DEALS (at a HUGE discount) and pay cash.  If you are in a hurry, then I would work really hard to find GREAT DEALS (at a HUGE discount) and use leverage.

Good Luck,

Mike

Michael Quarles · Answer

Good to meet you

First congrats on your success.

Before the answer can be given I think you need to ask yourself what type of person you are.

1) Can you handle more units emotionally... More doors more headaches more frustrations etc

2) At the end of the day do you need more doors? Is this about ego or economics? Either one is okay...

3) Eventually when you sell which type, single or units allow you the best return?

Then I would have to ask myself where is the best return on my dollar... If its just a return youre wanting will putting your money to work as a HML be a better return and less risk?

Again congrats

Michael

Kip G. · Answer

I'm dealing with the same issue now.  I find the idea of taking on debt in the current environment to be very scary.  No one knows what's ahead - inflation? deflation? stagflation? massive unemployment? who knows?

On the other hand, my goal is to be financially independent within the next 5-7 years and leverage will help me reach my goal.

I'm not totally sure what I will do yet but I'm leaning towards taking on the extra debt.  I have 4 properties free and clear.  My plan is to get a 30 year fixed rate mortgage on one and use that money to buy two more properties.  That way I will have three properties supporting one mortgage.   I figure if I keep that ratio I will be okay.

I don't want to be over-leveraged so my hope is that by having 3 properties support one mortgage I should be okay if the economy tanks.

Dale Osborn · Answer

I started with the goal to own 15 homes free and clear. After getting the second one paid off, My wife got the calculator out and this is what we were looking at in our town:

Houses were selling for about $65K and rent was about 450-500/month. 
A 27-unit apartment (all units were 2-bedrooms) was available for $20K/unit and rents were about $400/month. 
Needless to say we sold the 2 SFHs and put it into the downpayment and assumed the existing first mortgaged. Never looked back after that. All your units are in one spot. Usually have an office you can set up a phone in and a maintenance/storage area for tools and lawn equipment. No more driving all over town to check on properties and carry everything with you. After 10 year though we did get burned out on apartments and now are recommending mobile homes and mobile home parks as the way to go. No more maintenance, plugged sewer lines at 1AM, no more garbage disposals to unclog, no more plugged up traps or toilets. We just rent the dirt and they own their own homes and are responsible for all maintenance issues!

Bob Hines · Answer

Thanks for the reply.  Yes I know there are personal reasons that go into going both routes, and I do have personal reasons/situations for and against both paths A & B.  I left them out as I'd like to hear opinions from others on this as maybe I'm overlooking a strategy all together.

To lever up or not?

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