Pros and Cons of Paying Off a Loan and Not Paying off a Loan

[Michael Faudoa]

Hi all, my name is Michael and I am a new member here on BP. 

I have a question that I am hoping someone can answer- 

Why do some people advocate that you never pay a loan down because a loan is a wealth generator? I know that a benefit of paying off a loan is increased cash flow, but I am curious how not paying down a loan can also generate cash. 

In Brandon Turner's book "The Book on Rental Property Investing", he states that you have your tenants paying your mortgage for you, and that he could work a minimum wage job for the rest of his life and still retire a millionaire because of the tenants paying down the loan. I don't understand though? 

[Eddie Aviles]

Hi, I am on the learning track right now and in looking for my first deal. But here is how I understand it.

Option one: Pay down your loan. You will have a much larger monthly cash flow. You will accumulate from your cash flow to make a down payment for your next deal. Minimal leverage.

Option two: leverage the loan. Make a smaller down payment on the house. Instead of rolling the cash flow to pay off the property sooner as in option one, you will save that cash flow to buy your second property, sooner than it would take you to pay off the loan and save for the second property in option one. Now that you have multiple properties, each adding up to a small cash flow then if they were all paid off, but you let the tenants pay off the property over time.

Many houses at smaller cash flows may take less time to snowball into few houses with the same house. Yes, more debt and leverage, but tenants pay that. Either way, you will build up the equity in the house sooner or later, creating your portfolio.

Hope this makes sense. Hope I explained it well.