to leverage or not to leverage

[Fred Stevenson]

My home is paid off, and I'm taking 80% out of my house in a 30 year refinance loan. My plan was to purchase three - five SFR's for cash using 20% of my own cash and 80% from the refinance loan for each purchase. That way I would own three - five rental properties free and clear with a new 30 year mortgage on my house.

However, someone suggested to me that I should consider using the cash from the refi combined with some of my other cash as a 20-25% down payment on propspective rental properties while financing the rest with a new 80% loan using the investment property as collatoral.  With this strategy, I'd be able to buy many more than 3-5 homes, but I'd also be leveraged to the hilt and reduce my monthly cashflows. I'd love to hear some opinions on the pros and cons of these two strategies.  Thanks.

[Marcia Maynard]

Security is important to us. My husband and I maintain full time jobs and our rental property business model is designed to support our needs after we retire (or become disabled), not to support us now. We invest excess personal income into our rental property business. We also put 100% of our rental property net income back into our rental property business.

We make it a point to only carry debt as mortgages on investment property (80% LTV or less). We keep our personal home free and clear, only purchase vehicles with cash, and pay off credit cards in full every month. We keep our personal emergency fund at 10 x our personal monthly expenses. We contribute 10% of our wage earnings into our personal retirement accounts. We maintain adequate insurance, including a $1M umbrella policy.

For our rental property business, we pay off properties on schedule or accelerate the pay off so we are able to hold some properties free and clear. From the gross income we generate we put 10% into a reserve account to cover the unexpected, 10% into a capital account to cover needs we can anticipate (replacement of furnaces, roofs, etc.), 10% into an upgrade account (improvements to make our properties more marketable), 10% into an account to make contributions to the local community to improve our neighborhoods and fund necessary social services, 10% into an account for future real estate purchases, 50% to cover debt service, taxes, insurance, maintenance & repair, holding costs, business expenses. When we have sufficient funds in any of these accounts, we tap the excess to pay down debt or purchase more real estate!