Own outright vs loans?

Question

Tom V. · Answer

Most people will tell you to use leverage vs paying all cash. And, when you compare the numbers side by side leverage is the clear winner in terms of return on investment. But, the one factor that is missing from the numbers is the risk involved when using leverage. Figuring out how much that risk is worth to YOU is the tough part.

A few things that I like about owning properties free and clear:

1. No mortgage payments due - If the tenant stops paying rent, or if the property sits vacant for a month or two (it likely will happen), then you're not still shelling out those mortgage payments every month. Vacancy isn't as big of a deal if you own it free and clear.

2. You don't have to answer to a lender and jump through their hoops. You are in control.

3. You can possibly get a better deal when paying cash for a property. You can close fast and many sellers would likely accept a cash offer rather than an offer with financing attached.

If having mortgages hanging out there is going to stress you out, then pay all cash, sleep good at night, and count that factor as part of your return on investment. If you pay all cash for your first property and then you absolutely hate being debt free, you can always get a mortgage on it later.

Kyle J. · Answer

Since your stated goal is to have retirement income in 30 years, I'd go with option 2.

With option 1, you'll only have 1 paid off property in 30 years when you need the income (assuming you do a conventional 30 year mortgage). With option 2, you'd have 4 paid off properties in the same amount of time.

David Faulkner · Answer

Or option 4: BRRRR. I like this one for several reasons ... first, you can normally get a bigger discount buying all cash, Second, it matches the leverage against the risk profile, meaning that you are unleveraged in the beginning when you are learning and there are a lot of uncertainties with a distressed, unrented property, you then reduce this uncertainties with the 1st 3 R's before you leverage up. In a sense, you get the best of both worlds, the safety and ease of cash when you need it and the growth potential of leverage when it makes sense. Plus, instead of 1 or 4 properties, BRRRR executed properly has no limits.

Ali Boone · Answer

I always vote towards leveraging, but it's really an issue of your personal comfort level as to which is better for you. I'm fine with leveraging, but not everyone is.

Check this out and it breaks down the two options in more detail and compares them-

https://www.biggerpockets.com/renewsblog/2015/04/1...

Levi T. · Answer

Think of it this away. What rate of return do you want on your cash, more or less?If you want less, pay cash, your getting cap rate, nothing else really. Money is gone unless you refi, and your buying power has now been reduces even more than it would if you used debt services.If your paying with a percentage down with debt service, your getting COC. Which will always give you a higher rate of return than cap. Also, you get to paydown the debt service over time with rental income which means more gains in a way, and if for some reason you want to paydown and refi you can. Lastly, you can buy more properties, that will paydown sooner, and generate more income over all. The catch is not to make bad deals that require more cash down, you want less cash, and more cash flow always, with the ability to BRRR at a later date to buy even more properties.

Bhekizwe M. · Answer

i agreed with option 2 or 3 that is a bit more conservative. there will be economic cycles

Jake Thomas · Answer

Buying with cash is the safer more secure route but if your goal is to eventually become a full time investor you cannot scale the business using just cash. Saving up $100K to buy every rental will take too much time. I have about $100K wrapped up into my last 3 properties all using loans and I cash flow at $1,600/month after all expenses. I also own three properties that are appreciating versus just one. But don't just buy on appreciation, that is just a bonus.

Brent Coombs · Answer

If for the next 30 years you don't NEED the $1,200/m (say $700/m net) except to invest, why wouldn't you re-invest it IMMEDIATELY by leveraging it into other great property deals you find?

Come retirement, would you prefer the cash flow from 3 free and clear properties, or 15? Cheers...

Julie Falen · Answer

Sometimes the idea is not as clear cut as it first apears.

What is your income now?

Can you reduce your taxes by taking advantage  of mortgage interest deduction, and depreciation?   Do you need to or  want to?  I suspect you are in your prime earning years - maybe you do, maybe not.  Ask your CPA.

ANd If you have 30 year amortized mortgages, they will be paid off when you retire, and the income will be even hihger, and taxed at a lower rate

Own outright vs loans?

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