Brrrr, debt free, or a happy medium?

Question

Let me preface this by saying I believe in trying to be/stay debt free if at all possible. With investment properties though, it seems more logical to be into a property around 40% and leverage the remainder. To me this seems like enough to head off any financially tough periods of time (like now) but let the bulk of the load be taken on by other people’s cash. So id love to hear stories about your methods and whats been working for you in the real world. I can’t wait to read your perspectives.

Aaron Hollingshead · Answer

Most people (I suspect) here will encourage you to leverage more than you're suggesting.  But it all depends on your situation.  I'd say that if you can buy properties with 40% in and you're still able to fill your other savings buckets, cash flow, etc then do it.  To me, the older I get the more I value security over maximum leverage.  As an example, I have a quad that's hitting the 2% rule (closing in on 3%, actually).  Conventional wisdom would say I should leave it alone but I'm actually hoping to pay it off in 3 years.  That will mean that instead of making 15,000 a year on the property I'll be making 30,000...I know it's unorthodox, but there's something comforting about having lots of equity.

Theresa Harris · Answer

Do what works for you in your market.  Where I am there is almost no chance that you can have multiple rentals and be debt free (when I bought a few years ago, they started at $225K and now start at $350K).  I have mortgages (80%) and am paying them down, no refinancing or pulling money out.  I took them for the longest period the bank would let me. I want them paid off by the time I retire (my current plan).  If the market hadn't gone up so much, I might have bought more..

Chris Thomas · Answer

@Stephanie Simmons

Thank you Stephanie.... looks like you’re like me, a happy medium kind of person. I appreciate your insight.

Stephanie Simmons · Answer

It's all in the risk you are willing to take - but the lower your payments or carrying costs the less cash reserve you need.  The higher they are the more you need.  Lower the payment the better the cash flow....  Yeah you can be leveraged 75% on every property but if it costs you $$ every month - then that isn't going to work out.  So it depends on your financial situation - I usually do 35% to get lower interest rates on a traditional mortgage; but then I flip with cash and have high cash flow from that part of my real estate investments.