What you think ? i'm just curious

Question

Hey. Do you guys think it would be a good idea to dump 100k into 1 property to be free and clear that way you can maximize your CASH FLOW or leverage the 100k and spread it around through multiply properties ? My only thing is that their is really no asset protection when you leverage the 100k and you have mulitply properies under a loan. If 1 of your loans crash do too NO TENANTS ETC or you don't have any reserves to cover the monthly payment yourself. The government is coming for all your assets and then what ? File bankruptcy ? Compared to cashing out and having the property free and clear. You won't have the fear of "what ifs" because if you don't have tenants at a moment etc. You won't have to worry about paying off a loan because the property is already paid for. correct ?

Nick C. · Answer

You may get advice to go one way or the other, but this is completely a personal choice. Every situation is different, everyone's risk tolerance is different.

No asset protection? I don't understand that statement, isn't that what insurance is for? I'd say you have less asset protection if you own free and clear, you might get an ambulance chaser coming after you. If you have a mortgage on the property that will scare off the good ones.

If your loans crash because you have no tenants you bought in the wrong area and are overleveraged. Buy good deals, don't borrow too much, have cash reserves.

This is real estate, you should always be afraid of "what if's" no matter what your position is!

Max Householder · Answer

Chad Carson has a method he calls the Debt Snowball Plan. Basically you'd take your $100k and lever up 2-3 properties, then use all the income (after setting aside reserves of course) plus savings from your day job (assuming you have one) to pay them off one at a time. With each one you pay off, your income goes up and helps pay the others off faster. Once you have all of them paid off, lever up 2-3 more and do the same thing. The second go-around you'll pay them off even faster since you'll have free-and-clear income from the paid off properties plus the income from the levered properties plus your W2 income all working for you. Rinse and repeat until you have enough passive income to quit the rat race.

http://www.coachcarson.com/debt-snowball-plan/

It's kind of a hybrid approach so you get the security of paying off your properties, but don't have to eat quite as much opportunity cost while you wait to save up enough capital to buy with cash.

Thomas S. · Answer

Paying cash for income properties is extremely conservative investing. Money would make a better return in a mutual fund than in a income property. With a opportunity value in the range of 10% equity in a rental actually decreases cash flow from the property itself. Also keep in mind a property will appreciate the same amount whether it is 100% equity or 100% leveraged.

Investors need to understand first that cash must earn it's keep and second that every income property has two distinct and separate income generating streams.

One income stream is obviously the property itself the other is the equity lying dead in the property. If that equity is not put out to work then the property must pay for that equity.

$100K in equity valued at 10% is worth $833/month and is therefor reducing the cash flow from the property by $833/month. It is extremely rare that any property purchased with cash would have any positive cash flow after paying the opportunity return on the equity. In reality there is little to no value in actually owning the property since it is the equity that is actually generating a return and it could do that with less effort in a  investment fund.

At best in todays market you are only avoiding a 5% mortgage. This means that equity over leverage is losing the investor a minimum of 5% return on that investment.

Jeff Filali · Answer

To each their own. Some people like using leverage, some people prefer not having debt.  Also, having everything tied up in only 1 property could be very bad, versus having it in multiple where if one property was vacant, the others help offset.  Again, to each their own.

I personally only pay cash for my properties, the only mortgage I have is on my primary residence.  It just depends on your personal goals and strategy. There's times I consider cashing out the equity to be able to do more deals, but so far its been working for me by not having to leverage.

Good luck!!

Account Closed · Answer

@Isiah Ferguson I am with Thomas S. on this one. The numbers may work out a bit differently dependiing on your area but you will earn around 2-5% return on a 100% cash purchase which is similar to a mutual fund.  Putting everything into the performance of one property is actually riskier than buying multiple properties with mortgages in many ways. Multiple properties diversify your portfolio and cash flow from performing properties can pay for under performing properties.

Mackal Smith · Answer

I like to have my money leveraged because I control more assets that way. In St Louis, that same 100K would let me acquire as many as 5 properties. To help mitigate the risk of rents, I always buy duplexes or better and I buy them in such a way that 1/2 the property will at least cover the mortgage, taxes, and insurance. It's rare that I would have a completely empty duplex, 3 plex, or 4 plex, so for the most part I'm covered. Of my 25 units, I do have one duplex I own free and clear but even that property is leveraged as collateral for a Line of Credit so I can pay cash for a property, fix it up and refinance...

Like everyone mentions, it is definitely a personal choice, but leverage (done in a smart way) can definitely grow your portfolio more quickly than owning outright...

Shawn Ackerman · Answer

@Isiah Ferguson and investors money is always best spent making more new money.

Brendon Grover · Answer

I agree with Nick that this is a personal choice overall.  If you mortgaged the property, you should include a vacancy percentage in your numbers therefore covering any unknown vacancies in the future so you wouldn't need to worry about that.  Insurance covers assets...that's what its all about.  While I agree it could be beneficial in the short term owning a property outright, you would have to crunch numbers with some other property estimates.  Compare the cash flow of owning multiple properties with mortgages with owning one property with no mortgage.  Use the calculators here on BP, they are awesome.

Account Closed · Answer

There may be a third option. You could pay a large percentage, maybe 50% of the purchase price with cash, and keep some of the remainder as reserves. That way, you double your cash-on-cash return, but the mortgage payments should be low enough to handle just in case you have any vacancy issues. Either way, I'd agree with @Nick Colamarino, make sure you don't over-leverage.

Isiah Ferguson · Answer

I recently cashed out on a duplex which is giving me 14% cash on cash return. But since I've learned more information I think my best bet is to leverage myself and do a cash out refinance and expand my profolio. Thomas S.

What you think ? i'm just curious

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