Volume vs efficiency Have you ever thought about this?

[Joseph Weisenbloom]

I'm going to do my best to make sure this doesn't turn into a typical buy cash vs leverage debate. I currently invest in class C and B multifamily and leverage up with 25% down conventional loans. I have 20 units and have a property manager to help me out. The quandary I am in is that most of the money that the properties produce goes out the door to pay the expenses (mortgage, maintenance, capex, vacancy, insurance, PM fees, utilities, taxes etc). This doesn't seem very efficient to me to have that high percentage of my income going to expenses. It seems on paper that I am better off because I am leveraging but in reality I am worse off because I am being inefficient.

On the flipside wouldn't I be better off instead of having 20 MF units leveraged having 3 higher end single family houses  paid off? This would produce a much lower top line revenue but my net profit would be potentially higher because I am capturing a high percentage of the rent collected. For example if you have only 3 units you have the ability to self manage because its not that many tenants and single family tenants are easier. You can write into the lease that the tenant is responsible for utilities, lawn care and small repairs. For larger repairs you can DIY and save tremendously. You don't have to save for vacancy because you don't have a mortgage to pay when vacancies occur. Obviously you don't have a mortgage so that boosts the bottom line. Seems a lot more efficient to me and potentially more profitable.

Am I a fool or do I have a point?

[Dustin Beam]

Ignoring personal time involved, strictly financially, you're wrong about efficiency. Cash on Cash Return, ROI, etc are really efficiency calculations. You're dividing your yearly profit by money spent acquiring it. It's most likely that your profits will be higher w/ fully paid property, but you're doing "less" with it. Virtually without exception you get higher COCR when leveraged than you do when fully paid. It get even less efficient when you consider cash on equity, which is really an opportunity cost calculation.

This has nothing to do with risk tolerance, time involved, etc. Simple, by the numbers, efficiency. So for me personally, it has way more to do w/ where I am in my career. I'm very much in the growth cycle of mine, but eventually I'll be content where I am (I have no desire to be the next Cardone). When that day happens, I'll pay things down, and enjoy the lower stress levels knowing I have high equity stakes in my investments!