The reason two leveraged homes with a combined 35k equity stake is better than one 35k unleveraged home is that two houses can appreciate now as opposed to one. Keep in mind that as long as you didn't over-leverage you can and will play the long game and win. Think of it in terms of Return on Equity:
35k unleveraged home: Appreciates 10%. $3500 / 35000 = return on equity of 10%.
Two 50k houses with combined 35k equity: Each appreciates 10%. (5000 + 5000) / 35000 = 28.6% RoE. Leverage works because you only "own" 35k stakes of the two houses but you're still entitled to 100% of the appreciation when it happens.
It's a no-brainer. Now if you have low risk tolerance, why not put in bigger down payments, not just the minimum required? Then maybe you feel better about your situation while still getting greater gains.
Originally posted by @Account Closed:
My comments will open a can of worms....but it's been weighing on my mind a lot lately after reading that article.
I see many folks coming in and talking about the BRRRR strategy...and I see many folks coming in and using other people's money to leverage themselves into more properties to chase the dream of financial independence. I've also read the article about the $35,000 "pigs" that folks seem to hate.
At the same time, I'm buying distressed properties that were previously rentals that are absolutely trashed from neglect of the previous landlord. I looked at a home two weeks ago (via photos from the agent) of a home that belonged to a prominent investor in the midwest that was "Occupied up until the Sheriff's sale in December" that looked un-inhabitable to me. I wouldn't live there
I don't see this as being a way to financial freedom unless you can accomplish two things:
1) Reduce your lifestyle (pay off your personal home, get out of debt, reduce expenses to the basics)
2) Own your properties free and clear.
By leveraging yourself into your next rental, you're reducing your cash flow. Say you buy a property (distressed or otherwise) and pay cash. You rent it out for $725 per month and 40% of that goes to reserves/insurance/property taxes. That leaves you with $290 month net (or $3,480 per year) of free cash flow. Put a mortgage on that property and you reduce that profit to less than $100/month. That's peanuts. You might as well save yourself the anxiety and stress of rentals and just give up that Starbucks habit. People will argue that they are building equity and that tenants are paying that off for them but equity doesn't by you your ham sandwich for lunch (financial independence)....what it does is it ties you down into an investment that your kids might benefit from or that your nursing home will benefit from when you get old enough.
...and what do people do...they get tired of maintaining that house that's making them $90 a month and try to pull more money out of it by not keeping a reserve for repairs or capex and they let it go the way of neglect....which reduces it's value....which means it loses the very same equity they argued about 15-30 years prior. Throw in market factors when you don't have 5 years to wait for a market recovery and you're screwed in retirement.
The solution (and I agree with the article) is buy the first house with cash - even if it is a $35,000 "pig", save the net profits (after reserves), buy another one with that profit, and let it snowball. That's the only solution. You have to have time and patience...and in many cases more time than patience.
I recently read "The Tao of Charlie Munger". In the book, it talks about how Charlie and Warren Buffet started out by leveraging...and then they stopped because they realized it was a fools game. I recommend the book for a different perspective.
