Hey Lance,
It's a good plan, but of course the downside is that it's going to take a really long time.
If you can find properties in need of rehab, it's possible that if you can get them at enough of a discount you may be able to add enough value by rehabbing that your returns get close to what you would get by buying a rent ready property using financing. Easier said than done of course because you are searching a much smaller pool of properties, but it's possible.
Also, there are some middle ground possibilities with regard to financing. For example, suppose you figure that you could support yourself we 10 free and clear rentals (as opposed to 20 or 25 financed ones). One possibility is that you could work on purchasing these properties at a prudent pace using financing. When you reach your goal number, you get the cash flow from all 10 properties, plus the money you have been saving each month for saving for down payments, and throw it at the mortgage of whichever property has the highest interest rate. Then work on the property with the second highest interest rate, except now you have the increased cash flow from the first property that you paid off to throw at it as well. You get a nice snowball effect.
One thing I like about this kind of plan is that you accept the higher risk of the debt only during your younger years when you have your job income to help mitigate it. When you are older, and maybe looking of living off your rental income, you have the lower risk of paid off properties. When it comes time to pay off the properties, you get a big head start due to the mortgages having been slowly paid down while you were busy buying new properties. For example, if it is 10 years before you go into the pay off phase, the oldest mortgage would already have been paid down by almost 20% just from making your regular payments. Assuming modest inflation over those years, the value of the remaining balance would also have devalued by a decent amount, which is another factor in your favor.
Other possible middle grounds:
- Find financeable properties that can be bought cheaper due to needing a modest rehab (paint, carpet, and a few k of handyman fixes). You end up with a more money in the property, but your mortgage payment will end up as a smaller percentage of your rent, so less ongoing risk, and you can make a higher return if you do it right.
- A lot of the added risk of carrying a mortgage can be quantified. If a free and clear property is attractive because x amount of reserves would allow you to carry it for, say, 12 months without a tenant, then just figure out a larger amount of reserves you could carry that would let you go that long with a mortgage. If it works out that you still make a better return with financing even with the extra cash on the sidelines, then it may make sense. This doesn't mitigate all of the risk (e.g. cash flow going negative due to market changes) but it does reduce it.
Hope this helps. Good luck!
-Harry
