Originally posted by @Joe Villeneuve:
Originally posted by @Account Closed:
Originally posted by @Lesley Resnick:
There is an argument to be made for both sides. It really comes down to can you sleep at night?
My own view is leverage is the way to go. I would propose that leverage is less risky than owing a property free and clear. If everything went south , prices drop and financing dried up. I could walk away having lost a small amount of money since the property was in an LLC, so be it. In this scenario the bank would not want it back there is no meat on the bone. I could most likely cut a deal with them.
If I owned it free and clear and could not rent it, but still had to maintain it and pay taxes and insurance, I would not want to lose the property and be forced to keep paying or take a huge loss in selling.
Alternatively I have some or all of the cash on hand that would have been locked into the paid in full property. I could manage through the storm more effectively.
While generally speaking, you use leverage to increase your ability to do more...stating that it is 'less risky' than owning the property debt free is sort of a stretch. Buying cash is like lending to yourself at the prevailing market rate. People typically use debt to expand their RE investment. So instead on buying 1 or 2 properties, with leverage, you may be able to get 9 or more. If the market were to tank as you described... you would likely have been invested in a lot more properties and consequently incur more loss.
"stating that it is 'less risky' than owning the property debt free is sort of a stretch"
Let me ask you these three questions. Based on a leveraged property versus an all cash property:
1 - WHAT is at risk?
2 - Who is AT risk?
3 - Who is THE risk?
"Buying cash is like lending to yourself at the prevailing market rate."
To the contrary. Buying with cash is like taking your money, and putting it under your mattress....and going back to the statement above this one, if someone takes your mattress, you lost all your money.
"If the market were to tank as you described... you would likely have been invested in a lot more properties and consequently incur more loss".
Again, to the contrary. If the market tanks, and you have little or none of your cash in a property, you have lost little or nothing. This is all based on a rental property, since those are the only ones you would be holding with a mortgage. None of your expenses go up due to the loss in value (your taxes could even get reduced), and your rents usually increase due to more renters on the market...or at least stays the same.
The value of the property is the same whether you are leveraged or not. The only thing that does change is the value of the cash that is into the property...which is far less with a leveraged owner.
The title of the thread is a question..... "Is leverage safe or risky?"
This is the definition of risk, last time I checked: "...a situation involving exposure to danger."
This is the definition of safe, last I checked also: "...protected from or not exposed to danger or risk; not likely to be harmed or lost."
Buying RE is already risky business, when you then borrow money to buy (incuring an expense), that increases your risk. There is always a default risk on the loan that has its consequence. Using your own money (without expense) , no default risk... which exposes you to danger?
We dont need to get into an opportunity cost discussion to answer what is a very basic question.
If you were certain market would tank, whats the logic in borrowing money then in the first place or using your money at all?
