After reading a few post on here, it seems there is a small trend or at least turn in the tide of being debt free.

Pookie and I have paid off a ton of debt this year with the help of selling 2 houses. But still have a way to go.

If one was worth 2 million in assets and had 1 million in liabilities, common sense says to sell some and become debt free.

What is you just had 10 homes and 5 had liens, would you just ride it out instead of selling off and becoming debt free?

Does age, market, cashflow play a part in the decision making process?

I understand (and see it more clearly now) that free and clear props cashflow WAY better than their financed counterparts but can you build your empire just as fast.

Not answering to a banker or having to produce financial reports or net worth status at the drop of a hat is worth a lot as well.

Thoughts?

What do you do with the cash at hand if there are few investment opportunities out there.. ?

From cash on cash return perspective, I am holding onto everything, even the dogs since it is a strong LL's market here and the return is decent after debt service.

With cash on hand, I would think you could get even better buys on future buys.

Hold on to all 10 and with a regular payments have them paid off at age 55, then you will have 10

If we're talking across the board, I HATE bad personal debt. I've always scrambled to pay off debts like that ASAP. My wife's school loans are next. They are monstrous and no wonder people are broke.

Anyway, for me to accelerate paying off real estate debt, i would have to dump a dog and put the profit against my smallest mortgage debts.

On the other hand, with my one of my smaller mortgages (a private financed loan), it has a balance of 14,400. The monthly payment is $110. If I took 14,400 from a sale and paid that off, it would take me 130 months to get that 14,400 back.

Or I could take that 14,400 and turn it into 30k on a flip and buy another rental that cashflows $400 a month and be ahead in that sense. So it really is a tough call.

For me, I don't despise the real estate debt like I do student loan debt. The end result is what I thdo no we really have to look at. If I paid off 500-600k in real estate debt, what else could I have invested that money in and what type of return could I get?

Quick math, my average unit cost $26,000 and cashflows after ALL EXPENSES like health insurance and day care $185 a month. With $500,000, I could buy another 19 units and increase my monthly cash flow another $3,500. Rough math.

Paying off what I have increases my cashflow and the biggest perk is that there are NO ADDITIONAL TENANTS!!

That's where my dilemma is. Less debt, less properties, less tenants vs more properties, more tenants, more debt, but more equity growth.

Lee,

This is a great question you have asked here. Thank-you for posting it.

My short answer here has to do with Cash Flow. Every seasoned investor or newbie I know who has had to exit the RE business,..did so because they lacked the cash flow to pay their short term debt obligations.

We all have different tolerances for risk. That's An additional reason that it's not just a matter of building a spreadsheet on this one.

Great points that all need weighed in on...

NE.. I agree, RE debt way different than student loan or any other debt

Tim.. the hassle factor is REAL when it to the transaction factor plus the cost associated with them

J(IN) I know we are both getting closer to 55 (LOL) but Pookie and I love the idea of tossing around the idea of being debt free (or at least stop buying and pay down a bunch) BUT I don't know if I can stop buying PLUS she is WAY better at finding bargains than I am...

AND I will throw this in there for grins.... an older investor told us a year ago... buy all you can, don't worry about the loans if you do them smart, it pays off big in the end WHAT? really? Have times changed since the 60s and 70s?

A lot has to do with age or at least if you are trying to grow, remain stable or reduce your real estate portfolio. IMO< When starting out or trying to grow, the best approach is with leverage. Leverage is your best friend in an appreciating market. It allows you to grow. It must cash flow after debt service and all expenses or its a potentially bad deal depending on your motives.

Money is still so cheap. I don't understand why people are so against using debt to expand

Lee, why not do a bunch of flips with the specific purpose of using the profit to pay down your real estate debts?

There's nothing wrong with that.

A few people here knock it for me being so gung-ho about flipping, but they are a means to an end. My flips are to grow and sustain my rentals. Plus they are more readily available than solid rentals as a tool for investing. (Here locally anyways.)

Mike (MO)

I agree with you in principal,...leverage is your best friend in an appreciating market. Note the word 'appreciating' here. In 2007-09, we all learned what happens when markets stop appreciating, turn 180 degrees around and depreciation kicks in big time. In a down market, leverage becomes your enemy. What most people don't understand is that Leverage is a double edge sword,...it can be great one day and a nightmare on the flip-side.

Money earns nothing in the bank. Invested in a house, it's working for us.

I think the key is the loan itself.

Adjustable rate? NO Way. Never.

Business loan that you HAVE to refinance at a certain date even if rates are up and possibly housing prices are down? No way.

Interest Only? We liked those a lot, personally, but we were disciplined and paid down the principal anyway which in turn lowered each payment. So 10 years later when it locked in as a regular 20-year note, we had a much more expensive property than we could have afforded normally and it cash flows really nicely. We won't pay that off because that money is better in our hands that in the banks, so we can pay cash for another property if we can find one.

My parents have ALWAYS been in debt. Not dumb debt, good debt. They are now 67 and 71. We are selling part of the farm and rolling it into commercial properties. The farm, in terms of cash flow... stunk. But when I tell them that the cash flow from the commercial properties will have them out of debt in 2 yrs... their eyes light up. Its like a monkey is being thrown off their backs. So, to answer your question...

In the 10 years I have been in this business, I have listened to my share of RE gurus talk about the 3 L's,...leverage, leverage and more leverage. The one subject the guru's don't talk about is the amount of debt that leverage creates and how to manage that debt load. Talking about debt is almost a taboo subject.

My stuff is to large to buy with cash unless you work for a hedge fund and have $3m-$5m sitting in a bank.

Debt can help you grow your business, but the debt service can cost you your business. Finding the right balance is a difficult task.

Fixed rates and payments without a balloon requirement are easier to budget for than adjustable rates.

If you have $100k, you can buy 1 $100k house that cash flows ~$1,000/month or 5 $100k houses with debt that cash flow $500/month each after debt service, for a total of $2,500/month. As long as you can always make the debt service payments, the leveraged option will net you more in the long run.

Myob, I don't know if that's entirely true. If a family can operate comfortably on 10k cashflow a month and has a goal of acquiring 20k in cashflow a month, 10k to survive and 10k to blow however they see fit, if it's leveraged, does it matter?

I'm not sure, but I don't think so. The tenant pays the debt.

You may not be free to the extent of having to be extemely mindful of your business, because if you are using debt, you have to be on the ball 100% of the time.

We are in the process of paying off the rentals. Our primary and one rental has no debt. Four sfh to go. It seems never ending but we'll get there. DH just turned 60 and I'm 59 so hoping to have everything paid off in 5 years then start flipping for extra income.

With interest rates so low and SFR with so much equity, refi'd cash-out three about two years ago & paid off two. T's more than pay PITI on refi'd ones & total CF is up to about 9K/month. Still got lots of dry powder to buy if market tanks again. Would be cash poor if just paid off SFRs, and it'd take 10-20 yrs to recover the paid off amounts after paying taxes on the large increased CF.

This is my problem,

880.08 to principal, 116.41 to interest.

26 payments to go.

The shack would sell for 300 now.

Times two or three....or four such loans

I've been taking the route of waiting the last two years.

Your idea of selling five of ten homes, works only for short term. Single family homes appreciate historically so if you have ten houses you stand to gain much more.

I won't gain much in appreciation over two years (actually I may) but if I had ten years to go I would consider selling.

That leads us to the theory of keeping ten homes, and buying more...and selling off the least favorites. This is more a way of life, a working business model.

However, a quite investment of one or two rentals is almost like flying autopilot.

Here's a real-life scenario:

Our approach until now has been debt-free investing. DH works for the man, we live frugally and invest the surplus by paying cash for beat-up houses and rehabbing them.

That worked great until he lost his job...again. So we were looking at a small herd of cash cows, a paid-off house, and no debt. But our paid-for houses weren't producing enough to live on.

So while he was still employed and the banks would loan to us, we took $250K of equity out of our house at 3.75% for 30 years. Our plan is to use it to buy 8 more SFH that cash flow $500/mo. Three of those will pay the mortgage and the rest is gravy. At that point we won't be rich, but we'll be able to live reasonably well on the rental income.

The downside: I did a great job of identifying an area to invest in. Such a great job that in the six months since we started buying, property values have skyrocketed and we're struggling to find deals that meet our criteria. Meanwhile the interest clock keeps ticking. We're preparing to shift to hard money lending. So debt can get you ahead faster, but it does come at a cost.

Keep all ten, ride it out. You'd get hit with depreciation recapture @ ordinary income rates if you sold the 5 to get debt free...

With that said: Debt is nearly always a must if you're trying for large growth. For me - it's how does debt or no debt line up with my goals? I'm in a growth phase, taking on good debt at 3.5% fixed for 5 years. Once I hit a target where I'm happy, I'll stop taking out new debt and attack debt more than I am now.

I'm a bit surprised to see this thread is so active, but no input from Sid. He's our anti-debt guy here! I am curious of his take on this.

- John...

Lee,

I am very encouraged to hear of your successes paying off debt. I agree too that I've seen a shift towards a less aggressive piling on of debt.

Good debt, bad debt...heh, you know where I stand on that. My stand isn't even mine, really. It was given to me...

"The rich rules over the poor, and the borrower is a slave to the lender."

As for me, the words are clear: all debt makes me a slave, and I'm not supposed to be enslaving myself. Getting out ASAP!

I always thought this was an interesting and realistic take on Proverbs 22:7:

http://moneyhelpforchristians.com/is-the-borrower-really-slave-to-the-lender/

Put simply: "Slave" then isn't the same as "slave" now.

Note that the author actually agrees that, in general, the bible may be anti-debt in many cases. But concedes that Proverbs 22:7 is probably not a good snippet to base that decision on.

I know Ramsey took it and ran with it. But I think it is a misunderstanding of that verse in the context that it was likely intended at the time.

- John...

Lee,

Life's short.

Read Carolyn's post on Jan 9.

Then Roy's reply to my post about the new year.

My brother in law died at 57.

Play with your kids while they are young. They will soon be teenagers zooming around with their friends, NOT hanging with Mom & dad.

There is no such thing as good debt. Debt is debt.

No matter how nice they are to you, the bank owns the house until it's FULLY paid off. Equity is great on paper but the bank does not take equity as payment. They want CASH. NOW.

I've never heard ANYONE say they were sorry they did not have more debt. I know TONS of people who lost at all because of debt. Several used to be on this forum.

Yes, run when times are good but don't outrun your ability to cover expenses when the times shift.

Build a SOLID business on rock, not on ice.

I fear new investors are only seeing an up market.

RE goes UP and RE goes DOWN.

Debt is tempting because it's easy. Just borrow the money and go! But there are 100 ways to make money in RE without saddling your family with debt.

Study your numbers. Where are you making the most - do more of that.

My Pastor gave a great talk called "the Value of a Trashcan". Throw away the things that are holding you back or are time suckers.

BRAD

John...that was an interesting read, thanks for sharing.

It did nothing to change what the passage means. I thought it was interesting how the author, like many popular Christian writers today, tried to project a modern understanding of the word backwards in time onto what was clearly written and intended for ALL times. The author cites "The Message" a popular summary / "here's the gist in modern language" paraphrase of Scripture as a proof text and reinterpretation. Then on top of that, he follows up with such assumptions as, "People borrow to buy a car or buy seeds...stuff they need to survive."

Apparently, the author has never heard of concepts such as carpooling, buses, taxis, and saving up cash while stair-stepping into cars debt free. Or farmers who boot strap their operations based on cash flow and grow gradually. I can't be for certain, but it sounds like he thinks people were not making the same old arguments back in the Old Testament! How amusing, considering both Scripture and other ancient texts are filled with phrases on borrowing, lending, etc.

The correct approach is let Scripture interpret itself. Taken as a whole, the Bible never says debt is part of God's plan for his people. The only time one might even stretch and imagine that "debt" is "good" is when one is told to lend generously to the poor. A quick context check, however, show that such loans were made under the assumption that if they could not be repaid, they were to be forgiven. Lend = gift/share...and repay it if you can. Similar to how I would give someone in my family money rather than lend it. Sure, if you want you can pay me back that's fine, but I don't expect it or hold it over their head.

I did like two points where the author talks about Proverbs 22:7 being a warning to the rich not to lend to the poor, lest they enslave them and become "masters." As the old saying goes, "it takes two to tango." This is another reason why I am not a fan of the RTO schemes where a large chunk of money is taken up front and a house is "sold" to a buyer when the Seller knows that the repo rate is extremely high (sometimes more than 99 times out of 100!). Setting poor, ignorant folks up to fail in the name of helping them become home owners doesn't fall in line with how the Lord has led me to understand his word. Jeffrey made a great suggestion once that if we were to approach such sales with a requirement of financial counseling and mentoring, we might improve the success rate for the Buyers.

I have spoken with some folks on here regarding those kinds of deals and why they make me very uncomfortable. They know where I stand: I know where they stand. We leave it at that, knowing that our Lord is rich in mercy and doesn't put us together to be guilt-trippers for one another. A soft word may succeed where in-your-face confrontation does not. I am speaking to myself here. I need to get better at this.

The other point I like is where the author says Proverbs is simply a statement of fact: not a judgement. I don't judge people who borrow: but neither do I tell them it's a good idea. Kind of like touching hot stoves...bad idea, but if you do it...well....I still love ya anyway.

Just for clarification, when I refer to "good" debt, I am talking from a perspective of that debt MAKING me money, not TAKING my money. Not as in "yippee skippee, I got a loan."

NE, your definition of good debt fits with some folks I've talked to.

Others say that "business debt" is good debt, which is funny given the failure rate of start ups within the first 2 years. Or school loans because they open the door to a brighter future and a high-paying career. Or cars so they can get to work and earn a living. Or (fill in the blank).

I have yet to hear someone admit, "Yeah, I took out some bad debt." (grins)

Last story and I'll close out with a few thoughts: I was talking to the president of our congregation at our Bell Choir Christmas party (his wife plays in our group) back in mid-Dec. He just retired as a road warrior / high ranking exec and making some good $$$. I asked what he planned to do now, start a business? He says, no, they already got their fill of that several years ago and got out just before the bubble burst in 2008. Two of their friends didn't. They borrowed a lot (home equity, I think) to buy a franchise Mall store that sold candles, etc. When the business cycle went down, they tanked with it. Over $150K in the hole after inventory liquidation.

Not a judgment...just a true story.

Being in business is rough enough with boom and bust economic cycles that come and go without us having any real control. Debt magnifies prosperity in both directions. You never hear about leverage impacting you negatively in the guru books, other than maybe as a foot note. It should be in there right next to the chapter, "How I lost my spouse, kids, and health after working 90 hours a week for 3 years then filing bankruptcy."

It's real: the stress caused by financial strain compounded by debt. Money fights and money problems are the #1 cause of divorce in North America.

Brad: I wish I had more debt.

There. Now you can't say that you've never heard anyone say it any more.

Seriously -- if the right deals came along, I would happily use leverage by putting down 10-20% and then making more money on that rental. They will come over time -- I'm always looking for another to come along, of course.

Therefore, of COURSE I wish I had more debt. Because it would really mean more rentals, more income, and more retirement down the road. I pay those off fairly quickly (15 years or less) and still make money while doing it. Then will greatly enjoy the debt-free cash flow 15+ years from now.

So, absolutely, I wish I had more debt.

- John...

Sid: I'm not going to push a religious discussion any more in this thread. Maybe we can do it in person sometime. The short version of my view is this: sometimes, you DO have to consider the context of scriptures, the issues with TRANSLATION to English in some places, and that not everything was meant "for all time."

Words DID have different meaning then -- and sometimes even more different meaning at the point of translation. So, yes, you DO have to consider what was the INTENT of God's teaching at that time.

As the author point out with a good example -- if you found a letter from 75 years ago that said "I'm feeling quite gay", that would mean something completely different today than it would have meant when it was written. The author is just trying to point out that "slave" actually meant something different than today. (And that is IGNORING translation issues too.)

So, we can just agree to disagree for now. I don't think this is the place for a religious scripture discussion. I simply think that not every single-out scripture was written "for all time" and means the same thing then that it does today.

- John...

Sid, I would NEVER tell someone to take on student loan debt. I paid my off like I was running from the jaws of the jaguar! Or however Dave puts it. I would however, tell someone to take on debt for a rental. But I would tell them to do it very very very carefully. Small enough and with enough equity in the house that if things went south and They had to run from it, they could dump it for a steal on the open market and get out from underneath it.

You would be semi-proud though, my recent dump that I bought I am trying to do a little differently. I bought it for $8500, and used a small private loan. Sorry, but I did. It cost me 95 bucks a month with a balloon in 2 years. I'm not really worried about it. But I am doing the fix up without a loan and I found it is very very hard. I can't remember who said it, but time and money are interchangeable. I am seeing that extremely clear right now, as I take profits from my monthly rental income to slowly but surely fix up this house, I am taking much more time to get it done. But at the end of the day I won't have the debt on the house. Or I could borrow against this house fix it up get it on the rent rolls and be done with it and probably two months. So it is a tough call. Do I take a year and a half and slowly piecemeal this house together just to have no mortgage on it for 20 years or do I borrow 20,000 or so against it and just get the job done. And overall I'm only looking at $100 difference a month in cash flow? It really is going against my normal process to not borrow against This house. But I'm Trying, simply to see things from a different perspective. One thing I can see operating with only cash is that it's a lot slower. It's definitely a more sound and sure investment, but to me time is valuable. It's definitely more valuable than money. Again, I know where you're coming from. I'm not looking at this from a religious or spiritual standpoint, just simply a math and time standpoint.

PS remember how the hunting has been good fro the past few years - tons of foreclosures to snatch up at bargain prices??

Those are houses lost to debt.

SOME were lost by investors.

Lee,

Back to your original question...

I'd sell 3, use the profit to pay off the other 2 liens and have 7 paid houses.

The cash flow would be great, allowing me to buy another house CASH year year - so I'd be able to replace those 3 sold houses quickly if the number of houses were important to me.

Snowballing my income.

A few years down the road would have a much higher income than hanging on to pay off those mortgages.

Local LL has 47 paid houses. He just bought them one at a time from his cash.

A young, quiet poster here who has 65 paid houses, again, just one at a time from cash. Each year it gets easier.

BRAD

Brad: And also remember how many of us HAVE reached or have made great PROGRESS in achieving our goals of FREEDOM by using leverage too.

See? I can make up the same anecdotal evidence. :)

- John...

John, I'm certainly fine taking our chat offline, any time. Coming to the Convention this year? Conversations can be had there much more easily. I'm planning too, so long as the Army doesn't require my presence.

Lee, I like Brad's plan. Sell a few, pay off the rest. Live in the peace of knowing there is one fewer bureaucratic entity with a claim on your personal peace/financial prosperity. Govt and taxes will always be with us, but the Lender is one fewer, and a BIG ONE at that!

NE, run from the cheetah (gazelle intensity), but I like jaguar too! I'm very happy for your progress. It's cool that you're experimenting with non-standard approaches. Might find out this way works just as well if not better. I remember several years ago someone here (can't recall who) challenged me that, "you can't get into real estate investing without debt." I made it a mission to find a way, and learned about tax liens. Got 2 last year...6 this year. Still waiting to see how many of those 6 convert to Deeds, but the amount I've spent is very attainable for someone to save up within 6 - 12 months. Will keep you posted on how it goes. If I recall, you bought your $8500 house about the same time I picked up a lien on one for about $1900.

If the right deals came along I'd love to have more debt. My bankers more or less said they would let me ride to $25m and I view that as a nice goal. I'm at only $3m now so I have a long way to go!

But I won't chase the market so now that its good I'm not buying anything rental wise. I refuse to compromise my numbers. I have seen some crazy numbers thrown my way, land I would happily pay $200k-$250k for and I could have a few years ago offered for $500k+. NFW they can sit on it.

My two large sites I got into in 2010 and 2012 respectively, when no one wanted to touch RE. I picked them up for a song as real fixer upper pieces.

I'm actually quite concerned about the multi family market, I think its over valued and will soon be overbuilt in some markets. I think banks are getting to aggressive with LTV's on the big stuff as well, I'm sorry I still think 50% is a good LTV not 80% on some cooked numbers to push up the value.

I have used terms like good debt and bad debt before. If the debt you have is making you money that is good. If the debt you have isn't that is bad.

A beginning investor I wanted leverage. I was looking for 100% financing and low money down. I wanted to grow the business and leverage was my friend because I was young and full of energy.

Now I am not an old fart, but I am a bit wiser than that growth happy 20 something. I see debt as mortgage against my future. I have looked to aggressively chip away at the pile of notes. I have some great cash flow but I want to live debt free in another eight or so years.

So if you are asking yourself what to do, I challenge you to look at the local market place. Around here flips and rehabs are all the rage..........don't do what everyone else does. Instead do the opposite where there isn't nearly the competition. Wait for what is hot to be out of style and capitalize on it if it makes sense.

Lee,

I truly fear for newer investors who have not seen the market go down. Many got in after the recession and only know how to operate when values go up and money is cheap.

Cheap money is a siren's song luring unsuspecting investors (those with little RE education and business experience).

We bought the "OPM" Other People's Money standard cry of the 80's so we mortgaged to the hilt. We could get money with a phone call. EVERYBODY LOVED US at the bank! They took us to lunch, gave us gifts...

But RE runs in cycles, up then down. When residents stopped paying rent because they lost their jobs in the Recession we kept our business alive by paying the mortgages with our savings. But that had a limit. We got >this< close. The strain on our family was intense.

The bank does not care how much equity you have, they want their money. Or if they see equity they might foreclose on that property so they will get paid.

We could not sell our houses for what we owed.

The debt that helped us build almost ruined us in the Recession.

Consider the time factor. I was a conduit for the bank's money. I hustled, sweat, cleaned poo, risked...so I could give interest money to the bank.

The claws of the bank are often hidden. I recently received a settlement from the city for a strip of land to widen the road. The mortgage paperwork says a pro-ration of that must go to the mortgage balance. And they charges me $10,000 to "process" that $24,000 check.

And how long? Sure we can hold mortgages but I'll be a LL for 55 years by the time the homes are paid off.

Hit with a health concern? Who is going to handle those houses? What will my kids be saddled with if I leave this planet?

It's about PROFIT, not number of houses.

If you have to borrow great sums just to buy a property, then RE investing is not appropriate for your area.

There are 100 ways to make money in RE. Buying and holding is just one way.

My advice to my adult offspring: Learn how to wholesale, it's simple and no cash required, do a bunch of deals, bank that money because along the way you'll find a keeper and pay cash. Repeat.

The older I get and the more I financially counsel folks at church AND investors, use your money to pay off bills.

If you don't have enough to pay off your personal debt you have no business playing in RE. Then take what you were paying on the bills and use it for playing in RE. Get educated at seminars, etc.

Money is made in your mind. G

BRAD

Brad you make an excellent point when you say its not about number of units. When I attend our LL group meetings , I am almost always asked about how many units I have. The correct answer should be who cares - because that doesn't matter really.

Great look at the picture as a whole Brad. Pookie and I studying from several angles.

And it is NOT how many doors you own but how is your return or cashflow per door. I want to beat other investments with no hassles as well.

If I can put my money in mutual funds or cattle and get the same return without tenant hassle, why not?