I am $1.1 million in debt by choice.
If I reach my goal of owning nine houses by my 28th birthday (1/1/2016), I will be $1.6 million dollars in debt. I am a real estate empire builder whose goal is early retirement by living off the cash flow of our houses.
To do so means building my empire large enough that it produces the cash flow needed. Unfortunately, I am young and cash poor, so buying the houses mortgage-free is impossible at the moment. That brings me to leverage and debt. Debt makes me happy, because my debt is earning me money and allows me to reach my goals as quickly and sustainable as possible.
We all know of the reasons to pay cash OR to pay off your house as quickly as possible. What people don’t talk about, though, is why you would want to put as little down on a house as possible. In real estate, quality is VERY important — but so is quantity.
Reasons Not to Pay Cash in Real Estate
1. Low Interest Rates – Under current mortgage guidelines you can buy a house for 3.5-5% fixed rate for 30 years. This is an absurdly low rate historically. Why would you lock your money away when otherwise it would only cost you 4% in a mortgage?
2. Leverage – There are few ways that one can truly leverage their money. The real estate field is one of the best ways to leverage money because it only requires you to commit one dollar for every 20 you borrow, or in the case of an investment one dollar for every five you borrow. This is a great way to have your money work as hard as you are working.
3. Opportunity Cost – Our goal is to have as many properties as possible. The key for us to be successful is to save our down payments as much as possible. By limiting our down payments to the required amounts, we are able to buy more houses. For instance, the cost of paying cash for one house would cost us the opportunity to buy four other houses.
4. Lack of Savings – The less we put in the house means the more cash we have for issues. When we bought our fixer upper, our savings account or emergency account is what allowed me to sleep at night. My husband is super handy and we do a ton of projects ourselves. We have replaced tile floors and bathrooms, re-plumbed a laundry room, repainted the entire house, and I could go on. While we could fix it ourselves, it would cost a pretty penny if we couldn’t. Having a saving account is a great way to prevent being house poor.
5. Diversification – Our mortgages allow us to invest our down payment in other areas. One of those areas is TSP retirement funds. Not only do we own seven houses, but we also max out our monthly TSP account.
6. Higher Emergency Fund – When we bought our first house, it was with a VA loan and a foreclosure that needed a lot of work. Instead of putting our cash in the house, we saved it for those “oh shoot” moments when we needed money.
7. Doesn’t Save You As Much As You Think – I have always bought with mortgages and I have had no problem getting the house I want. Just because you buy with a mortgage doesn’t mean you won’t be successful with cash offers.
If I did not believe in leverage, I would never be as successful as I am today. Like anything, the key is to be an educated buyer. Debt is dangerous if not used properly, just like too many sweets could kill you. As always, the key is moderation and understanding not only your limits but your goals.
My business plan in hand — a willingness to learn and most importantly understanding that land lording is a marathon and not a sprint. My leverage love carries on.
Still, never say never. I am sure there will come a point where I will pay cash because that will be what the market dictates. I am sure there will be a time that I am a tenant. The key is not to say never, but to judge the current time and circumstance.
I promise you that we will only be able to retire early because of my willingness to leverage and think outside of the box.
What are you goals? Would you pay cash for a house? Are you a cash or a leverage buyer?12