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
What is your target cash flow on each property? What do you try to have in reserves for each property as an emergency fund?
I am in the Military as well and am scared of long distance landlording. Curious to read more of yiur articles.
Elizabeth Bennett Colegrove says
We aimed for $200 + . Our houses are bought with as little down as possible in appreciating areas. We do not have an emergency fund for each house. Instead we have reserves on hand (fluctuating) Long distance self management landlording has become our speciality and saved us tens of thousands of dollars over the years.
Mindy Jensen says
I couldn’t agree more. You say you have 9 houses, are they all mortgaged? I have heard about issues getting loans after #4 and $10. Do you put both of your names on each mortgage, or do you split them up with some in your name and some in your husband’s name?
Elizabeth Bennett Colegrove says
We currently have 7 mortgages. We are working on #8 and #9. While it does get more difficult after mortgage #4. You can have up to 10 mortgages on each person name. After 10 mortgages, you can continue to qualify for conventional mortgages under Freddy/Fanny as long as they are personal properties. In the beginning we bought the house on both of ours names. We have since split it up, so each person is only buying one house. This allows us to double the number of rentals we can buy with a conventional loan.
Mary S says
Great blog! We are looking for an investment property. I have a few questions…How do you buy foreclosures and short sells on credit? I thought you had to pay cash for it?
Elizabeth Bennett Colegrove says
We have been able to buy them with a mortgage no problem. That being said, there are properties that require cash so you definitely need to check and see that specific properties requirement.
I just found your blog and have a few questions…
I currently have one rental which used to be my residence, but home values crashing made it impossible to sell. Eight years later, values have rebounded and I plan to sell it this spring and will make about $30,000 from the sale.
I want to build an Empire (approx 15 rentals) in the next 5-10 years. But, I’m cash poor. I’ll have the money from the sale of the existing rental, but that’s about it.
In my market, it looks like the sweet spot is houses that are $50,000 and will rent for $800. This should provide a cash flow of +/- $300 while I still have a mortgage.
Do you have an article about how to actually get a mortgage? I’ve spoken to a few mortgage guys in my area, but none have been especially helpful, and I leave the conversations thinking this may not work. Credit score is around 800 and only current debt is the mortgage on our primary residence.