Would you be surprised to hear that my goal is to rack up an additional $4,000,000 of debt within the next few years? Yes, Debt... I want MORE DEBT. Not Credit Card Debt, or Student Loan Debt (it's been awhile since I've been in school). Not Medical Bills or anything of Collections, Liens or Judgements. No, none of that BAD DEBT. I seek to hold all of my debt against cash-flow producing Real Estate... Lots of GOOD DEBT - as much as I can get!
"Debts are like children: the smaller they are the more noise they make." - Spanish Proverb
Welcome to Episode #21 - Give Me A Mountain Of Debt - With Rental Properties Going All The Way To The Top
So, going back to what I was saying in the lead-in... It's good debt, because with over $4,000,000 in mortgage loans at the typical requirement to put down 20% to 30% (or to maintain that level of equity in a refi) - this would mean that I'd own over $5,000,000 of Real Estate! At an average price of $125,000 per property (let's say), that would be approximately 40 rental properties, and possibly even more rental units if some of the properties are multi-family - duplexes, triplexes, quads.
But I know how you likely feel about debt. Let me read a few anonymously quotes that likely sum up your thoughts on the matter...
"A mortgage casts a shadow on the sunniest field." - Robert G. Ingersoll
"Debt is a great source of inner unhappiness." - Debasish Mridha
,"Debt is like any other trap, easy enough to get into, but hard enough to get out of." - Josh Billings
Or even more provocative…
"Debt is an ingenious substitute for the chain and whip of the slave-driver." - Ambrose Bierce
And I could have found a hundred more quotes like these, each seemingly better than the last (or worse, depending on your prospective). And unfortunately for me (and likely for you too) - I previously thought this way about debt as well - all debt - so I'm not going to say these are wrong. And I still do think this way when it comes to things like Credit Cards, Car Loans, and for somewhat different reasons (see last week's episode), Student Loans.
So don't get me wrong... Quotes like these are not far off when it comes to almost every type of loan or debt. But Rental Real Estate is an exception. It's a great / amazing exception for multiple reasons. There's absolutely nothing like Rental Real Estate and the unbelievable deal that we get here in America of being able to lock in a fixed rate / low interest loan for 30 years! That (in the case of Rental Real Estate) will be paid back from the rent you earn from Tenants over that period of time.
Let's say I want to buy a $100,000 house... Banks and other lenders will actually line up and fight to give me $0.80 on every dollar of that purchase. So I only have to come up with $20,000 (maybe $25,000 when accounting for closing costs and other expenses). And at today's low interest rates, my fixed rate 30 year loan may have a payment of less than $500/mo. Add in taxes and insurance, and let's say my payment (PITI - Principle, Interest, Taxes & Insurance) is $625/mo - and there is no HOA.
Now let's say that I'm able to rent this home for $1,000/mo. Then I take out reserves totaling 20% for: Vacancy; Repairs & Maintenance; CapEx (Capital Expenditures - large ticket repairs that have some longevity and may increase property value like a new roof or HVAC system); and Property Management (and I know that some withhold more for reserves), but far too many Landlords don't even consider it. So I'm left with $800/mo, of which $625/mo goes to PITI (the mortgage payment, taxes and insurance). This leaves me with a remaining positive monthly cha-ching of $175/mo.
Now I know that doesn't sound like much, but it totals $2,100/year, which is a return of 8.4% on your $25,000 investment. And this is not even counting the $2,400/year you're putting aside for reserves - that may eventually get high enough that you can safely lower it and boost your cash-flow and return further. Now I would have preferred to be able to rent such a home for something like $1,280/mo and then be near to $400/mo of positive cash-flow (after reserves). That would be over 19% ROI.
And with Rental Real Estate,you make money in at least 4 ways... You don't just make money from the cash-flow. You also have tax benefits (mortgage interest, expense write-offs, depreciation); and mortgage pay-down through amortization - eventually you end up with a fully paid-off house from your tenant's rent payments covering your mortgage! That's called a FREE HOUSE! And while you cannot count on it - you should also be buying in locations that have the potential for value appreciation. So I won't go into it here, but in a coming episode specific to this topic, I'll break down the math of how these multiple ways of profiting from Rental Real Estate often total a combined ROI (Return of or on Investment) of over 50%! Where else are you going to get that!?
And it’s the leverage of debt that makes it all possible. You only get that return on investment because you borrowed 80 % of the money, and only had to put in 20 %. If you put all the money in as cash, your rate of return is going to be garbage. It’s the leverage of debt that accelerates your growth in multiple ways. First of all, you’re putting in less money, so your return is based on the amount that you put in. You’re putting in 20 % in the deal instead of 100 %, but also because you only put in 20 %, you’ve now got extra money that you can go buy another house.
When I got into this, I had $100,000 that I wanted to invest. Instead of buying one house and being done for years, I bought five houses with that money, or four if you want to count the closing and holding cost that I had to come up with. But the point is, I took what Dave Ramsey and others, who are against debt, would have had me buy one house with, and I bought four or five houses with the same amount of money, accelerating my growth. And in the process, I learned things that allowed me to start using other people’s money in various creative financing techniques in order to accelerate my growth even further.
If I felt the way most people feel about debt, I would be sitting here with one house, wondering how am I going to make any money in real estate? And would you be listening to a podcast of a guy who has one house trying to tell you how to be successful in real estate? I don’t think so.
So why would I NOT want to buy this $100,000 house that makes me money in multiple ways, and get $80,000 from a lender at what are currently all-time low interest rates - locked in for 30 years! OMG - what a deal!
At some point in the future when interest rates are at or near 10% again like they were 30 years ago (or worse), you're going to wonder what the H you were thinking by not stacking up on all this cheap to FREE money. And YES, you can make a mathematical case that when accounting for inflation and other benefits, that Rental Property Mortgages obtained today is essentially FREE money. So I want ALL OF IT that I can get. And my goal is at least $4,000,000 more over the next 2 to 3 years.
As long as each property is cash-flow positive, then I'm good. And the amount of cash-flow that I target for each property even gives me room to lower rents in an economic downturn to avoid vacancy - and still have positive monthly cash-flow. In the prior example, I could lower that $1,280/mo rent to $980 and still have $100/mo in positive cha-ching (cash-flow is king). Or if it were only rented for $1,000/mo, I could lower to $900 and still have $75/mo in my pocket (not as much cha-ching but its still positive cash-flow - KING). I could even go lower if needed, and assuming a crash doesn't happen right after I buy the property, I'd have plenty of reserves on-hand (after awhile) - and could lower future withholding of reserves to ride out the downturn.
People who lost their shirts in the last downturn where vastly over-leverage and were not withholding sufficient reserves. Don't make those mistakes! And certainly don't let the mistakes of others poison your mind to the amazing opportunity that exists for Rental Real Estate Investors today - to lock in all-time low interest rates for 30 years! Its the best thing ever! Give me millions of it and more. And hey, if you don't want it - Great! More for me!
The bottomline is that poor people have debt, but surprise, surprise…rich people have debt also. The difference between the two is knowing how to leverage debt to make money; making money with other people’s money, and in the case of debt, the lender, which is typically a bank. You’re making money with their money. You're buying an asset that appreciates in value, that gives you tax benefits, that gives you cash-flow, I really don’t see what’s better than that. It’s all about knowing how to manage debt, how to leverage debt, and how to utilize debt to your own betterment.
Now, if you’re going to go out and use your credit cards to go on a cruise, you probably should stay out of debt. That’s not a proper use of credit or debt. But if you're going to go buy a cash-flow producing asset that’s almost certain to be worth more than what you're buying it for years later, will put money in your pocket every month, and also make it so that when tax time rolls around, you likely don’t owe anything and will probably get money back, I told you before on a prior episode that the years before I got into real estate, I always owed in taxes – $14,000, typically – but the year after I bought two houses, I got $6000 back as a refund, which was unheard of for me.
But the bigger point is that that’s a $20,000 swing. I went from owing $14,000 every year to getting $6000 back, and I actually made more money that year that I got that refund. $20,000 was my tax benefit, resulting from having bought two houses in 2015. Those houses are now worth, both of them, actually, are worth tens of thousands, and in the case of one, over $100,000 more than it was worth when I bought it, or more than what I paid for it. And they’ve been putting positive monthly cash-flow in my pocket every month since I bought them in 2015.
Do you think I care that there’s a mortgage on that property? And that mortgage, principle, interest, taxes, and insurance has to be paid every month? I don’t, because guess what? I'm not the one paying it.
The tenant who lives in that property pays the mortgage on my behalf indirectly. They pay their rent. I use that rent to pay the mortgage, to pay the principle, interest, taxes and insurance, to pay the HOA. And then I pocket the difference, which is hundreds of dollars per month. And the properties have gone up in value, so I have hundreds of thousands of dollars’ worth of equity in those properties. And when you factor in the other properties, there are massive amounts of equity. They’re positive, monthly cash-flow generating assets, and I bought them with 80 % debt from a lender. I couldn’t have done that if I had to pay cash for them, because I would have been done after one, maybe two, properties.
Change the way you look at debt. Dave Ramsey is correct; if you can’t manage your finances, if you can't pay your bills on time, if your cell phone bill is late, your cable bill is late, if you have collections, leans, judgments on your credit, then you have some work to do before you're able to play with the fire that can be debt. But if you have those things figured out – if you know how to pay your bills on time – and if you know how to leverage borrowed money to your betterment, there’s no better way to do it than with rental real estate.
So, that’s what this episode has been about; change the way you look at debt. Like the title of the episode says, I want a mountain of it! I want millions more in debt over the next several years. But what that means, the underlying message of that, is that I will be buying a lot of cash-flow producing real estate over that period of time, and I'll be using debt from lenders to do it. Many cases, it’s banks and traditional lenders.
But as I grow this business, I have opportunities to leverage private lender funds, and sometimes private lenders with funds in self-directed IRA’s. so, you’re someone who has money that you’d like to invest, and you’d like to get a good, consistent rate of return on it, give me a call. Go to andlandlord.com, submit the form on the site, the ‘Get in Touch’ form, and we’ll schedule a call and we’ll talk about your needs and what you might be able to do as an investor with me and Blue Chariot.
Beyond that, if you're someone who has cash, and you would like to buy rental properties in the Raleigh/Durham area, again, get in touch with me. I'm a realtor, and I'm a property manager, so I can help you.
But, remember, the underlying point of this episode; debt is nothing to be scared of. It’s something that you have to respect, especially if you're using private lender funds, because you don’t want to be the person who messes up someone’s retirement. You don’t want that on your conscience. But if you're a debt adverse person, I would just advice you to change your outlook on it.
Let’s say you do have rental properties, and they’re fully paid for – no mortgage – and all that cash-flow, other than taxes and insurance and maybe an HOA payment, or any other expenses, goes in your pocket. There’s no principle, there’s no interest, there’s no mortgage, it’s all your cash-flow. But the problem is that this property, or these properties, are likely worth hundreds of thousands of dollars, maybe millions, and you’ve got all of that equity sitting on the table.
There are two critical things wrong with that.
No.1, you’ve made yourself a target. If someone were to sue you, they now have a very big treasure chest to go after; all of that equity, hundreds of thousands, maybe millions sitting in those properties in equity, that they can now capture through a judgement. You don’t want to just let the properties sit there as targets for someone to go after. Take that equity out in the form of a mortgage, at an all-time low interest rate, and use it to buy more properties. Again, what is better than that?
But the other reason is related to what I just said. By having fully paid-for properties, no leverage, no mortgage, you basically have equity that is, for a lack of a better word, dead money. You might as well put it under your mattress because it will do just as much for you under your mattress as equity locked in a property. Pull that cash out, and go buy some more properties, to increase your wealth, to accelerate what you’re doing, with debt.
I could not even sleep at night if I had equity in fully paid-for properties, just sitting there collecting dust, doing absolutely nothing for me. That’s a financial crime.
Now, maybe if I was 80 years old, I would feel differently about it. Talk to me when I'm 80, I'll let you know, but right now, I am all about debt! Good debt, cash-flow positive rental properties, on top of that, debt, and as high as I can stack it, I will.
How do you feel about debt? I LOVE DEBT! GOOD Debt that is... Debt that benefits me, while being paid back by someone else (my tenants). I don't want debt that I have to pay back - that's BAD debt.
In this episode of the [... and Landlord] Rental Real Estate Investing Podcast, I express my thoughts on debt and explain how and why I want to obtain at least $4 Million of additional debt (against cash-flow positive Rental Properties) in the coming 2 to 3 years.
Real Estate is the only asset class of which I'm aware that lenders will readily provide 80% of the purchase price. In other words, they provide $0.80 of every dollar needed - 4/5th's of the purchase price! And they do so at what are currently all time low interest rates that can be locked in for 30 years! OMG - what an amazing deal!
And then not only is the loan paid back by rent received from tenants, but over time the dollars being paid back (due to inflation) are worth less than those originally borrowed. And the end result of this is a FREE HOUSE for me, since I'm not the one who paid back the money. It was paid back by my tenants over time and I got cash-flow as an additional benefit all along the way!
So in this episode of the [... and Landlord] Podcast, I state my case for wanting as much debt as I can get - as long as its GOOD debt against cash-flow positive Rental Properties. Or do you only want Rentals Properties if paid for up front in cash? That's fine if so... Let's both work our plans for 10 years and see who's in the best position at the end - with the greatest cash-flow, equity and highest net worth.