Jeremy asked: Why would you do a loan on a rental VS pay for it in full? Is one plan better than another?
Speaker 1: Welcome to the real investing show with Tim heritage each day, we’ll provide real investing for everyday investors. Tim is a nationally recognized real estate investing expert podcast, host and public speaker. He built his businesses from the ground up and is here to help you do the same. Here is your host Tim heritage.
Speaker 2: Welcome back to real investing. I’m Tim heritage today, Jeremy Wrights. Would you do a loan on a rental versus pay for it in full is one plan better than the other? [00:00:30] Okay, so I’m assuming that the question is, do I prefer to get debt or leverage against my rental properties or do I want to use all cash and not have debt? Debt is always cheaper than equity. Debt is always cheaper than equity. If inflation is only 9% at the current, uh, run rate and you can easily get [00:01:00] 6% interest long term financing, then the math is having your cash in the property cost you more than having the debt against the property. So what I do, I mean, you still focus on reserves, Jeremy, you still wanna have the reserves, the cash reserves the liquidity. Now, if you’re flipping a home, now [00:01:30] you said a rental, so we’re gonna stick to rental, sorry.
Speaker 2: Uh, you know, as a rental property, it’s all about the long term return on your investment. So you have return on equity, how much money you put into the home return on investment, right? Which is really the same thing as return on equity. In this, in, in the most common form, you have rate of return, you have annualized cash on cash. You have IRR over the length of investment [00:02:00] for me and my wife, the way we look at it, we like to leave of 25 to $50,000 in each home. And we like to be able to make at least 12% on that money on an annual basis. So for the math, to be simple, if we leave $50,000 in a home, we want to make $500 [00:02:30] a month. So if you’re after all of your expenses, you’re making $500 on that rent home per month, right?
Speaker 2: That’s 6,000 a year, which is 12% of the $50,000. And that’s just kind of the math that we use. The nice thing is if I’m making 12% on my money, I’m beating inflation. And by leveraging 75% of that, of the [00:03:00] value, let’s just say, I can do four properties instead of one. Now, if I can do four properties, instead of one, and one goes vacant, then I have 75% of my cash flow. If I have one property and one goes vacant, I have 0% of my cash flow. So rental investing in my opinion works the best with responsible leverage [00:03:30] and critical mass. I feel like you need to have, once you get to four, you’re pretty safe. And in my opinion, 10 is kind of the magic number to where even when a house goes vacant, portfolio wise, you don’t really feel the impacts. So unless you just have more money than you know what to do with, and you feel like you’ll never run outta money, I feel like responsible thought out leverage is the best way to run a successful real estate investing [00:04:00] business. And based off the advice from my mentors, I don’t have a single mentor that believes in paying off homes, or let’s say having low leverage amounts most are looking at ways to increase, leverage mind you that still cash flow and continue to grow and scale and add unit count. So I hope that’s helpful. Thank you Jeremy, for your question. Remember if you’ve got questions hop on over to, I have lunch, money.com. We’ll see you tomorrow.
Speaker 1: Thank you for hanging out with us today on real investing. [00:04:30] If you have questions, comments, or feedback, please visit Ihab lunch, money.com. Tim. Can’t wait to hear from you. We are always grateful for your reviews. And if you enjoy this episode, please subscribe and share it with your friends. Remember the business is the vehicle, not the dream. See you. Next time. The proceeding program is provided for general education purposes only and is not constitute legal tax, financial investment or other professional advice. No information contained in this program should be construed as financial investment or legal advice from any individual author of post or guest. You [00:05:00] should always consult a financial advisor before investing.
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