By: Jay Long
Q: Dear Jay, Thanks to you I’ve realized that buying rental houses based on the 80% refinance game plane is killing my cash flow. I’ve discovered that 10 paid for rental houses will make me more money each month than 50 houses with 80% debt on them. I’ve almost got all of my houses paid off. But, I fear I’m missing out on having more houses as my area appreciates in value. 50 houses going up at 6% a year is better than 10 houses… isn’t it? Am I missing out or doing the right thing? Losing Faith in Little Rock A: Dear Losing Faith, Keep hanging in there. I firmly believe you are on the right path. Paid for houses are always better than houses with debt. Paid for houses always make money. Debt heavy houses don’t. There is safety in cash flow. As to your question, I need to say that there is no right or wrong answer. It’s a matter of opinion or perspective. Yes, 50 houses that appreciate 6% a year will create more equity than 10 paid for houses that appreciate 6% a year. That math is correct given those tight parameters, but there are many other things to consider. First, most housing markets don’t go up exactly 6% year in and year out. If you’ll study your local appreciation trends there is a very different story. For example: the west cost and the north east markets are notorious for huge jumps in value for a couple of years followed by a crash in the next... then no change for several years. This exact trend has happened at least three times in the last twenty years. Another example is vacation areas like costal Florida. These cities and towns see a boom of activity over two or three years and values will double, but when the activity stops a few months later they won’t see another increase for ten years. The risk of borrowing every penny to own more houses through the appreciation cycle is you never know where exactly the cycle is and how long it will continue or if it will change. Yes, we all know it’s going to go up over time, but how much time. It’s just like going to the race track and betting all of your money on the favorite horses to win every race that day. The odds are in your favor, but only one second place finish will bankrupt you. Another reason against betting everything you own on appreciation is that over leveraged houses don’t have a positive cash flow until the market turns up with a value boost or rents can be increased. How long can you live on bread and water waiting for the market to go up. An even better question is why would you live on bread and water at all? Why not live with more money coming in each month than you need to spend? The biggest benefit and also the most over looked benefit to having paid for rental houses is that the rent money comes in and it stays in. There are no mortgage payments to steal your cash flow. You can literally do nothing for several months and the money will pile up in your checking accounts. This will allow you to pay cash for a new rental house every few months. There is no need for bankers, appraisers or over priced refinance closing costs. If you do the math for the next several years of your life, I’d be willing to bet, a high cash flow low debt business will not only give you a better quality of life (less money stress), but it will also allow you to reach your financial goals faster than a business where you barely scrape by each month in debt up to your eyeballs and praying for the market to turn. If you need more evidence on this point study how Warren Buffet build Berkshire Hathaway, how Richard Branson build Virgin Records and how Donald Trump did his early real estate deals and later swore off personal debt. Jay Long is an expert real estate investor and national speaker. He’s also a licensed real estate broker, author of several real estate courses, seminars and a monthly newsletter, and former vice-president of KREIA (Kentuckiana Real Estate Investors Association). If you would like more information about Jay’s courses, monthly newsletter subscriptions, or if you would like to have Jay speak to you group… contact him at: JAY LONG PO BOX 20025 LOUISVILLE, KY 40250 PHONE (502-893-3313) FAX (502-893-3384) EMAIL Jaylong7@aol.com or www.JayLongInnerCircle.com
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