If asked when it makes sense to pay off my properties, my answer during most of my investing career would have been never.
I do understand that people have different investing strategies, levels of risk tolerance, and goals — especially at different stages in their lifetime. For me, up until recently, my strategy has been one of leverage and reserves.
If you own $3 million in real estate and have $2 million in debt against your portfolio, with $2 million in accessible reserves in another more liquid investment, then what’s the difference if the real estate was paid off or not?
For me, I would have lost hundreds of thousands of dollars if I hadn’t tapped into the equity I had built in my portfolio. At one point, I had acquired 11 lines of credit on my SFRs and apartments, which I was able to borrow against at 3-5%. Then, I lent that money out to fellow rehabbers at 15-18%.
People say you want your money working as hard as you do, but I wanted my equity working that hard, too.
From an asset protection and accounting point of view, it may make more sense to keep the real estate leveraged with debt (especially if any of your properties are in your own name) and to keep pulling the cash out of the real estate (in other words, sweeping the account). Then you could put the cash into safer, more liquid buckets, such as retirement vehicles, insurance contracts, or even other asset classes. For example, notes, private lending, and tax liens could all be a viable investing alternatives. You can also write off the mortgage interest while your tenants continue to pay on the debt on your behalf. Continue reading
By Dave Van Horn – Bigger Pockets