Leveraging Equity vs. Paying Off Mortgage

I had a good conversation yesterday about which strategy works best, leveraging the equity in your property to buy other properties or to pay down the principal to be free of the mortgage.

The example we were debating was whether it was better to own 5 properties free and clear or to own 10 properties that were still being financed.  If these properties are cash flowing at $1,000 a month then the difference is $10,000 a month versus $7,000 (your profit margin is higher than $1k a month if you've paid off your mortgage).  

I would tend to want more profit because you can use the cash to pay down the principals faster.  With that said the big issue is managing risk.  There will definitely be vacancies to account for and other expenses like maintenance and owning 10 properties leaves you exposed to a lot more variables.  

That being said I think a combination of strategies is the best approach.  I think the leveraging equity is ideal for beginning investors who do not have enough capital to buy properties with cash.  When you build your cash reserves and have several properties then it is probably more ideal to pay off your mortgages and then buy another property free and clear.

Real Estate versus the Stock Market

I was recently in a debate about which investment vehicle is the best one to invest in.  More specifically I made the comment that real estate is the "fastest" way for people to become wealthy.  I said this because no bank will ever give you a loan to buy stocks, however they will gladly give you a loan to buy a property.  This key difference is why you are able to make money faster through real estate, you are leveraging the bank's money to get more valuable assets.  Buying stocks overtime will make you wealthy but buying a valuable property at a low price gives you instant equity. 

There are ways of building your wealth through dollar cost averaging and buying stocks over time, but real estate in my opinion is the fastest way to wealth.  There is one caveat here, buying stock options might be a faster way to gaining wealth.  I however don't recommend everyone buy options and try to build wealth that way.  There is more risk in buying options because you are not buying the underlying asset.  You are buying an opportunity to buy something.  You can however leverage your money in a greater way through options trading which will generate larger amounts faster.  That said I do not think the everyone should use this as a vehicle.  I think if you are dedicated to learning about it and doing the research then by all means see if you can master it, but it takes skill and a lot of research.

In essence buying properties at a discount, fixing them up to gain equity and renting them out, is a great way to build wealth quickly, and if you supplement it with buying dividend paying stocks using dollar cost averaging then you are well on your way to financial freedom.