Thursday, March 13, 2014

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.

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