Posted by John Corey on March 27, 2006 at 11:25:32:
One great aspect of any RE investing is the owner has a lot of choice for how they invest. There is no one best strategy for all.
If you are comfortable with little or no leverage then that is what makes you comfortable. Stick to what you feel is best for you until something else feels best.
That said I want to make some observations as to the logic of the position. Some might call it shooting the breeze if we were in a social setting. This means that ultimately we do not have to agree.
What makes a person comfortable is not the same as what might be optimal or even correct. It is just want makes the person comfortable. To take this outside RE many people get comfort from eating (comfort food). Long term it might not be the best strategy even if it is comfortable to them at the time.
As the bankruptcy rate shows that the majority of RE investors do not go bankrupt it is hard to draw conclusions from the fact that you know people who have done so. There might be some selection bias in the sample (that they know you, that they live in a specific area where a plant closed, etc). It might be that their use of leverage was the problem so the issue is them and not leverage. Leverage is neither good or bad. A tool that has a purpose. Like a hammer for nails and a screwdriver for screws.
Given that the majority of loans are actually paid off the pricing (interest rate) shows a mortgage as being one of the lowest risk market segments for a bank to make loans.
I would say that you are comfortable with the returns you earn compared to what you might earn ‘cash on cash’ if you used leverage. It works for you based on how you evaluate things; how you choose to view the facts.
Your desire to have no debt is a personal one. Debt is neither good nor bad. Equity is not defined as debt so I will assume you made a typo. Otherwise please explain why you want to redefine equity as debt. Granted equity is trapped and not the same as liquid cash when it comes to flexibility.
Simple math can be used to show how your solution will consistently produce lower results compared to a model that has statistically the same risk but more leverage. What this means in English is a person can provision for cash flow gaps without needing to avoid the use of debt. You can reduce the default risk to such a low % that the use of leverage can be practically as safe as owing income producing property free and clear.
So, if you want to debate the topics I am all ears. If we want to just agree that different styles work or some things feel comfortable we can drop it also.
I just have a hard time with a position that can not be logically supported other than by saying it is emotional decision (feels comfortable). Yes, a personal problem as I ‘feel’ better with the logically correct position.