I’m not an investment expert, nor do I own any property. However, I do see how leverage is the way to build wealth quickly and how this book makes sense in some cases. Actually, this is probably how many many wealthy people got that way.
It’s all about the CASH FLOW. I can see how maximimizing the flow maximizes the leverage. The main point is the property MUST cash flow to cover whatever carrying costs you have. Otherwise there is no extra money to leverage.
The other main point is we are not considering a single property. If you are only buying 1 property you might as well pay off the debt if the property isn’t appreciating quickly. However, the goal is to buy more and more and more properties.
I don’t see how cash flowing opportunities could be currently possible for new investors at today’s prices for SFR properties in SOCAL. It IS possible for some types of properties in other areas though. The day when residential properties in SOCAL can cashflow for wealth building investors (after a 20 percent down payment), the market will probably be “back to fundamentals”. I’m sure this had to have been the case at one time even in SOCAL. Otherwise we are all indeed too late and permanently missed the gravy train.
I think it is a matter of perspective and goals whether you are “saving” more money by building equity by paying off a loan or “wasting” money by only making interest payments and investing the difference.
I think the reality is the “interest only” investor will not have a high interest paying investment that makes up the difference “lost” to the “loan payoff” investor. However, that “reduced” amount of money saved is not locked up in the mortgage. The goal is to save money until an additional 20 percent down payment can be made to purchase another leveraged cash flowing property. Once the $300 dollars you invest every month adds up with interest to make 20 percent for a new property, you buy it. Now those 2 properties are working together providing more cash flow than the one property. And now 2 properties are appreciating (someday again) with leverage vice one.
If you choose to pay down the loan, that $410 you “saved” every month is still locked up in equity. Granted, you can always cash out refinance, but that would be defeating the point. We are talking about a difference in goals. Some people want to be debt free. Others want to be wealthy. If your property doesn’t cash flow in SOCAL and you can’t get a higher rate of return elsewhere than your mortgage rate, paying off the loan is probably the way to go.
So it does make sense to me to never build equity with payments, but to build cash flow, and let equity build over time with appreciation.
That being said I’m emotionally solidly in the “debt free living” camp when it comes to my eventual home purchase one day. I would view my own home as shelter vice an investment. A poor decision? Perhaps. I haven’t ruled out leveraged wealth building through real estate. Those opportunities will have to get eashier to find though.
