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Tag: Investment Properties

Debt-Free Real Estate Investing: Is it Possible, and Should You Strive for It?

While most people buy investment properties with mortgages or other financing, there are plenty of perks to debt-free real estate investing, too.

Investors who choose this route won’t typically grow their portfolios as quickly as those who use debt to buy properties. But in exchange, they’ll have the peace of mind of owning their investments outright.

There are many opinions about whether it’s better to pay off debt or invest, but it ultimately comes down to personal beliefs and risk tolerance. Some investors don’t mind having multiple mortgages if it means their portfolio is growing. Others can’t sleep at night, knowing they might be unable to pay their bills if their tenants are late on rent.

If you’re wondering if debt-free real estate investing is right for you, consider these pros and cons. 

READ: What You Need to Know About Buying an Investment Property in Denver

Pros of debt-free real estate investing

The numerous benefits of debt-free real estate investing are mainly centered around the security it provides for more risk-averse investors. 

1. Zero risk of foreclosure

When you have a mortgage on a property, there’s always a risk (however small) of losing it to foreclosure. Even if you have steady, reliable tenants, unexpected events happen. If you can’t pay your mortgage on your investment property for several months, the bank can foreclose on it. If you own it debt-free, you don’t have that risk.

2. Peace of mind

You have immense peace of mind when you own your investment properties debt-free. You don’t rely on your tenants to ensure you can pay your mortgage each month. When inevitable issues pop up (like a bathroom flooding or the heat going out), you don’t have to worry about paying for significant maintenance issues and a mortgage at the same time.

3. Increased cash flow

The biggest benefit of owning real estate debt-free is that much more of your rental income is pure profit. To be sure, you’ll have regular expenses and maintenance costs to factor in. But when you own your property outright, each rental check you get is a significant, reliable payday.

READ: 5 Ways to Lower Operating Expenses For Your Investment Properties

Cons of debt-free real estate investing

While owning real estate debt-free comes with many advantages, there are also some drawbacks.

1. Opportunity cost

It takes a lot of time to save for a rental property in cash. If you’re set on only buying rental properties debt-free, you’ll miss many opportunities in the meantime. Other real estate investors who are comfortable with debt and leveraging their other properties can build their portfolios faster.

2. Limited purchasing power

Buying properties debt-free requires a significant amount of cash, often at the very limit of what most investors have available. This restricts the type of properties cash-only investors can consider. When you buy rental properties with mortgages, you only have to come up with the down payment, allowing you to add more properties more quickly and invest in a broader range of options.

3. Impact of inflation

After several years of elevated inflation, a dollar isn’t worth what it used to be. If you save to buy an investment property in cash for years, it’s possible your money will not keep pace with inflation. In other words, the longer you hold on to your cash savings, the less it might be worth when it comes time to buy a property.

Who would benefit most from debt-free real estate investing?

Debt-free real estate investing is best for people who are more conservative or risk-averse in their personal finances. These investors value stability and control over their investments and are willing to accept slower portfolio growth to achieve it. It’s also a good choice for those seeking an alternative to the stock market or more traditional investment portfolios.   

Other ways to make real estate investing more cost-effective

In addition, debt-free real estate investing can appeal to those looking to save money on interest payments. But it’s not the only way to make investing more cost-effective.

1. Work with discount brokers

First, work with a discount real estate broker when selling or flipping properties. These are brokers who don’t mind lowering their commission cost, especially for real estate investors who might sell more than one property with them.

READ: Mastering Residential Real Estate Flipping — 10 Essential Keys for Success

2. Invest out-of-state

If you live in a high-cost-of-living area, consider making a real estate investment out of state. Many parts of the country (particularly the Midwest) have more affordable housing where your cash can go further in buying an investment property. Many people move in search of more affordable housing, and you can take advantage of that by purchasing a rental property in a growing area.

3. Purchase a fixer-upper

If you’re willing to work with contractors or have DIY experience, consider purchasing a fixer-upper. This is one way to get a great deal on a property, even if it means putting in more work before it’s ready for renters. Of course, if you pay for a fixer-upper in cash, you’ll likely have to have money saved for renovations as well. If you choose to get a mortgage, some mortgage lenders offer home improvement loans in addition to your mortgage.

4. Opportunities and risks in debt-free real estate investing 

Whether it’s an investment property or a personal home, all home buyers should purchase a home in the best way for them. Whether that’s with cash or a mortgage, carefully consider the path to investing and homeownership that best suits your long-term financial goals and risk tolerance.

 

Luke Babich HeadshotLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is also a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.

Purchasing a “Second Home” as Your First Property

Real estate is all about location. It’s no secret that the current economic climate of the past few years has caused major shifts in real estate buying habits. The volatile market, combined with the need for more multi-purpose and spacious homes, has created a new trend among investors and home buyers alike. 

Buyers are investing in more remote locations for their homes, rather than heading into big city life. In fact, 64 percent of surveyed real estate professionals this summer stated they have seen a growing trend of buyers purchasing their “second” home first; which involves buying a property in a more off-the-beaten-path location. Buyers are looking for extra square footage, open outdoor space, and the ability to invest in property with more financial perks than big city purchases can offer.

Not only do these more remote locations deliver more space to work, live, and enjoy, but they also on average save buyers an estimated $76,000 on the cost of the home. This makes purchasing a “second” home first more appealing to first-time homebuyers and seasoned investors.

Of the over 900 real estate agents surveyed, a majority still suggest the current real estate climate is favoring sellers. The low supply of homes to purchase is expected to keep sales moving quickly, even though affordability is far from ideal. Purchasing in a more affordable location is a key to making these remote location purchases more popular.

Perks of Investing in Remote Locations

  • Easily overcome local real estate market limitations.
  • With work-from-home capabilities at an all-time high, live where you want without being tied to your office location.
  • Access more profitable markets where economic growth is booming.

Why is Remote Investing Rising in Popularity?

  • Investors earn higher yields in other markets.
  • High prices in certain markets (think coasts and major cities) can make investing nearly impossible for many.
  • Allows investors to diversify their investment portfolio for more financial security.
  • Makes investing in real estate more attainable for new investors and buyers.

Pros & Cons

Whether you plan to invest in a “second” home as your first home to live in or as a true investment property, there are pros and cons to consider. One pro includes having the ability to widen your scope of markets to invest in. Another positive to investing in a remote location is allowing for larger profits by purchasing a property with more affordable prices, higher yields, and lower taxes. Purchasing outside your local market also delivers truly passive income.

As for the challenges associated with purchasing a remote home, there are many things to consider. You need to spend time analyzing other real estate markets to ensure you’re making a sound financial decision. If you are planning to rent out the property, you will likely be met with the challenge of finding a trustworthy individual to manage your property and help with maintenance. 

If you are trying to decide if investing in a “second” home first is the right choice for you, consider this: Real estate transactions always involve risk to the buyer. Be sure to do your research on the location and learn about the challenges that can come with being a landlord from afar.

 

Rancho San Diego Family ReunionOlivia Forgette is a real estate marketing specialist, writer, and homeowner who enjoys using her experience to help buyers and sellers feel informed and confident during their big real estate transactions. When not writing and blogging, you can find her loving on her newborn baby boy, or in the kitchen baking some homemade sweet treats.