https://www.youtube.com/watch?v=kBqad3IJyN4
The text discusses the concept of paying off real estate debt as a strategy for real estate investors. It begins by referencing the book "Rich Dad Poor Dad," which suggests that good debt can make you wealthy while bad debt can make you poor. The author, Chad Carson, acknowledges the importance of good debt but argues that paying off debt is a crucial strategy for maintaining wealth.
Chad Carson introduces himself as an investor who believes in achieving financial freedom without the need for massive real estate portfolios. He mentions his recently authored book, "The Small and Mighty Real Estate Investor: How to Reach Financial Freedom with Fewer Rental Properties," which promotes the idea of using real estate as a means to attain financial independence.
The author emphasizes that while Robert Kiyosaki's advice in "Rich Dad Poor Dad" about using good debt to build wealth is valid, it is equally important to understand the value of paying off debt. He provides four compelling reasons for why paying off real estate debt can be advantageous:
Carson dispels common misconceptions, such as losing tax benefits by paying off a mortgage. He explains that owning properties without debt still allows for depreciation benefits, and the reduction in expenses is a positive outcome.
Regarding inflation, he argues that properties without debt can still appreciate in value and generate rental income, often keeping pace with or outperforming inflation.
The author acknowledges that paying off debt may not be suitable for all investors at every stage of their journey. For those focused on growth and acquisition, it might be wiser to reinvest capital. However, paying off debt is presented as a strategy for investors who have already built some wealth and wish to balance growth with risk reduction, increased income, and personal freedom.
In conclusion, Chad Carson advocates for the strategic use of real estate debt but emphasizes the importance of eventually paying off debt to secure financial stability, reduce risk, increase cash flow, and simplify one's investment portfolio. His approach is geared towards investors seeking a balanced and sustainable path to financial freedom.
You know the book Rich Dad Poor Dad says that good debt makes you rich and bad debt makes you poor. So if you want to become a lot more wealthy, you just need to get more and more and more good debt, right? What if I were to tell you that's not the entire story? It's true that good debt can make you wealthy, but the secret to staying wealthy is actually paying off debt. And if you want to know how that works, stick around, and I'll show you how.
Everyone, I'm Chad Carson, you can also call me Coach Carson, and I'm an investor who believes you don't need to 10x your growth, own thousands of units in a big real estate Empire in order to be financially free. I just wrote a brand new book called "The Small and Mighty Real Estate Investor: How to Reach Financial Freedom with Fewer Rental Properties." If you want to check it out, you can find it at biggerpockets.com/do-less.
Robert Kiyosaki and Rich Dad Poor Dad weren't wrong when he said that good debt will make you rich. 21 years ago, when I was a brand new investor, I literally had $500 to invest. I had just graduated from college and I didn't even have a regular job or a lot of credit. Using debt and other people's money, also known as OPM, was a game-changer. It helped me to go from scratch to owning rental properties and building a lot of wealth.
I later learned that building wealth and actually turning that wealth into Financial Freedom, where you have the free time to do whatever you want for as long as you want, are like playing two different games. To achieve what I wanted to switch from the first game (Building Wealth) to the second game (Financial Freedom), I had to learn to use some different strategies, and one of the most important was paying off real estate debt.
I know you may be skeptical. This isn't conventional wisdom, and no one else out there is telling you to pay off real estate debt except for maybe Dave Ramsey. So to help you think through this, I want to give you four reasons that it's a good idea to eventually pay off some or maybe even all of your real estate debt.
The first reason to pay off debt on your investment properties is to reduce risk. Dave Ramsey likes to say, "It's hard to get foreclosed on a property without a mortgage," and it's true. If a tenant stops paying or if you have some other economic hard time, it's easier to work through that if you don't have debt. But I disagree with Dave Ramsey that debt is so risky that you should never use it as a real estate investor.
When you're first starting or growing as an investor, the reward can be worth the risk, especially if you're careful with debt. But it's easy to get stuck in the perpetual debt religion and forget that there is risk to borrowing more money. Eventually, as you grow, reducing risk should be smarter. Listen to Warren Buffett, who says, "Why risk everything you already have to get something you don't really need?" The point is, growth shouldn't always be a top priority; eventually, reducing risk should be. In my experience, the biggest risk, the number one way investors can go out of business, is debt. I've known investors who had balloon mortgages, which means they're supposed to pay one big lump sum five or maybe seven years after they borrow the money. In some cases, the banks weren't loaning any more money; it was in the middle of a financial crisis when they were pulling all their money back in. In other cases, something could change with the investor, and the banks weren't willing to make them a loan. The end result was they lost all of their properties and all of their equity. If COVID has taught us anything, it's that the world is unpredictable; tough times that neither you nor I could predict can happen, and paying off debt is just one way to protect against that.
The second reason to pay off debt on your investment properties is to increase your income or your cash flow. When you pay off a mortgage, the money that used to go to your lender each and every month now goes to you. For example, let's say you own a property that's worth $400,000 today, and ten years ago you bought it for $300,000. When you bought it, you got a $240,000 loan at 5 percent interest. But now you've been paying it down over 10 years, and you owe $122,000. And let's say the payment on that mortgage, the principal and the interest payment, is $1,300 per month or $15,600 per year. So, assuming you'd eventually save up $122,000 to pay that loan off, the end result is you now have $15,600 of increased cash flow. If you looked at that investment like a cash-on-cash return, you're actually making over a 12% return. Now, remember, you're reducing your risk at the same time. Where else can you get that kind of cash-on-cash return while also reducing your risk? I personally haven't found anywhere else.
The third reason to pay off debt on your investment properties is that it gives you structured goals, which most of us need. For example, stock investing has a strategy called dollar-cost averaging. The way that works is that every month, without fail, you save up money and then you immediately invest that money in the stock market. Over time, it gives you a disciplined strategy because you know exactly where your money's gonna go. This happens to work in real estate; you could do something similar. You could save up your money every single month and strategically use it to pay off debt. This especially makes sense once you've already bought enough properties to meet your financial goals. I like using something called the rental debt snowball strategy. The way this works is that instead of using the cash flow on each individual property just to pay off that property's loan, you could buy all of your cash flow together and attack one loan at a time by concentrating your cash flow. By doing that, you could pay off a loan very fast, sometimes in just a few years, and then you can move on to the next loan and the next loan. Without a strategy to put your cash somewhere like this, cash just sits around, and it finds a place to go, usually in a luxury vacation, a big house, or a big car, and not into something that's going to give you the freedom you want over the long run.
The fourth reason to pay off debt on your investment properties is that it makes your life simpler with less hassle. Of course, you do have a choice of what to do with your money; you could reinvest it into even more properties. Maybe that would make you more wealth and build more cash flow. But if you choose to reinvest your money into paying off debt, you're going to keep the same number of properties or maybe even less. From a practical standpoint, what that means is you have less hassle, fewer tenants to manage, less maintenance to worry about, and you generally just have less on your mind. And what this all really comes down to is time freedom. Because having free time to do whatever I want for as long as I want is really why I started investing in the first place.
By the way, I spend an entire chapter talking about this concept, including multiple ways to pay your debt off faster, in my new book, "The Small and Mighty Real Estate Investor," which is coming out in July. If you pre-order before July 20th, you're automatically entered to win all sorts of great giveaways and bonuses, including some 1-on-1 coaching with me. So pre-order today at biggerpockets.com/do-less.
Now, with all of that said, I know some of you probably saying, "But Coach, paying off debt on real estate investments is dumb. What about the tax benefits? What about inflation? What about getting a lot better return putting my money somewhere else first?" The idea that paying off your mortgage loses your tax benefits is simply a myth. A property without debt has the exact same amount of depreciation as a property with debt. And yes, once you pay off your mortgage, you no longer have an interest expense that you get to write off on your taxes. But decreasing your expenses is actually a good thing. In business, you would never say, "Hey, let's keep that expense and make less money so we can pay less in taxes." That would be the exact same thing as going up to your repair contractor and saying, "Hey, when you fix that deck, please charge me double because it's all tax-deductible." To say this simply, when you pay off your loan, you make more money. And yes, that means you also pay more in taxes, but trust me, that's a good problem to have.
With inflation, it's true that using debt or leverage to buy real estate is a great strategy. But that doesn't mean that owning investment properties without debt is a bad strategy. If you've chosen your locations well, the rent and the property values on free and clear properties still go up even without debt, and often they go up as much or even more than inflation. And as I said in the beginning, paying off debt isn't for everyone and it's not for every investor at every stage of your journey. If you're just starting out or if you're in the middle of your wealth-building journey, just save this idea until later. It's probably better for now to reinvest your cash into more down payments or into marketing to buy more properties. These are the things that are going to help you grow. This strategy is for those who've already built some wealth. It's for those who've decided to balance growth with those equally important goals of reducing risk, increasing income, and increasing your personal freedom. This is the strategy for those who want to optimize their life, not just a return on investment. It's for those who want to maximize their peace of mind, not maximize the number of properties they own.
Let me know in the comments below if paying off real estate debt is a strategy you plan to use either now or sometime in the future. And be sure to subscribe to this channel to learn more ways to become a better real estate investor and pre-order my new book at biggerpockets.com/do-less. Thanks, and see you next time!