Managing Investment Debt for Increased Cash Flow
Dumping the Bad Debt Gave Us Options
Two years after becoming debt free and another baby later, I realized I really wished I could stay home with our kids. We also both wanted to move back to the Midwest. Such a move and transitioning to one income would have been impossible if we still had huge debt payments to make each month. But we were free from those restrictions and that debt no longer ruled us! In 2014 we decided to leave the East Coast for the Midwest, and I would stay home with the kids.
Without debt payments to make, we had saved hundreds of dollars each month and now had about $50,000 in savings. Before we moved we talked about diversifying some of this savings (while reserving 3-6 months of living expenses) into something other than our retirement accounts. We already owned a house in the Midwest and we had become accidental landlords. It was working out well, so we thought another rental property might be a good idea.
Taking on Investment Debt
We quickly found a good potential property in our hometown. We wanted to pay cash because we “knew” debt was bad. But we couldn’t afford it yet. What to do?? We were Dave Ramsey followers! We had seen how much debt had limited us and we hated debt! Even considering going back into debt seemed like a betrayal of our past sacrifices.
Yet we worried if we waited until we left the East Coast and no longer had our great jobs, we might not be able to get a loan. We might lose what looked like a great opportunity (except for that debt part). Looking back, we were wrong. Getting a loan wasn’t quite as formidable as we thought. But in our minds it was now or never.
After some hand-wringing, ambition won over debt hatred. We were confident the rental income would pay all the bills for this property, so we decided to move forward. You can read all about our second rental property here. We bought our second rental property with a 25% down payment on a 20-year loan.
Our plan was to get back in Dave Ramsey mode and pay the mortgage off early—we thought within 10 years. Then we would own another rental property free and clear! Right after the purchase we made a little debt tracker to put on the refrigerator to keep track of our progress. Sounds good, right? Except – we moved without having a job lined up for Mr. College Rental. Rental income was now our ONLY income! So all the rental income (after expenses) went towards our living expenses instead of towards paying the mortgage off early. We hadn’t given up on the idea of paying the mortgage off early… we just decided it would have to wait.
Reinventing the Wheel—Discovering Rental Property Cash Flow
We bought the house knowing the rental income would pay for all the expenses, but we didn’t really expect any profit on top of that. Remember, this was just a way to diversify savings—not something we expected to make us an income.
We soon increased the income from the property by renting to college students instead of a family. We reexamined the numbers and realized the house was now making us about $350 a month over its expenses. Awesome! We realized if we could make other such deals, we could create more cash flow. I know—not a new concept at all. We didn’t realize how not new this was until we began to study everything we could find on real estate cash flow and how many, many others have used passive income from investment properties to supplement existing income or replace earned income from an 8-5 job. We were already sort of “supplementing” Mr. College Rental’s income—if you can call it that when you’re unemployed.
By this time we were already looking more favorably on investment debt. This debt was different from our old consumer debt. We didn’t feel stifled by this real estate investment—it was actually helping us.
Reading Rich Dad Poor Dad by Robert Kiyosaki completed our change of heart. It further encouraged us to loosen up and not look at investment debt the same fearful way we did the consumer debt we’d spent 3 years paying off.
More Investment Debt = More Cash Flow
We began to actively search for a good deal again. We had enough money saved up to make one more cash down payment if the right deal came along. That deal showed up and in 2015 we bought our third house. Click here for the details on property number three. It turns out we COULD get a loan without our six-figure income!
The cash flow on House #3 was even better than House #2! We were hooked now. We had real estate fever. Big time! We wanted to grow our portfolio. We wanted to own the whole town! Although Mr. College Rental had a day job now, all thoughts of paying off mortgages early with cash flow vanished.
Our Real Estate Empire Expansion Hits a Wall
We had one big problem with our plan to own the entire town. We had spent almost all the cash we had for investing. Now we wanted more properties, but didn’t have more cash for a down payment. What to do…
Note: We did keep an emergency fund for ourselves and one for our properties through this time. It is very important that you have cash on hand to handle any costly emergencies on your properties.
Our first investment property we owned free and clear. We considered selling it to free up cash for more down payments, but the hassle of selling a single-family home with a tenant seemed huge. So, we did nothing for a while.
Cash Flow at 100% Financed
We kept looking at rental properties for sale and running numbers on them. Finally, we found a good property that would cash flow well even when 100% financed. We decided to keep House #1 (and its rental income) and use part of its equity as collateral. This is how in 2016 we acquired our next property, with Houses #4 and #5 on it. The property has been a huge blessing. It pays all its bills and leaves us with about $650 a month in cash flow!
Had we not been willing to take on investment property debt, we would be missing out on about $1500 monthly in cash flow, plus all the other benefits on owning rental properties such as increasing equity.
Anti-debtors might think that letting a bank get control of a property we once owned free and clear was crazy. Maybe they are right. But so far it has worked great for us. We plan to finance our next investment using this method as well.
Yes, we now have debt. But the debt is on an asset that is generating cash flow. We are not “really” paying it—the tenants are making the payment. And they are paying enough to also cover the taxes, insurance, and maintenance costs with money left over for us.
We have no debt on liabilities that do not generate income. As long as we do our part to keep the houses rented then our tenants are funding the mortgages and bills.
We won’t go so far as to call investment debt “good”, because all debt has varying elements of risk that should be carefully considered. But now we believe if you mitigate that risk by investing in assets that you understand, taking on investment debt that will make you more money can definitely be a positive thing.
In other words, we don’t advocate taking out a big loan to buy a fleet of semis if you can’t drive them and have zero shipping industry experience.
Debt on things like credit cards and car payments? No way. Never again! That is Bad Debt. These things don’t make money. Like Robert Kiyosaki says, “a car is not an asset, it’s a liability”. Debt on an ASSET that will make you money? In our opinion that’s fine and even good IF you mitigate your risks and don’t get carried away.
Our bad debt limited our options and freedom. This new investment debt actually gives us more options. Now we have to just try to cool our real estate fever so we don’t make risky moves with debt!
What is your story with consumer and investment debt? Has it worked for you or against you?