Real estate debt reduction as a strategy

If you want to make a million dollars in real estate, take on a million in debt and let your tenants pay it off. This is something that resonated with me when I heard it on the BP pod and something that I planned on not telling the internet community. I wanted to keep this gem as a secret for myself. I wanted to be a doer not a teller. Debt pay down is a way to make money in real estate that people aren’t aware of. As a refresher, check this out:

There are four ways to make money in real estate. They are 1) rental income, 2) appreciation 3) tax benefits and 4) debt pay down. This article will focus on the fourth because I don’t think it gets talked about at all.

What inspired this post was the infamous 8 unit that just came online. The property is priced at 200k, which is weird because this is arbitrary (I need and appraisal and I don’t trust numbers that end in zero) but the way I estimate a mortgage is $600 per every $100k. So the mortgage, not including taxes insurance, maintenance, vacancy is $1200.

Total cashflow as is would be 8 units at $600 (which is low for Detroit). Total revenue per months is $4800. You have a few options. You can cashflow about 1800 per month off this property or plow it all back on top of the debt, using the tenants money to clear the debt off your property. $4800 per month can liquidate 200k (less a 20% down payment) which is 160k in 33 months.

I bring up this strategy because it is a defensive strategy. These days multi family housing is hot. In my opinion it is too hot. Another thing is that these days refinancing property is hot. Too hot. This means we have to be investing defensively as much as we invest offensively. Always have multiple exit strategies, always have contingency plans. Anything else would be irresponsible. We invest for keeps not for a moment.

So in playing for keeps I find that you can’t do what everyone else is doing. This is what makes me a contrarian. I am a contrarian in nature. So what I see everyone doing is what I do the opposite of. All intelligent investors are contrarians. We go where people won’t go, we buy what they don’t buy, we don’t do what they do. We see the herd and go the opposite way.

I believe you have to be smarter than the smartest investor. You don’t become that guy by waiting for cues from what other folks are doing no matter how many units they own and how successful they appear to be.

There are a lot of “successful” people in multi family right now. These people are playing off this huge rush of renters that appeared after people lost homes, and then couldn’t buy homes because of bad credit and poor work history.

I like multi family but I don’t want to do it the way other folks are doing. I don’t want to suck all the cash out the deal. I don’t want to count on raising rents. I don’t believe that “rents only go up”, that is pre recession talk, the same talk that had folks high and dry in single family home flips gone bad. Lastly, I don’t want to raise rents and refinance out the property to then buy another property using the same strategy. Nope. That’s is sheep stuff.

What people aren’t doing but which I deem intelligent is they aren’t letting their tenants hand them wealth. By letting your tenants pay off your debt you now have net worth and cashflow forever. They decimated your debt which effectively means they gave you property free and clear and all you had to do is sign on the dotted line. Instead of pulling the cashflow out via passive income or a refinance you plow it all back down into debt reduction. In this regard I am like Dave Ramsey, I hate debt but I refuse to be the person that pays off said debt. Let the tenants handle that.

This is the smarter way to do real estate that isn’t as obvious as what other folks are doing. Acquire property with debt and be patient while your tenants pay it off. The wealth game is a long game but it is also a smart game. Don’t believe the hype that you have to flip, wholesale, BRRRR or rent and that is the only way you can make money. Everything is a deal in 20 years. Load up, wait and be great. Debt pay down is a lucrative strategy.

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Todd Millionaire

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