Follow Josh Koth and Jack Hoss on their journey towards financial freedom using the power of Real Estate through the REI Rookies Podcast (Real Estate Investing Rookies Podcast). We share our experiences as we acquire rental properties, build net worth, and work towards financial freedom. We are focused on creating wealth through conventional and creative real estate investing while improving our financial education. If you are a fan of Rich Dad Poor Dad by Robert Kiyosaki and Millionaire Real Estate Investor by Gary Keller, or are looking for an alternate to the Dave Ramsey, Jim Cramer, Motley Fool or Suze Orman shows we invite you to subscribe today!

 

EP029 | Good Debt vs. Bad Debt

This week we tackle the controversial and ongoing debate of good debt vs bad debt and chat about the pros and cons of each strategy. Do you purchase rental properties with no debt or leverage resources and possibly purchase more. We work through a couple examples and what has been working for us.

What you may be told is good debt

  • Taking out a Mortgage
  • Getting a Home Equity Loan or Line of Credit
  • Getting a Student Loan
  • Small Business Loan

What you may be told is bad debt

  • Credit Cards
  • Payday Loans
  • Automobile Loans

Let's simplify this

  • Good Debt buys assets that put money in your pocket
  • Bad Debt takes money out of your pocket

Dave Ramsey advocates no debt and save for everything. His snowball method is great for ridding yourself of consumer(bad) debt. Will not build passive income in a timely manner. You have to choose what's best for your personality and risk tolerance.

How do you use debt in REI?

Key Points:

  • Higher Returns
  • Cash-on-Cash Return of a leveraged property will usually be significantly higher than that of a property purchased with all cash.

Let's take a look at an example:

  • Property Purchase Price = $52,500
  • Rent = $850/mos

All Cash Purchase

  • $850/mos rent x 12 months = $10,200 gross rent per year
  • $10,200 gross rent per year - $3958 for capital expenditures (CapEx), Insurance, & taxes = $6242 net rent per year
  • $6,242 net rent per year divided by the original investment of $52,500 gives us the Cash on Cash Return on Investment
    • $6,242/$52,500 = 11.89% Cash On Cash Return on Investment

Down payment (leveraged) purchase

This time instead we only make a down payment of $10,500 and take a bank loan out for the balance

  • $850/mos rent x 12 months = $10,200 gross rent per year
  • $10,200 gross rent per year - $3958 for capital expenditures (CapEx), Insurance, & taxes = $6,242 net rent per year
  • $6,242 net rent per year minus annual debt service of $3,277 = $2,965
  • $2,965 net rent per year divided by the original investment of $10,500 gives us the Cash o n Cash Return on Investment
  • $2,965/$10,500 = 28.23% Cash On Cash Return on Investment

Equity

In short, there are different sources or arguments around equity, but for simplicity, let’s just look at appreciation. Let’s say our hypothetical house was bought for $100,000 in 2015 appreciates by $15,000 by 2016. If you bought for cash, you bought one house (because you only had $100,000 available to invest). You will then have experienced $15,000 in equity build due to appreciation.

Now, let’s say you leveraged, so you were able to buy five properties instead of one ($20,000 each, which totals $100,000). If those houses experienced the same appreciation wave, by 2016 you have now earned $75,000 ($15,000 x 5 properties) in equity build.

Lesson of the Week – REI specific
                
Thumbtack - "Consider it done. From house painting to personal training, we bring you the right pros for every project on your list."
            
Coach's Corner – Personal Development Tip or Book or Quote
     
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” -- Andrew Carnegie, billionaire industrialist

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Follow Josh Koth and Jack Hoss on their journey towards financial freedom using the power of Real Estate through the REI Rookies Podcast (Real Estate Investing Rookies Podcast). We share our experiences as we acquire rental properties, build net worth, and work towards financial freedom. We are focused on creating wealth through conventional and creative real estate investing while improving our financial education. If you are a fan of Rich Dad Poor Dad by Robert Kiyosaki and Millionaire Real Estate Investor by Gary Keller or are looking for an alternative to the Dave Ramsey, Jim Cramer, Motley Fool or Suze Orman shows we invite you to subscribe today!

EP030 | Out of State Real Estate Investing - Part 1 - Clayton Morris Interviews the REI Rookies

EP028 | Property Launch Recap and Update