One difference between employees and employers is that employees trade their time for money while employers trade people’s time and people’s money for money.

Some advisors recommend that once you pay off all your debts you should pay your rental properties with cash. Although it is possible I believe it makes since to finance it. It is a good advice but may not work for every one depending on every one’s risk tolerance.

What is your risk level?

Paying cash for rental properties is the most conservative approach in real estate investment. As one person, you have limited resources to build wealth. You should use resources available to you but use them carefully to reach your goal. Erasing risk entirely is a risk itself. You would own few rentals if you have to purchase them with cash each time.

We need to think like wealthy people. We need to think like employers. We need to think like bankers. We need to intelligently use all the resources at our disposable to build our wealth.

Abraham Lincoln said: ”You cannot help poor people by being one of them” .

If you are wealthy, you could help more people so why limit our potential?

As employees, we only have 24 hours in a day to trade for income.

As employees, we only have our income to live on and to save.

Saving a part of that income after expenses to pay for a rental property is limiting our potential.

We need to save to come up with a good down payment to purchase a property with a loan at a low interest. Then we turn around and act like a bank ourselves. We rent the property to a tenant at a higher interest rate. We collect the rent and pay the mortgage, administrative cost, and maintenance and we decide whether to apply the profit toward the additional principal or save it for the purchase of the next property.

A moderate risk taker would apply the profit toward the additional principal to pay the house off quickly and build equity in the house. The moderate risk taker would continue to save part of his income to purchase the next property and charge higher rate to rent it to a tenant and use the rent to pay off the mortgage. In case of absence of rent, the landlords would have enough saved from his income to pay the mortgage.

A high risk taker would not worry about building equity in his rental properties. He could pay the minimum mortgage and use the remaining rent toward the purchase of another property. He might even go further and borrow against equity in the rental property to purchase another property without his own money. I would not recommend that. I would suggest you build equity in your properties. When the rental property is paid off, the rent is all yours. You could save money by paying more than the minimum mortgage on your rental properties but you don’t need to buy them with cash necessarily.

Let’s assume you save $20,000 and put it down for a house that cost $100,000. Let’s say you set the rent in a way that after paying the minimum mortgage, you have $300 gross profit. ((300*12)/20,000) equal 18% annual return on your investment of $20,000 down payment. Your mortgage interest might be 5% but you charge 18% to rent the house to your tenants. To be more conservative, if your gross profit is $150 a month instead of $300, your annual return would be 9% (150*12/20,000). That is 4% higher than what the bank charges you. You have the potential to gain that every year. You would raise the rent every year or so. If you applied all the rent to the mortgage payment and pay it off within 10 years, you would have equity built into your house. If the rent is $1,300 a month and the equity in the house is $100,000 (your rent income paid to the bank including your down payment) then your return after the house is paid off would be 15.6% (1,300*12/100,000). 18% return earlier is a high return with risk involved. 15% is a high return without the same level of risk as the 18%. 15% is the best return considering the level of risk involved.

Using leverage helps invest in more properties than you would have otherwise, using your own savings. “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world”. Archimedes

By using other peoples’ money, you pledge to be responsible with it, and make them money as well. It is a responsibility.  Borrowing money to invest is a resource too good to pass. The house is the collateral that the bank would seize in case of default in your engagement. That is your responsibility as a business person to satisfy your tenant, and protect your assets by honoring your words. You might get to a point where you might be able to purchase properties with cash but the beginning is not it.