Commercial Real Estate Investing - How Comfortable Should You Be With Debt?

"What we want to be rich in one day hang in a year." - Leonardo Da Vinci

I just received an email from an investor's principle that has a question, and something of a dilemma ...


He wants to buy a property in the commercial real estate, but do not like the thought of all the debt that is involved. He has worked hard to achieve a credit account, have some money to put down on a property, but do not like the idea of having a large loan on his head.

What should he do?

First, many of you reading this know that there is a difference between good and bad debt. When you get a loan to buy a $ 500,000 property and there is enough cash flow to repay the loan - and pay him a nice cash flow, debt that is positive. That's the good debt that not only covers the cost of borrowing, but also gives cash flow each year.

This positive leverage allows you to purchase without using the $ 500,000 cash of $ 500,000. You have your tenants making the payments and their appreciation and value is based on the debt that you have used - not just the cash you put into the property. If you put $ 100,000 into its signal and the property appreciates, say so, the 3% or $ 15,000 that you just made a return of 15% on your sign ..... using leverage.

This is without mentioning the positive cash flow you will receive from the property - especially the costs involved. Low to really be comfortable knowing that the debt will give constructive used higher returns on their invested capital. It's just a tool, nothing more.

And when you sell the property the debt is paid off, too.

If this still makes fine then you want to focus on all cash deals, or deals where you have your cash in, just no leverage. You sacrifice turn, you sacrifice the number of deals available to you, and you can even sacrifice the quality of the deals where you get involved. If it makes you sleep at night, that's OK, but know the rewards.

I found that a well-located investment should be a cinch for a new loan, a new "tool" to get the most return and cash flow that you can. If you can not sleep at night, then you understand the actual path that you are leaving cash flow and further back on the table for inner peace. It is a business, and quite honestly, there are no right or wrong - just preferences.