Is Leveraging Bad?

I don’t want too much read into this post, but I’m wondering right now if leveraging oneself is a bad thing. The specific question: “is it bad to pull equity out of a property in order to have a better down payment on a new property?” This could be a home, a rental property, or a commercial building. Is it bad to leverage the value that has been built up in something, and then use that equity to add another asset to the portfolio.

Now, leveraging is great in sales- giving something up in order to achieve a greater “package” in the end. But does that same principle extend into personal or business finances? Does it make sense to leverage an asset order to gain another?

Part of me says “yes, it makes sense to do that.” If I’m not going to take the money and put it into something that depreciates, like a car or a boat, but into something that could be considered an investment, then it might make sense, especially if both assets could appreciate in value. The problem, of course, is that if the market turns, and both assets depreciate, then you’re stuck with high payments on low value things.

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That, of course, is under the assumption that the first asset is still not completely paid for- for example, if a house has a mortgage on it, but has some equity, is it a dumb idea to pull that equity out and use the cash to, say, buy another house? What then? Is it better to sell out of the first house, paying off the line of credit, or use the house as a rental property, to try and bring in a little revenue? That sounds risky, too- what happens if there is a problem, such as no tenant? A tenant that refuses to pay? What happens when things in the house break, as they do? Having two mortgages can become a serious problem!

I had a customer when I lived in Las Vegas who owned several rental properties, and he made a pretty good living at it. He was a great customer, and always did the best services for the properties he owned, wanting them to be perfect for his new tenants. I remember discussions with him, and I came to the conclusion that rental properties work best when they are owned outright, and if there are multiple properties. That way, if one goes down, there are others to make up the difference.

I suppose it works the same way my trucks work- having several of them means that if one goes down, we are still able to function pretty well. It does make it hard when things are slow, but as we have grown the carpet cleaning business, each successive van brings the overall cost down. While buying new vans outright is certainly cheaper in the long run, it does also mean the capital we have available for advertising, repairs, etc, is far lower than it otherwise might be. There are other costs, too, that will come regardless of whether or not the van gets used, such as insurance. In reality, a van only needs to run three or four times a month in order to pay for itself, so its not a huge deal.

But when dealing with rental houses, there is only a monthly payment, and only the opportunity for monthly income, not daily or weekly income. Upsell isn’t possible, either, as far as I can tell, which can make it hard when there is a lull in the market. On the other hand, there are things like corporate housing, Air BnB, and other options available that could make a quicker buck, so to say. Hmmm…

Maybe that’s a new business opportunity- figuring out how to help people leverage assets they already have into more assets. Well, something to think about anyway!

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About DGrigsby