The best investment for debt-free, why should you pay down your debt first before investing.
For many people, becoming debt free is the goal. Some give more of themselves and their wants than others to get there, but most feel lost when that debt-free day finally arrives. For many, the next step is to invest. But what is the most advantageous way to multiply your hard-earned dollars? We would challenge you do begin with your goals.
If you have put in the work to pay that debt off, peace of mind is obviously something you value. So, naturally, secure, hedged, historically proven investment strategies would be a great place to start. But what checks those boxes? Stocks have shown themselves to have a concerning amount of downside potential. Real estate brings up 2008 flashbacks.
But we would like to take a moment to educate you on what we saw in 2008 in the multifamily investment sector. Surprisingly enough, there was not the strong correlation to single family experience that we all felt. Rents did not dip much, not nearly as much as home values. So, cashflow remained steady and investments in the multifamily sector substantially outperformed those in the stock market. Multifamily values did regress to a greater extent, 12-20% depending on location and condition. But the most interesting aspect of multifamily assets’ relationship with the crash of 2008 was the recovery of this alternative asset. Rents held for two years or so, and then grew at a rate that far exceeded historical trends. The exceptional growth continued, for years beyond the recovery as well. This cycle was repeated once again in 2021, following the Covid-19 pandemic.
So, how do we apply this newfound knowledge of alternative investment classes? I would begin by challenging you to challenge your perspective on debt and investing. When it is your money paying the note, yes, get rid of it. Dave Ramsay style. But once you are there, with no PERSONAL debt, a safety net saved, and the excess income that needs to be placed somewhere, it is officially time to broaden your financial horizons. The hard part is over, and we want to pave the path to the early retirement you have worked so hard to earn.
Think of it this way. When you go to shop for opportunities in the stock market, your dollar is worth a dollar. If a $100 stock becomes worth $110, that is 10% growth. But how do you realize that gain? You have to get off the ride. And you are taxed for it, heavily.
Now let’s take that same $100 and go shopping in the theoretical real estate store. Every dollar is worth $4-5 with the power of leverage. So that same $100 has a purchasing power of $400-500 worth of real estate. This advantage is created by debt. If that $400 goes up by the same 10%, you’ve created $40 in value. On a $100 investment! Now, here is the really exciting part – you don’t have to sell it to receive the gain!
But what is also different about the debt we use is that the mortgage is paid by the tenants. It is not a burden, but actually an advantage. It is also important to know and understand that banks have no desire to be in the property management business. And the government doesn’t either. So, banks won’t lend on properties and opportunities that do not pass their strict lending criteria. They also do not give these loans out to just anyone. They want a proven track record, a net worth the equivalent of the loan amount, liquid capital in the owner’s bank account equal to or greater than 10% of the loan amount, and a safe, strong business plan. These are all hedges to protect the borrower and anyone involved in the deal.
The government knows it isn’t built to house the nation. So it offers incentives for those who take it upon themselves to provide housing to their fellow Americans. And, at a very macro level, do you want to bet on a company in the stock market having another great year or Americans needing a roof over their heads? These are the questions and concepts that led us to this space.
So I’d like you to ask yourself one final question. How many financial advisors have you met who are financially free?
If the information above is enough to peak your interest in who we are and what we do, we would love to learn the same about you! Congratulations on becoming debt free, whether it was with Dave Ramsay or on your own accord! We would be love to be a part of the next chapter of your financial journey. Let’s change the world and your financial future, together.