Equity versus Leverage

Equity versus leverage is an ongoing debate when deciding how much (if any?) money you should put in to the purchase of your rental property.  Me?  I’m a fan of having some instant equity in a home.  With equity, I’m usually speaking of a down payment…your hard earned cash.  There are other ways to earn equity, as well.

To be clear most, not all, banks require a 20% down payment on a single residence income property and 25% down on a multi family home rental property.  However, I have begun to hear lenders tell me they can do 15% down.  Back in the day, before the bubble burst, I even bought an income property with 0%, yes zero, down. SIDE NOTE: When I got home from that closing I told my wife it’s almost over.  She asked “What is almost over?”

“The housing boom.  I just bought a property with absolutely nothing in it with bank approval. They have lost their minds.”

But I digress.

In my mind, equity is a good thing in your investment property.  You have “skin in the game.”  Plus, with a lower mortgage payment you have a bit more cash flow. With better cash flow you are better able to weather storms that may come up like major repairs, disasters, worsening economies, climbing vacancy rates, etc.

Now mind you, I don’t like to see too much equity in a home, either.  If you are walking around at 20% LTV your plan had better be to get the rental paid off asap and just live on complete cash flow.  If that is the strategy, great.  Especially if you are older.  But if you are in your thirties, or forties (and maybe even fifties) is this the best use of leverage?

Equity versus leverage is a sliding scale.  Each individual real estate investor has to decide for themselves;

  • What is my risk tolerance?
  • What cash flow am I trying to generate?
  • What is my growth or hold strategy for the next 5 year window?
  • What are my “Retirement worth having” plans?

Let me know if I can help you answer some of these questions.

Chris Lengquist
Ad Astra Realty, Inc
913-815-3473

2 Comments

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2 responses to “Equity versus Leverage

  1. Thank you for this insight! It is actually a constant debate to which of this 2 is better. Yes you’re right it will depend on the situation. In weighing the pros and cons of both technique as to what I see leverage has more disadvantages and is riskier than equity. Do you have any suggestions on what I should look into in to know what strategy is more profitable in long term investments?

  2. The advantage of leverage, is exactly that, leverage. With leverage you can purchase more rental property than you could if you were paying cash. So for security and peace of mind, more equity is always better. For multiplying the advantages of investment property not called cash flow, the better path is leverage. Age has a lot to do with this. I’m all for leverage for people who are 25, 35 and even 45. After that, I get progressively more conservative until about 65 where it should be mostly equity. That’s my arguable opinion.

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