Debt-Free Real Estate Investing: Is it Possible, and Should You Strive for It?

While most people buy investment properties with mortgages or other financing, there are plenty of perks to debt-free real estate investing, too.

Investors who choose this route won’t typically grow their portfolios as quickly as those who use debt to buy properties. But in exchange, they’ll have the peace of mind of owning their investments outright.

There are many opinions about whether it’s better to pay off debt or invest, but it ultimately comes down to personal beliefs and risk tolerance. Some investors don’t mind having multiple mortgages if it means their portfolio is growing. Others can’t sleep at night, knowing they might be unable to pay their bills if their tenants are late on rent.

If you’re wondering if debt-free real estate investing is right for you, consider these pros and cons. 

READ: What You Need to Know About Buying an Investment Property in Denver

Pros of debt-free real estate investing

The numerous benefits of debt-free real estate investing are mainly centered around the security it provides for more risk-averse investors. 

1. Zero risk of foreclosure

When you have a mortgage on a property, there’s always a risk (however small) of losing it to foreclosure. Even if you have steady, reliable tenants, unexpected events happen. If you can’t pay your mortgage on your investment property for several months, the bank can foreclose on it. If you own it debt-free, you don’t have that risk.

2. Peace of mind

You have immense peace of mind when you own your investment properties debt-free. You don’t rely on your tenants to ensure you can pay your mortgage each month. When inevitable issues pop up (like a bathroom flooding or the heat going out), you don’t have to worry about paying for significant maintenance issues and a mortgage at the same time.

3. Increased cash flow

The biggest benefit of owning real estate debt-free is that much more of your rental income is pure profit. To be sure, you’ll have regular expenses and maintenance costs to factor in. But when you own your property outright, each rental check you get is a significant, reliable payday.

READ: 5 Ways to Lower Operating Expenses For Your Investment Properties

Cons of debt-free real estate investing

While owning real estate debt-free comes with many advantages, there are also some drawbacks.

1. Opportunity cost

It takes a lot of time to save for a rental property in cash. If you’re set on only buying rental properties debt-free, you’ll miss many opportunities in the meantime. Other real estate investors who are comfortable with debt and leveraging their other properties can build their portfolios faster.

2. Limited purchasing power

Buying properties debt-free requires a significant amount of cash, often at the very limit of what most investors have available. This restricts the type of properties cash-only investors can consider. When you buy rental properties with mortgages, you only have to come up with the down payment, allowing you to add more properties more quickly and invest in a broader range of options.

3. Impact of inflation

After several years of elevated inflation, a dollar isn’t worth what it used to be. If you save to buy an investment property in cash for years, it’s possible your money will not keep pace with inflation. In other words, the longer you hold on to your cash savings, the less it might be worth when it comes time to buy a property.

Who would benefit most from debt-free real estate investing?

Debt-free real estate investing is best for people who are more conservative or risk-averse in their personal finances. These investors value stability and control over their investments and are willing to accept slower portfolio growth to achieve it. It’s also a good choice for those seeking an alternative to the stock market or more traditional investment portfolios.   

Other ways to make real estate investing more cost-effective

In addition, debt-free real estate investing can appeal to those looking to save money on interest payments. But it’s not the only way to make investing more cost-effective.

1. Work with discount brokers

First, work with a discount real estate broker when selling or flipping properties. These are brokers who don’t mind lowering their commission cost, especially for real estate investors who might sell more than one property with them.

READ: Mastering Residential Real Estate Flipping — 10 Essential Keys for Success

2. Invest out-of-state

If you live in a high-cost-of-living area, consider making a real estate investment out of state. Many parts of the country (particularly the Midwest) have more affordable housing where your cash can go further in buying an investment property. Many people move in search of more affordable housing, and you can take advantage of that by purchasing a rental property in a growing area.

3. Purchase a fixer-upper

If you’re willing to work with contractors or have DIY experience, consider purchasing a fixer-upper. This is one way to get a great deal on a property, even if it means putting in more work before it’s ready for renters. Of course, if you pay for a fixer-upper in cash, you’ll likely have to have money saved for renovations as well. If you choose to get a mortgage, some mortgage lenders offer home improvement loans in addition to your mortgage.

4. Opportunities and risks in debt-free real estate investing 

Whether it’s an investment property or a personal home, all home buyers should purchase a home in the best way for them. Whether that’s with cash or a mortgage, carefully consider the path to investing and homeownership that best suits your long-term financial goals and risk tolerance.

Luke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is also a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more.