past, staying debt free was the hallmark of a financially successful life. But a recent article posted on The American Dream states that most Americans are drowning in debt of all kinds, with a significant portion of that debt owed for mortgages. Yet in the world of income property investing, keeping properties financed can be a good thing. In Jason Hartman’s words, “Refi till you die.”
The statistics can seem alarming. According to The American Dream, as of 2012, mortgage debt as a percentage of the Gross Domestic Product, or GDP, has more than tripled since the mid-1950s, and total home mortgage debt is currently about 5 times larger than it was 20 years ago. But these are simply the facts on the amount of mortgage debt held by Americans today. What the numbers don’t show is how a significant portion of this mortgage debt is working to the advantage of income property investors throughout the country.
Why is debt, so long considered the enemy of sound financial planning, an advantage in the world of rental real estate? In the aftermath of the housing meltdown of 2008 and beyond, many distressed and foreclosed properties were available for near-record low costs, enabling many new investors to make quick purchases with cash. Yet these new property owners found themselves locked out of many of the tax advantages of property ownership, forced to use their own money for maintenance, and ineligible for any mortgage-related bailouts.
Jason Hartman’s basic formula for reaping returns on income property ownership involves purchasing as many properties as possible on a fixed rate mortgage. This locks in the repayment rate for about 30 years – payments which can be covered from rents paid by tenants
. The larger the loan, the more support is provided by lenders. And with interest rates remaining low, it’s possible to secure financing for a large amount, which can be used to purchase either single family homes or multiplexes up to four units.
Another way that debt can work for the investor has to do with inflation. While inflation raises the price of consumer goods, so that the dollar you earn doesn’t go as far, it also reduces the value of debt. In periods of inflation, there’s a difference between the nominal value of a mortgage and its actual value – which is generally lower because the currency it is valued in is being constantly devalued. So a mortgage has a real value that, depending on the rate of inflation, may be substantially lower than its nominal, or face value. With tenant rents paying down the mortgage on a regular basis, the investor can save a substantial amount on the debt owed.
Debt, in the form of mortgages that can be periodically refinanced, also offers tax benefits. Mortgage interest is tax-deductible, as is mortgage insurance. Real estate taxes are also deductible. So are numerous other expenditures associated with owning and maintaining rental property. And a mortgage can be protected in the event of a natural disaster or other event that destroys the property. For example, after the disaster of Hurricane Katrina in New Orleans, mortgage companies put a moratorium on payments, freeing homeowners of their monthly obligations for up to six months.
To earlier Americans, debt was a dirty word. But as Jason Hartman’s investing strategies demonstrate, in the world of income property investing, the debt associated with mortgages can be music to an investor’s ears.
The American Monetary Association Team