AND THATS OK
From financial advisors to personal finance bloggers, there are countless views on debt in retirement. Many in the FIRE community view eliminating debt as an important step of achieving financial independence. There are many benefits of living debt free. However, I am planning on achieving financial independence and retiring early with over $1 million in debt.
You see, I view debt as a wonderful tool when utilized properly. No, I am not talking about getting a loan to buy a new car; that cost my friend over $240,000. Rather, my mountain of debt will consist of various fixed-rate mortgages for rental properties. Fixed-rate mortgages or debt means the interest rate stays the same and does not fluctuate. On a side note, my primary residence will be paid off or I will elect to rent (TBD).
So, why am I comfortable with so much debt?
First, I will not personally pay my monthly mortgage payments. My tenants will pay the mortgage via their rent payments. The properties rent for substantially more than my monthly caring costs which is commonly referred to as PITI (principal, interest, tax, and insurance). The difference between the rents and carrying costs allows for the property to support itself, pay for repairs, AND provide me with monthly cash flow.
Second, the cushion between the monthly rental rate and carrying cost will allow me to build up a reserve for repairs and/or vacancies (read emergency fund for the property). I self-manage my properties and my only vacancy to report was a half of a month on one property. For those new to real estate investing, I would recommend assuming at least 5-10% vacancy rate when analyzing a property. Additionally, the cushion allows me to drop the rent if the area becomes less desirable or if rents decline while still paying myself every month. Please note, rental rates typically do not decline. Rather, rental rates typically increase with or faster than inflation. (Obviously, this depends on the market).
Furthermore, I have fixed-rate debt which means my monthly payment will not increase for the next 30 years. Naturally, over the next 30 years, inflation will be my best friend. My rental rates should continue to increase gradually over time which will increase my monthly cash flow. I will also be paying back my debt with less valuable money since $1,000 twenty years from now will be worth less than $1,000 today.
Over time, my mortgages will be paid down and eventually be paid off. This is commonly referred to building equity. The properties will likely be worth more in 10, 20 or 30 years, however, I never assume the homes will appreciate in value. I recommend never buying a property because you think the price will appreciate; that is pure speculation. BUT!!!! There is a good probability the value will increase gradually over time but I am conservative in my underwriting/investing assumptions. As such, I care more about the cash flow and less about the property’s appreciation.
Once the properties are paid off, my monthly cash flow will increase greatly. The extra cash flow creates more financial freedom. I can use the new cash flow to buy more properties. I will have the freedom to travel to more places. Donating more to charitable causes that I am passionate about will be another great use of the extra cash flow. More cash flow = more options = more freedom.
Have you thought about how much debt you want in retirement? What are your plans? Will you be debt free or have debt like me? No one size fits all.