What’s up guys? In today’s video, we’re going to be answering the question, should you buy an air b&b, or other property in cash? This is a question I started getting after I posted my reaction to Dave Ramsey’s advice, you can check that video out on the channel, but Dave Ramsey, obviously a prominent person in the world of personal finance. And he is a big proponent of buying properties in cash, he really believes in buying properties and cash not carrying debt on your properties. And so I want to break that down and share why I actually disagree with that philosophy. And with that line of thinking for the average investor, who is actually properly managing their risk, and does their due diligence correctly. So that’s a big Asterix there. And I think that’s an important place to start in this video, especially as it relates to advice from other financial people in the space like Dave Ramsey, is it Dave Ramsey, you have to remember is coming from a place of catering to the average person, not the average real estate investor, or the average investor, just the average person, the average person in North America carries a whole bunch of credit card debt, doesn’t know how to manage it properly, doesn’t manage their finances well, and should in no circumstances be deploying financial leverage, because it’s more likely to result in disaster for them when they don’t do their proper due diligence than anything else. But if you’re on this channel, I gotta believe that my core audience here is a much more kind of a sophisticated, let’s say, investor, who does their due diligence understands risk and can calculate risk into their investing properly. And so if you’re doing that, then I think that a lot of the advice that Dave Ramsey gives isn’t necessarily going to be applicable to you. And it’s also just ultimately just gonna slow you down. And so here’s my thoughts on why it makes a lot of sense to use leverage financial leverage when investing in real estate or short term rental properties. Well, ultimately, it’s pretty simple. When you’re using no leverage, it means really, all you’re getting money from is your time and your effort, you’re not actually making much money on your money itself. Realistically, if you’re going in buying a property in cash, then the return you’re getting on that is pretty minimal, you’re only getting a small return on the cash that you put into that you’re not actually using financial leverage to your advantage. And so you’re only really making a return on the money that you have. And you’re making a return on your time. And so let’s just look at this, I always like to look at just simply appreciation to really break these numbers down. Let’s say that you buy a property for $500,000, and you buy it all in cash. Well, if that property appreciates at 2% per year, then over the next 10 years, you’re gonna gain about $110,000 In appreciation. So you’re taking your $500,000, and you’re gaining $110,000 on it over the period of 10 years. Now you’re gonna cash flow on that property, let’s say you got by a great property. And let’s use the example of a property that I have that I bought for right around 500,000. And it grossed about $120,000, in bookings. And so you would have $120,000 coming in, in bookings. And then obviously, you’d have very minimal expenses on that, because you’re not gonna have a mortgage, you’re just really gonna have insurance, property taxes, those sorts of things. So your net is going to be pretty high on that, let’s just for the sake of argument, say that you’re making about $110,000 a year on that property. Now, if you took that same $500,000, and you deployed it, using financial leverage at using it for 20% down payments, you can get about, again, like keeping the math equal, we’ll just kind of discount any closing costs, things like that, we’ll just keep it apples to apples and say that you’re putting that right into real estate. And so you’re gonna get five properties, you’re gonna get about two $2.5 million dollars worth of real estate. So with that $2.5 million with a real estate, if you’re able to buy five properties that are all going to gross, let’s say $120,000, but now they’re going to net, let’s even just say $60,000, or for even simpler math, we’ll just do $50,000 per property, if you’re paying your mortgage, things like that, now, realistically, probably closer to 80. But just to keep the math simple, and I’ll show you it still works. Even if you’re ultra ultra conservative, you’re now going to have five properties that are netting you $50,000 a year. So instead of making $110,000 a year in cash flow, you’re now gonna be making 250 realistic, you’re gonna be over $300,000 a year in cash flow. And that’s after paying for the for the mortgage, including the principal, including the interest, everything. And so now suddenly, you’re making about three times as much money in cash flow. You’re also paying down principal on the mortgage, which is building up equity over time. And then if we look out over 10 years, that $2.5 million were the real estate over 10 years at a 2% rate of appreciation the same rate of appreciation as before, is now going to gain $550,000 in value as opposed to the $110,000 in value. So every single year, you’re going to be making an extra $200,000 a year in cash flow, and over 10 years, you’re going to make an extra $440,000. In appreciation alone, not to mention that you’re also going to build equity as you go, in addition to that cash flow, because you’re gonna be paying down principal on the mortgage as well. So, again, if you look at the math, and you really break it down, the numbers are pretty clear. So then the question is, why is someone like Dave Ramsey recommending to people that they go buy property and cash when using their money as a down payment, and using financial leverage will result in a massively outsized return. And it all comes down to risk. When you use financial leverage, you can win bigger, but you can also lose bigger? Let’s take the example of this one home versus five homes. If you buy one home, and you have it fully paid off, then what’s the worst thing that can happen? If you have to, if you’re forced to sell that property, you’re never going to owe the bank more than what you can sell it for? Because you don’t owe the bank? Anything on that property? So yeah, you could sell it at a loss if you chose to. But why would you write if you don’t owe anything on the property? Why would you sell it if the market is down, you know, as long as you can afford to cover the insurance, property taxes, those sorts of things, which are pretty nominal expenses over the course of a year, then you never really have to sell the property. So you have a lot lower downside exposure, because really, the worst case scenario is you’ve just keep holding the property. And even if you were forced to sell the property, for whatever reason, and you did so at a loss, you would never be negative, you would lose money that you had invested in the property, but you wouldn’t actually owe more than you have. Whereas if we buy $2.5 million for the property using $500,000. And so now, we’re leveraged about five times. And then what happens if the market takes a drop? Well, the market drops. And those properties are, let’s say, only worth $2 million. And you’re forced to sell them because you can’t afford to keep paying the mortgage and everything else on all that property. Well, that now you sell it for $2 million. And you owe the bank $2 million on those on those properties. And so now you’ve lost all your money, if the property is dropped below $2 million, well, you’re actually going to owe the bank more than you have from selling the properties. So you’re actually going to be in debt now. So you can really be in a tight spot financially. But as you can imagine, it’s also pretty hard to make it make that happen, because the market would have to drop significantly. And that would have to coincide with you not being able to cashflow on the properties. Now, does that happen? Absolutely. We saw that happen a whole bunch in 2008. It happens a lot if you aren’t doing your proper due diligence. But if you’re a savvy investor, who knows what they’re doing, you do your due diligence, and you know how to manage your risk, then you can make sure that you’re never gonna be put in that spot. By doing a couple of things, the best way that you can protect yourself from that worst case scenario is ultimately going to be cashflow. Because if you have solid cash flow, meaning that the properties are cash flowing enough every single month to cover all of their expenses, and then some and you can, you can be assured that even in a worst case scenario, you’re going to be generating that kind of cash flow that it’ll cover all the monthly carrying expenses for the property, then you’re never going to be forced to sell the property, you’re never going to be in a position where you can’t afford to hold the properties because the properties pay for themselves every single month. So even if the market does drop, which ultimately we as individual investors don’t have control over. So if the market does ROP, you just hold on, you just hold those properties through the market drop and wait for the property values to come back up before you sell or just hold long term and don’t ever sell and then you’re just cash flowing year over year. The problem that most investors get themselves into is that they look at the best case scenario, but they don’t really consider the worst case scenario. And so when the worst case scenario does happen, and we get something like COVID, or we get something like just a general slowdown in Airbnb bookings, while they’re left without options, you want to make sure that even if you do experience a massive slowdown, the property still has enough margin in it that it’s going to be able to cash flow. Or you can have a backup plan a safety net in long term rentals, buy a short term rental property that you know, if you have to, you can transition over to a long term rental property and still have a cash flow really well. This is ultimately what we as investors need to do. It’s more important than anything, the most important piece of investing over the long term is going to be managing your downside exposure and making sure that you mitigate it and reduce it as much as possible. I always tell people that we work with that it’s more important to manage your downside than to maximise your upside. Because your upside Yeah, sure if you get a property that can cashflow really, really well. In a best case scenario, that can be really helpful. But if that same property is going to lose you money in a worst case scenario,

it’s not worth the risk. You never want to put yourself in a position where you can wipe out all this hard work that you’ve done building your portfolio because you just took on too much risk. So that’s my thoughts I want to know yours let me know in the comment section down below if you agree or disagree with this or what your thoughts are overall, if you liked this video, make sure to give it a thumbs up it helps me out tremendously with getting these videos in front of more people. So please take a take a second to like the video. And if you’re new here and you want to check out more of the videos on the channel, then make sure you subscribe as well. We post two new videos every single week here on the channel all about short term rental investing. So make sure you subscribe if you want to stay up to date with that. That being said, that’s all for this video and I’ll see you in the next one.