A friend of mine asked about my opinion on paying off his primary residence. He laid out two options: either he rents out his old house for $1300 a month or sells the home to pay off his new one, and that sparked a conversation about the cost and risk of a paid-off house.
I asked my friend how much equity it would take to make that $1300 per month rental cash flow, and he said if they sold the house they would net $381K. I asked him, is $15K per year a good return on $381K of capital? Absolutely not. So I suggested that he sell the house, but not pay off the new one.
Having cash on the sideline is a small price to pay to derisk yourself and be able to take advantage of opportunities as they arise. Having a paid-off house doesn’t set you to invest when the sky is falling or save you from risk if you face a liquidity crunch; it doesn’t do either of the things that could set you up to make great money.
The first challenge is a liquidity crunch. If your business starts to struggle, we enter a recession, interest rates go up, and you need cash, you’re going to have a hard time accessing the cash that paid off your house. A house is not a liquid investment. On the other hand, if you find a great opportunity but have no cash available, you have no ability to take advantage of it.
I told my friend to sell the house, take the cash, and put it in his checking account. Inflation and sitting money are the cost of doing business as an entrepreneur, it’s your get out of jail free card. Most successful entrepreneurs I know have mounds of liquid cash. The top rule of entrepreneurship, especially in real estate, is don’t run out of cash, that’s the only way you can lose. Having a home paid off feels nice, but it puts you in a position of unnecessary risk.
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