Why not keep your debt and use the cash flow?

Mike Pumphrey, AFC®
5 min readDec 19, 2022

There is a school of thought that you can use leverage to create cash flow without ever needing to pay off debt. But there’s a small problem.

I was recently listening to a radio show hosted by a real estate guy.*

He has one of those, “if I can do it, so can anyone” shows that are really just thinly veiled infomercials. But nevertheless, it’s where the dial landed one day driving around town.

One thing he said made me think though, and it might make you think too. When talking about buying a real estate property as an investment, he said (and I’m paraphrasing here):

“My goal is to make interest-only payments on mortgages. The less I pay in mortgage payments, the more I make, because of cash flow. I’m not interested in paying off debt; I’m only interested in the cash flow.”

I thought this was quite interesting, and caused me to question my own beliefs about the best way to manage money.

And it’s a good question: why bother paying off debt if you can use that leverage to make money?

How to be wealthy

There are lots of ways to be wealthy, but here’s how I believe it’s possible for the vast majority of people:

  • Earn a good consistent income, and advocate for yourself
  • Manage your expenses intentionally, with an eye to both today and the future
  • Pay off all debt, including your mortgage if you have one
  • Invest in low cost index funds, maximizing tax efficiency
  • Avoid traps such as lifestyle creep and chasing displays of wealth
  • Find community support and love

If you do all of these consistently and intentionally, it’s not beyond reach to clear $1 million in net worth and beyond, which is more than enough to live comfortably for the rest of your life.

I should note that this won’t get you wealthy in your 30’s or 40’s ( sorry FIRE enthusiasts), but this should allow you to live comfortably now while gradually improving your lifestyle as time goes on. (You can still live in a van if you want to, though I wouldn’t recommend it.)

Sound good?

Why no debt

An idea contained in the above list is that debt is something to escape. And the reason for that is because debt is a drain on your ability to do things with money.

If you have to pay a few hundred dollars on your student loans each month (or credit cards or mortgage or whatever), then that is a few hundred dollars each month that you can’t do something else with.

So as far as I’ve always been concerned, there isn’t such a thing as “good debt”. Debt sucks away my money, and I want it to stop.

What about cash flow?

But then there’s this other school of thought, which is that debt is something that you can use as a tool.

This is the school of thought posed by this real estate investor. The idea here is that you don’t pay off debt, but instead use debt to be able to make bigger lifts (such as owning bigger/more properties), and then use the benefits of owning those to more than offset the cost of the debt.

Since most people won’t own real estate for investment in their lifetime, I’ll explain this with a simple analogy:

I borrow $100, and have to pay $4 interest, but in that same time I can make $6, so I’m up $2. I don’t care about paying back the $100, since I can make that $2 forever.

This is also the same school of thought that says that you shouldn’t pay off your home if you have a low interest rate, and instead use that money to invest and make a higher return.

It sounds great, doesn’t it? I have to admit, that for a second I wobbled a little bit in my support for a debt-free lifestyle.

After all, wouldn’t it be nice to get all the benefits of working with bigger financial assets than one can outright afford?

One word: Risk

There’s just one problem though: debt increases risk.

Take our real estate guru again. He pays the very minimum on the property and gets cash flow from it. But what if the rental market crashes and he can’t fill his building? What if the bank calls the mortgage note for some reason? What if a disaster happens and the insurance doesn’t cover it?

People like to think that real estate is a sure bet. Buy the property, rent it out, wait for the money to roll in. Seems easy, right?

And yet, in the New York Times this week, there is a story about how the commercial property market in downtowns like San Francisco are cratering because of the rise of remote work form the pandemic. But who could have predicted that?

And if you take your mortgage money and invest in the stock market, you’re taking a consistent cost (mortgage costs) and trying to beat it with an inconsistent benefit (market returns). I certainly don’t think that makes sense when it’s your home that’s at stake.

Also, as I never grow tired of saying, it’s much harder to get foreclosed on when you own your home outright.

Cash flow is fine when you have money to lose

Ultimately, what I hear in the teachings of this real estate guru is privilege.

This is a man who has clearly made millions of dollars, and so can afford to be a little cavalier with his real estate investments. If one doesn’t work out, he can cover the losses. (Or he can just sell some more courses.)

If this sounds like you, then go for it.

But for the rest of us, I still say that you aim to be debt-free as soon as possible. Because then you will eventually have so much money to live with, invest, and save, then you’ll be on a fast-track to being wealthy and never having to worry about money again.

* I won’t give his name, but I will say that he clearly didn’t know about the Swingers community when he decided on his company name. I’ll let you fill in the details from there.

Originally published at https://empathicfinance.com on December 19, 2022.

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Mike Pumphrey, AFC®

Money coach, helping you thrive during late-stage capitalism.​