THE DEBT HAMMER! Why You NEED To Pay Off Your Debt

You've probably heard of the debt snowball, but have you heard of the debt hammer? People think that we are crazy for this. Why on earth would you lever up to build a huge portfolio, get all these tax benefits, and then pay the whole dang thing off? There is a reason and a strategy behind it. This is what the masters of the game do, and in today's episode, we're going to tell you how and why we're going to pay off all of our debt. Spoiler alert: I have like $17 million of debt. Caleb's sitting on, I think, 4 and growing.

I'm on put 4.

Yeah, we're going to talk about the 4 phases and we're going to focus on, uh, on the dead hammer. So here we go. So we're going to talk about the 4 phases really quick. We share this all the time on the channel, but there are only 4 phases that matter to build your business. We have learned this from many masters. This is what everyone is doing who wins the game. You have a build phase. This is where you are building the income that you need to hit your goal. So in our case, this is where you're buying the bulk of your initial portfolio. These are likely not going to be Class A properties. You're going to build something that takes a little bit of work because you are going to solve those problems and make a boatload of cash. But you build first, then you stabilize. That is where you're not trying to— you're not trying to renovate your rough units. You're trying to take— hey, with the pieces I have, Is there anything that I can do for light fixes to optimize the rent, to get the— to get everyone paying, to make sure that I'm at least 90% of my tenants are paying and the income is stable? Optimize is where I go after that last percent, the last 10% of leasing. We're doing upgrades to the building. They may need like a massive new roof. Maybe we're building a park at one of our campuses. But you're doing the things that you're going to do to make it the best possible asset it can be. After that, you pay off all the debt. And this is where people get lost or go, that's crazy. Originally, I thought there was 3 phases. I thought it was you build, you stabilize, and you pay off the debt. Problem is, if you don't optimize, there's not enough global cash flow to make a dent in the debt. And so you have to keep refinancing forever and it's going to take you 50 years. If you can optimize this, you can create an income stream that can actually roll, roll off all of the debt, which is insane. So, Caleb, let's talk a little bit about your portfolio that you've built and where you're trying to get it before we get to the dead hammer. So, Caleb, you've been doing this for about a year and a half, right?

Yeah, around there.

Okay. So you've been buying real estate for a year and a half. You have 53 units, 4 transactions, 2 10-plexes, 1 8-plex, and 1 25-plex, which I have seen in person. And it is beautiful.

Best asset I own.

Yes.

Not even close.

Absolutely phenomenal. Um, when you are putting together these deals, what is the ultimate goal that you are trying to reach? Like, in your build phase, what are you trying to build to before you get to the stabilize and optimize?

That is a great question. I used to think it was— I was very similar to you and Cody when you guys started. Say, let's hit the 100 units and let's do it. And then since then, it's kind of— the mindset's gotten bigger. So for me right now, I'm kind of eyeballing the 250 mark is where I want to get to.

Okay. Uh, why?

I got a few more years.

Why, why 250?

That's a great question. And it's just kind of— it feels like a number that's high enough at the same time. Like 100 units, like I saw you guys kind of breeze past that. I'm not gonna lie, I'm like, that's doable. I'm already halfway there, over halfway there at 53. I'm like, there's way more I can do because I am nowhere near where I want to be when I start that hammering.

Yeah, well, and, and to be fair, check out multifamilystrategy.com because you're right, breezing through your first 100 units actually is pretty easy. It's not hard, it's not easy in effort, it's easy in strategy. It's super simple. It's a lot of work. Yeah, and I would make the argument, is it more or less work than you expect— expected when you got started?

Different amount of work, different kind of work. That is what I thought. It's the guy— the biggest thing that I understood is like things take 3 times as long was the biggest thing on repairs, but on acquisitions it's not that complicated. It's a very simple formula. A lot of people out there try to overcomplicate this stuff. It's, it's really not that complicated.

Yep, it is extremely simple, uh, extremely replicable. Uh, there's a few skills you need to learn, and if you passed Algebra 1 in middle school, uh, you can do all the math required. And even if you didn't, you can figure it out because I'd say you probably need to pass 5th grade.

If you pass 5th grade, you're going to be all right. If you don't pass 5th grade, real estate's not for you.

Yeah, well, and funny enough, I, I actually know someone who barely made it past 5th grade who's, uh, farther than me in real estate.

Yep. I know exactly you're talking about. The Mr. Lumberjack.

Yeah, Mr. Lumberjack. There are people of all levels. Granted, he's also probably the smartest investor out there. If you haven't checked out his channel, Matt the Lumberjack Landlord, I will plug him here because he is worth plugging. Amazing operator, fantastic mathematician. Really, really, really all-around smart guy. Channel worth following. But yeah, you can do— like, basically the message here is any idiot can do this. You do have to put in the work on the front end, which is the build phase. Let's talk about paying it off. So you're going to get to 250 units. I think you're going to breeze past that because it took you a year and a half as a 20-year-old to get to 53. So you're a fifth of the way there. And to be fair, you're still a child. Okay. At 20 years old, most people have not graduated college yet. Like, that is— you are young, young, young and already having that much success as you mature as an investor and you're already well on your way. Um, 5x-ing your portfolio by doubling your experience is going to take you no time. I am— I'm going to call the shot right now. I think in 2 years you're gonna be at 250 units.

Well, I call my shot for me. Not even knowing what else I'm doing on the side, you're just calling the shot for me.

Okay, well, you've done this in a year and a half. I think in the next year and a half, because you'll still be 21, any year and a half you'll be on the back end of 21. Um, I, I think you're gonna make it.

Why not?

Or it'll just be 22. Whatever. I don't know your birthday. Okay. So you're going to get to 250 units. You're there. You stabilize while you build, by the way. You don't just, like, you don't leave your properties to rot. All these things have landed.

Absolutely not.

Think of those, you know, those little lights that like change colors and like waves where it goes from like blue to green to yellow and you're like, somebody—

That's exactly what 1 and 2 are.

Yeah.

Yep.

You know, you get caught staring at them like, ooh, is it green or yellow right now? It's making the transition. That is how these phases go. It's not specific blocks of like, oh, I made it out of build, we're in to stabilize. You're stabilizing while you're building and you shift into a phase that's heavier on stabilizing and then you'll shift into optimizing and then you'll start rolling down the debt on some things and you may still be buying properties. It does— the phases all do blend together, but those are the general phases. You're going to have an emphasis on one throughout. Once you get—

not like those people. Yeah, I'll just say it's not like those people when you're eating Thanksgiving dinner and you have everything separate on your plate. That's not how this works. Works. Everything's blended straight together. It's, it's not that cut and dry.

Exactly. You have your categories, but your categories will in fact touch. Uh, you picky eaters, uh, I apologize. That is just how the game is played.

You are never going to succeed in real estate.

Let's answer the main question: why would you pay off your debt? You get all the way there, you build your business, you can keep building, you can scale the Cardone levels where you have, you know, $6 billion of real estate. Um, why are you going to pay off your debt?

Why am I personally?

Yeah, why would you pay off your debt? You get all the way through.

For me, it's just the fact that eliminates all liability. No matter how— like, let's say you pay down all but, say, your 75% equity stake or whatever, you still have 25% there. And if something does hit the fan, you could still lose absolutely everything you've built, absolutely every dollar you invested into your business. And then it comes to a certain point where you're just not acquiring anymore. Like there's always like deals here and there, whatever, a home run falls in your lap, you do it. There comes a certain point in your business where that's just not worth it for you anymore. And especially another thing on top of that most people don't think about, I don't know your take on this, but just as we inflate more and more and more, the amount of debt you have doesn't change. So that same amount of debt as you— as the economy, like, I don't know, we're on a runaway train right now, so we'll see what happens. But our amount of debt in 20, 30 years is going to seem so minuscule compared to like what our assets are worth. You might as well just pay them off.

Absolutely agree. The other big thing is this is what all the masters of the game do. You get to a point where you don't need more money and everyone wants more and everyone wants to scale and everyone wants to tax or whatever. You hit a point where you have more money than you need, you pay off your darn debts, then you keep scaling from there. The, the least sexy thing that you can do is build a huge portfolio, become well known for it, and then lose the default on absolutely everything, like all these big syndicators right now in Houston. There— yes, uh, there's a lot of things that— there's a lot of ways you can get burned by scaling forever. It's why it's so important to identify your original goal. For me, I wanted to stabilize my portfolio, retire my wife from teaching, and move to Texas. My house is being built in Texas right now. Once I get there, $20,000 a month stable, like where I'm not doing projects because we have a huge portfolio, but there's a lot of projects in that thing where it's stabilized, banging out $20,000 a month, and we're already over that. That's where it needs to be. Now, for the portfolio Cody and I built, it's like, okay, well, why not stop exactly there? I'm going to do a few more projects because those projects are going to help me pay off the portfolio quicker. So I'm adding stability. So what you typically do is you hit your goal, You need to surpass it by a bit. And then once it's all stable, you have this huge base of cash flow. You pay off your least expensive debt first. So here we are, 10 minutes into the video, and I'm going to explain the debt hammer right here. So for those who stuck along for the whole ride, I apologize. I do not try to lead you guys along to get you to watch these. However, it worked.

You're here.

Debt hammer. Debt snowball. Actually, let's start there. Debt snowball is where you pay off everything, you come up with a plan, you throw X amount of money at it, and then once you pay off one debt, you roll to the next one, you roll the next one, and all of a sudden all your debt's gone. Problem with this: if you keep paying down your mortgages, the risk is now on you. You have all this cash in the deal, and if something happens and you default and lose it, it's gone. You want the risk on the lender until you've saved up enough in an account to pay off your smallest loan. And it actually does— I'll tell you right now, it doesn't take that long. If you have a few loans that are like $200,000 on a triplex or two in your, in your big portfolio, Cody and I did a $500,000 cash out recently. I pulled enough money out of a property that sold someone into it, so I actually earned it. It's not like I pulled new debt. I brought income great enough to pay off an entire debt, actually two of my properties' debts in whole. When you own nothing on them, the risk is gone. So you take— keep the risk off you, sideline all the cash flow until you have enough to whack one debt in its entirety, and then you write a check, you pay it off, that debt's gone. That is the way to play the game. That is the debt hammer. It works better on a risk basis than the debt snowball.

Yes, dealing with real estate, way better. It just, it just, it comes out of the fact is like, I've got one more mortgage payment left, default. It's like, can you imagine anything more deflating in your entire existence than that?

No, granted, you're probably not going to lose the property on your last mortgage payment because you don't owe that much. You're just gonna pay it off and be done. But That is the— that is what the risk is. You have all this cash in here, but you could still lose it. The goal is how do we own it? How do we never lose it? You want stability? Get rid of debt. And you know what? It's worked well for Dave. Uh, last time, yeah, it's like $700 million of assets and he doesn't use a lick of debt. What we're going to do is we're going to lever to our goal and then we're going to delever all the way down when we own our freedom. Because you don't want to lose the freedom. I just recognize that in today's economy, with the rate that we print money, you're going to have to lever and play the game to get ahead. But once you're ahead, lock in your gains, pay off your debt, and be done. Because then if you want to scale, scale in cash. Or one of our good friends do. They have hundreds of millions of dollars of real estate, by the way, in equity, 20% debt in their portfolio. They pay their stuff all the way off and then they buy new things levered and then pay those things all the way off. You can utilize debt however you want, but the goal is to pay off your debts and you keep a lower and lower and lower debt loan-to-value in your portfolio as you play the game. And that's how you don't lose it. You go from right now, Cody and I are about— markets have affected things a little bit. We're probably around 60% loan-to-value right now in our portfolio. We just did a really good price deal, so maybe it's less than that. At some point we'll roll down to 45% and then at 25%. At some point we'll pay off the debt. But as you play the game, you put less and less and less risk the bigger machine you build. And that's Caleb.

Exactly.

About those things at 20 years old, it's going to make all the difference.

I appreciate that. I sure hope so.

It will. It will. Because you're right, at 250 units, if you don't pay that off, you're going to have to keep scaling to meet that portfolio. And then you're stuck in an endless cycle of I have to do more deals. To keep up with my debt. It is realistic what happens, especially in a debt market like today.

Oh yeah, this is— I mean, we can say 7% actually isn't that bad. It's just how quick rates went up. But that's a whole different video.

It's the rate that they went up. That's the problem. 100%. 100%. 7% is fine. A lot of people had 13% debts. It didn't matter that much because pricing— well, you know, you're buying a house for $95,000.

That 13 months were in accordance, but that's a whole different topic for a whole different video.

A whole different topic, a whole different video. The message for today: pay off your debts. I should change our slogan. It's how do I own it and how do I own it? Put capital letters on that. You own it by getting your name on title. You own it when you don't have any debt and you owe no one nothing except for the government who will continue to tax you forever. There's nothing you can do about that. Yeah, unfortunately. That's it for today's video. If you want a free course, you want to learn how to put this together, there is a link. We even have a free spreadsheet, I think, below that. But seriously, go into those, click those links. They're 10 minutes long. It's the method. And longs. I think I said longs. Editor, keep that in there because it's funny. Guys, it's 10 minutes long. You can learn the whole model. Click the darn link. You'll thank yourself. And if you want more information on videos like this, Subscribe to the channel. Um, Caleb, how do people reach you if they have questions for you and how you scaled so quickly? Because you are absolutely outpacing me, um, by, you know, you're a decade younger and you have more real estate than I had when I was 30.

Yeah, best, best way to reach me is on Instagram. I'm @caleb.homel. I can't get rid of the dot yet because the guy won't give me his account, so we're getting there.

Caleb.homel. And, uh, I know you have a YouTube channel that you're going to be spending more time on.

I know it's in its infancy, but, um, we'll bring that out a little bit. Yeah, we'll bring that out a little bit later, but yeah, that's still building up.

Okay, okay, I'll drop a link to it here as soon as you're ready to do that. So if you're watching this, uh, a month from now, there'll be a link in the chat for Caleb's show. All right, without further ado, we'll see you guys on the next video. Thank you for watching.