To buy for cash or finance?

rmk9785eMay 26, 2011

I am considering buying an investment 4BR, 2Bath single family property for $140K, with 20-25% down in a small California town. Disposable money sitting in the bank is not earning much. The home would rent for about $1,000/month, is in a fairly decent area of town and in good shape. With good credit, I can get good interest rate and have positive cash flow even if I take a loan.

Buying all cash, I will have all the income as return on my investment. If I borrow,50-60% of income would go toward mortgage related costs. Which is a better alternative?

One thought says, leverage the down payment to realize almost the same rate of return and invest in more properties. Say, I could buy 5 properties with 20% down with the total I would pay for a single property and have the opportunity to collect 5 monthly rental payments.

Let's assume for the moment that the anticipated rental income has already taken into account cost of minor repairs, taxes, insurance and about 80-90% occupancy rate. Also assume that there won't be any appreciation for another 5 years.

Advice, ideas?

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Billl

If you use your own money to make a profit, that is an investment. If you borrow money in hopes of making a profit, that is a gamble. Personally, I invest, I don't gamble.

"One thought says, leverage the down payment to realize almost the same rate of return and invest in more properties. Say, I could buy 5 properties with 20% down with the total I would pay for a single property and have the opportunity to collect 5 monthly rental payments. "

A whole lot of people went bankrupt recently following that plan. It has HUGE risks. If none of the properties are paid for, 1 loss can start a cascade effect and wipe you out.

If you want to be a landlord, the slow and steady approach is a better way to build wealth. Buy 1 property. Use the proceeds to build up reserves to buy the next property. Use both those proceeds to build up reserves to buy the next property - but this time it happens twice a fast as the second one. If you do this wisely over an extended period, the end result should be that you own numerous income producing properties free and clear.

    Bookmark   May 26, 2011 at 9:49AM
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brickeyee

"A whole lot of people went bankrupt recently following that plan. It has HUGE risks. If none of the properties are paid for, 1 loss can start a cascade effect and wipe you out. "

It is a risk only if you do not have financial reserves to cover mortgages absent rental income.

When housing prices are high it is simply not worth tying ALL your money up in property.
In some places you would be hard pressed to afford even ONE without a mortgage.

The folks who crashed and burned had little or no financial backup, and wanted to play the 'flip' game.

THAT is gambling.

Simply having a mortgage on an investment is NOT.

    Bookmark   May 26, 2011 at 10:17AM
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marie_ndcal

The other thing to look at is taxes. When we rented in CA, if WE managed the house, paid repairs, collected rent etc, it became tax write off, but if we turned it over to a agency, it was not. Also we ended up with a big capital gains tax. Talk to your tax person first and find out what the rules are.

    Bookmark   May 26, 2011 at 3:36PM
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brickeyee

"Also we ended up with a big capital gains tax. "

Luckily the capital gains rate is often lower than earned income.

    Bookmark   May 26, 2011 at 4:00PM
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chisue

We've put off capital gains from a 1980 valuation by investing the entire 'boot' of the property sold in a new rental property that's in trust. (IRS #1031 option, I believe.) Of course, who knows what those taxes will be when the trust's ultimate beneficiaries inherit.

The advice we'd received was to delay, delay, delay payment of taxes. (Makes more sense during inflation than recently!)

    Bookmark   May 28, 2011 at 3:02PM
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brickeyee

"Makes more sense during inflation than recently!"

Don't worry, the inflation is coming.

Look at 'Quantitative easing'.

It is a fancy scheme of turning on the money presses.

    Bookmark   May 28, 2011 at 4:34PM
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