Pick the Better Investment: Get Interactive on BiggerPockets

by | BiggerPockets.com

Growing up, game shows were it!! They provided an interactive experience allowing us to get involved with what we saw and heard.   Shows like “Wheel of Fortune” and “Let’s Make a Deal” allowed us ( and still do!) to passively participate in the game. Whether its solving a puzzle or cheering on the contestant to pick the right door, these interactive programs make our experience very enjoyable. In today’s blog post, I’d like to introduce a “Let’s Make a Deal” concept that will hopefully make this post more enjoyable for you! In today’s “Let’s Make a Deal”, you the investor, are going to decide which is a better deal for you.

A Little background information for you on the game:

You are about to bid on a single family home worth $75,000 in today’s market in Anytown, USA after $10,000 in rehab. The property is the perfect investment for the buy and hold investor but could also be sold to an end buyer. There are two ways to purchase the house…..

Behind door #1, you can purchase the house outright for $36,000 cash. You will never have to worry about making another payment on the property aside from the normal taxes, insurance, etc.

Behind door #2, you can purchase the house with seller financing for $50,000 at 6% interest rate paying $299.78 per month in principle and interest until paid in full. (as noted by Sam Perkins in a recent post)

Which door are you going to choose?

Fortunately, I am going to give you the answer – though, it will not be until next week. I want to hear from you!  What door you would choose and why?

Before you post your response, I want to give you some additional information about the property. We can assume each month you have to escrow $200 for taxes and insurance and the property will gross $950 a month in rent. Finally, the property is in a growing neighborhood with new businesses moving in and a college expanding enrollment. Homeownership and the rental market are in demand.

Which door will you choose and why?

UPDATE: For our follow up post, please see Pick the Better Investment: Which Door Did you Choose??

Photo Courtesy of: E-Discovery

About Author

Kevin Kaczmarek is President of Capital Blueprints, LLC. Serving a national and international client base, Kevin helps clients achieve their personal goals for long-term stability and solid financial growth through Self Directed IRA Investments and individualized Passive Income Strategies.


  1. Dustin Collett on

    I choose door number 2, I am not looking to wait nearly 7 years to see that cash investment finally return to me. I can get a much better return in other investments which might actually require that 36k.

  2. I can think of multiple scenarios which would favor each one, depending upon the buyer situation financially, and the ultimate agenda of the buyer. This is a great core question. Fleshing out the various potential scripts would be fun.

  3. I would pay cash and flip it. Assuming a $75k sale price, paying 4% towards buyer’s closing costs, $10k in rehab and $6k in soft costs like RE taxes, insurance, utilities, advertising, interest (opportunity cost), closing costs on purchase and sale, you’d make $20k. Assuming 6 months purchase to sale, you could turn the money twice a year. That means you’d make $40k a year on a $52k investment. That’s pretty good.

    I don’t think I could do better than that by choosing door #2. I’m hoping you can show me how in your response post next week.

  4. I am as new to the investor arena as anyone can ever be, but based on the little that I think I know, I would choose door number two. If I’m right, I see a $450.00 cash flow with an opportunity to do a lot of creative things with this property. Owner finance means I don’t pay anything for the property itself except for the money it takes to close the deal. If I find a buyer, and I don’t want to worry about holding the property I can have the buyer pick up all of the cost and walk away with an assignment fee. Given that I only owe $50K on it and the area the property is in is demonstrating positive growth, I can wrap it and increase my monthly cash flow as well as make a sizable profit when it’s sold. I see lots of potential with taking you up on option # 2. You can do a lease with option to buy, or if the property has any equity you can sell it to another buyer or investor for a reasonable/fair mark up. I’s just a matter of doing the math and figuring out which would be the best option based on your particular goals, and the strategies you’ve chosen to focused on. Well; that’s my pennies worth. Since I am new to this business, I’d be very interested in hearing from anyone who might agree that I don’t know what I’m talking about. One last disclaimer, I am not an expert by any means, please don’t digest this material without consulting someone who is.
    Thanks for the opportunity to comment
    Dave Perez

  5. It depends on your goals. If you’re going to flip it then you would choose A. If you’re going to keep it for the long term you would choose B.
    If you kept the house for 30 years under option A you would get NPV Cash Flow of $270K. Under Option B if you invested the 36K in at 5% annually you would get NPV Cash Flow of $322k.
    Appreciation of the home would be the same under either scenario so it isn’t taken into account in the decision.

  6. Really a simpler question the author could have asked to any real investor is, “Would you rather have $14,000 now or $5,000 now plus a minimum $650 per month forever?”

    PS: Choosing the option to buy the property using owner financing for $50,000, the buyer would still have his $45,000. So he could go put $15,000 down on 3 more properties valued at $50,000 and rent them out for more cash flow. Plus he could re-finance all of his properties in the future to leverage to buy more cash-flowing properties.

    For my longer explanation and answer, read here: http://joshuagamen.wordpress.com/2011/03/31/real-estate-investing-capital-gains-or-cash-flow/

  7. Over the long haul, this property will only cash flow $175/mo at best. $950 rent – 50% of that for expenses = $475. Take out your $300 P&I payment and you’re at $175. Just to qualify my statement, I have 40 single family rentals. Over the last 4 years my operating expenses have ranged from 26% of gross rents to 125% of gross rents in any given month. I am including capital expeditures like replacing furnaces, roofs, etc. My average is 52%. So in my opinion, the 50% rule is pretty dead-on.

    In my opinion too many investors are too simplistic with their numbers and they don’t count “one-time” expenditures. Well, the expenditure DID happen, right? My P&L includes vacancy, bad debt, discounts, advertising, bank charges, insurance, legal fees, repairs, maintenance, vandalism, section 8 inspections, turnover costs, real estate taxes, tenant screening and utilities. Many of these items only come up during vacancies, but vacancies do happen.

    And I also think $14,000 is a HUGE financing premium to pay for any deal.

    • Ryan, if you read my post you will see that I am assuming only what the author of the question told me. And $14,000 is nothing to pay for financing when you aren’t paying anything, the author’s numbers are on a zero down payment deal for the financing. If you don’t like free money, I don’t know what to tell ya..

    • I would first determine the value after expenses of option two and decide if it was enough to pay for my effort and option 1 is suitable if I knew I had a quick buyer… I would additionally want to know how much this home could increase over time, as this could be a big factor regarding ROI

      Depending on the above answers, however I am a fan of OPM and keep my money to buy some other properties…

  8. If you are a great real estate investor then you should know the answer. I think, it depends on you plan, flip for A or flip for B. The tax rate of the income received as rent would be much less than from flipping because it is considered passive income when earned from rent.

  9. I know what you are saying. I have done deals like #2 and enjoyed the benefits. I tend to come across a little more emphatic than I intend sometimes. Sorry.

    I guess I look at it like if I can flip it, which with this property I can, then I would rather make my money now. With that said, I prefer to hold 2 bedroom properties as rentals. So if this were a 2 bedroom I might take option 2. I prefer 2 bedroom rentals because they are much harder for me to sell. I also prefer 2 bedrooms because they are smaller and don’t seem to get beat up as much as larger rentals. Just my experience.

  10. Thanks for the fun game! I would take option #2 because I want to build a portfolio of cash flow properties with the possibility of selling and exchanging closer to home later on. I am close to retirement age, and no money down for a property with strong rental as well as stable to rising property value is a keeper, not a flipper for me at this point in my life.
    btw, if this is a real property that you know of, I’d like to get it!!!

  11. I would definitely go with the second option. In a normal economy I might try to pay cash and do a quick flip. However, IMO the actions of the Fed scare the heck out of me and so I want to preserve all the cash I can for any unforeseen chaos in the future

  12. I will go for door 2 on this one. I can go take the $36,000 for a fix & flip somewhere else. Then with the fact that ‘ the property is in a growing neighborhood with new businesses moving in and a college expanding enrollment. Homeownership and the rental market are in demand.’ This will lead to good cash flow and increasing appreciation in the years to come. And what a great way to hedge against the upcoming inflation. This house can then be taxed at the capital gains tax rate in the future rather than as personal income in a flip situation. You could probably even sell this on a lease option and take the profit in 1-2 years at a the lower tax rate. Though a 5 to 10 year hold would put a lot more money in your pocket.

  13. Is this kind of a trick question? No one in this crowd is looking around going “gotta get me a 8% home loan”! Why not rephrase it “get an outside loan $36k” vs “owner financed $36k + $14k loan origination fee” –would there be any questions? I’m ignoring the outside loan origination costs, ($1K maybe?) and not looking up mortgage tables, so the numbers are “fuzzy”, but…. Imagine you start with your own $36k cash (you have the cash, the owner is in a real hurry) THEN get a loan. If you are wildly overextended, have an no income, have declared bankruptcy, etc. take the owner financing, & that’s just the cost of being you, but even if you have lousy credit, the rate you have to beat is 8%. Even if you can’t do better than 8% if you are keeping the place if you toss the extra $ from the rent at the principle & let the house “buy” itself by paying toward $36-37k, not $50k. It should cut the loan time in about half—and that’s at 8%.

  14. WOW! I can’t believe the overwhelming lean toward the WRONG answer. Let me start off by saying I’m a newbie and please don’t take my comments the wrong way (I’d hate to piss off potential investors before I ever got to know them:) LOL After all what could a measly contractor with no real estate investing experience possibly say that could change you veteran investors mind?
    Behind Door Number 2 is Smoke and Mirrors
    You are getting way to excited about the thought that you can get this property with no money out of pocket. You seem to have totally forgot that it needs $10,000 in rehab. Where might this money come from? Out of pocket of course. Now you suddenly have $60,000 dollars in it. That leaves $15,000. Now throw in the the cost of selling it. If you list it with a Real Estate agent there goes another $4,500. Even if you don’t you still have cost associated with selling it. Now you are suddenly down to $10,500. I haven’t even mentioned other misc. things like a title search. Lets say your speculation of the market in Anytown, USA is off and the market drops a little. you sure don’t have much wiggle room left and I’d start getting a little nervous about now.
    Oh yea, I hear you, You say your not planning on selling it. Your going to rent it. Well you still have $10,000 in rehab (Out of Pocket) and best case scenario you are going to have $200 to $250 in positive cash flow. $300 payment plus $200 taxes and insurance plus $200 to $250 expenses. The rent is $950 minus the $700 to $750 monthly expenses equals $200 to $250 per month positive cash flow. It is going to take you at least 3 and a half years just to recoup your $10,000 you spent on rehab. Remember you’re not going to be collecting any rent while you’re rehabbing it either. Then when you are done with the rehab you are going to have expenses in finding a good renter too. All before you ever get the first rent check.
    While you could argue that this deal could work over the long term it still don’t make it a great deal
    Take door #1 pay cash, get the good deal, flip it, and go on to the next one.
    I hope you enjoyed reading my take on it as much as I enjoyed writing it. Just Remember Owner Financing don’t necessarily mean no money out of pocket.
    I look forward to reading your posts and comments

    • I love your response. Totally something a great contractor would say!!! 🙂 – You would flip this house and make a larger flip profit than I would. But I would still take the no money down and rent this thing. Worst case scenario I would sell it again via lease to own and let the new tenants down payment be them fixing up the property. That’s the beauty of real estate investing, you have too much control to ever need to have risk! 🙂

    • Paul O'Connell on

      You are making the assumption that the seller would require you to pay $50,000 if you flipped the house early. Who’s to say the seller wouldn’t allow you to pay $36,000 in a year if you found a buyer (or another lender)?

      The settlement would increase the return for the seller (as opposed to waiting 6 more years for his money) and you would have had $0 down financing on an investment property for a year.

      Nice question Kevin.

  15. The answer to this is probably personal but I’m leaning toward taking a good deal now rather than waiting to see what happens in the future. My basic guideline would be that a fix and flip rehabber would purchase at 70% ARV and that would be $52,500. He has to put $10,000 into the rehab so that comes down to $42,500. If I can get 10% profit on ARV ($7,500) then it would be a great opportunity for me to wholesale to a fix and flip rehabber. My sweet spot will be $35k, but $36k seems close enough. I’ll probably put an offer in for $35,00o but would definitely put it under contract at $36,000 and sell to a buyer for $42,500. That is $6,000 in my pocket for no effort and if I can double close even better.

  16. Great scenario and comments, and I have to agree with the logic of the previous posted comments. And thank you, Kevin, for the reference on the “until paid”.

    There is certainly more to the question than meets the eye, and the couple cents I’ll throw into the mix are the motivation of the investor. Generally, there’s no better option than “free” or 0% financing from a seller. There were a lot of posts regarding the usage of funds, and unless the investor is experienced (assuming success and cash in accounts) or has access to funds, there is always a need to monitor cash purchases. Regardless of the deal and in most cases, there will be many more deals available to purchase for cash.

    In regards to motivation, I know I can speak from experience that not all investors start out with deep pockets. It takes a long time to build up assets, and you have to take advantage of every opportunity in front of you. 0% financing is certainly an opportunity, and it is a great way to start [grow] your portfolio.

    Each investor’s situation, motivation, goals, and strategy/execution will differ, but the name of the game is profits. Financing properties is the quickest way to build assets while holding onto your much needed cash. Build wealth on financing and “subject-to” deals, keep building cash, and work towards the day where you can purchase multiple cash deals like the example above on a daily/weekly/monthly basis to explode your wealth.

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