Use cash? Or does leverage really help?

Question

In terms of cash flow and security for someone approaching retirement age, is it really a good idea to get into a leveraged multi family deal using requiring a lot of time, effort and complexity?
	Wouldn't simply buying a quality SFR or two for cash generate more income and peace of mind?

Trying to wrap my mind around a philosophy appropriate to my level of skill. One size doesn't fit all, yes?

Bill Alpert · Answer

Wow, impressed with the the quality and diversity of people on this site! I'm thrilled to find such a helpful resource on the net! Thank you all!

David Krulac · Answer

@Bill Alpert

I think you are on the right track.  You don't need 100 units and you don't need the debt of 100 units either. I know several people who have 2 rentals or some small number and are not looking for any more.  There is nothing wrong with stopping at 2, and I like your idea of getting quality SFH.

If it were me I'd be looking for something newer rather than older, new to me means after WWII.  I'd be looking for something close to you so that you can easily look after it, so near to where you live.  And I'd be looking for something that was positive cash flow and with a return that equals your goal for supplemental income.  I would stick to detached SFH, I would not buy condos due to condo fees and restrictions.  And I'd be looking for SFH in good condition that don't need a bunch of work, maybe cosmetics, clean, paint, carpet, flooring, counter tops.  Good luck.  I see the musical instrument in your photo, related to Herb?

Bryan Hancock · Answer

One size does not fit all.  Leverage is like speed with a race car.  You can get where you want to go faster with more leverage, but you can crash and burn harder if you don't drive skillfully or if there are any potholes in the road.

Joel Owens · Answer

In that situation what some will do is put cash in with a partner for a deal where the partner has the stable income the lenders like.

At 85,000 you are looking at a very small interest % in an apartment building. The lender fees, due diligence, and closing costs on a larger building to close can sometimes be 30k to 40k alone or more.

For the amount you might have once you 1031 you might want to stick to the house or condos. When someone is contemplating a 1031 you have to know why you are selling and make sure you have something to exchange into that at is at least equal or better or that fits your changed goals.

Bill Alpert · Answer

Right now I have the potential to complete a 1031 that will generate between $85,000 to $170,000. Conventional lenders won't be interested in me; I have excellent credit but don't meet their income standards for a new loan, especially a large loan.

So I can use my 1031 proceeds and pay cash for a house or a couple of condos. Or try to get creative and do something larger. That's the real-life opportunity I'm facing right now.

Joel Owens · Answer

Hi Bill,

Everyone's situation is unique to them.

Let's say 2 situations but there are many more.

1. A young professional in their 30's with a family with limited wealth currently. They have 75k saved up and make 100k a year at their job. This type of buyer may be inclined to have more risk to an investment and headache for an extra yield.

2. An older person nearing retirement with a total wealth of around 2,000,000. They have a more secure nest egg and do not want risk to their capital they have built up over decades. They are fine with a 10% cash on cash return versus 15 to 20% or higher. They have already covered their cost of living easily and want something safer even for less returns.

"leveraged multi family deal using requiring a lot of time, effort and complexity?"

If you buy the property right that statement is not true. You can even own apartment buildings out of state and be great. There is a size and a scale where you pencil in a full time property manager and a repair man on site. Usually at about 50 to 60 units or more. If you have say just  a 10 unit then yes you will run into issues and buying yourself a job. At that level the complex is to small to sustain itself with minimal oversight.

I know owners who might go to their complexes maybe once a year or every other year. The res of the time it's interacting with the PM's. On multifamily buildings you are getting professionals that do nothing but that full time. With houses you could land a good PM or many times someone who is taking a leasing gig between selling a house.

If you want no headache at all or even to deal with "managing the manager" then you can look at things like triple net leasing etc.

How much do you have for this investment?? Is it 200k,600k for down payment??

I am not saying individual houses are bad they are just not trouble free like some think.

Chris Adams · Answer

@Bill Alpert I think the answer to your question is to understand what your goals are for this REI. Im going to assume you want cash flow, not long term growth. A multi w a heavy down payment will provide great cash flow (assuming a well performing property).

On top of that with a multi, lets say a 12 plex, if you have 1-2 vacancies your still receiving cash flow/rent from the other tenants. Sf homes 1 tenants is 100% of your cash flow.

A Multi should also have a lower overall maintenance and PM cost compared to a SF.

I personally invest in SFR, for 2 main reasons. I cant manage the down payment on a multi at this time, and I expect nice appreciation on all of my SFH's as the housing market rebounds. I am not near retirement yet.

Mark Ferguson · Answer

for me, it means the difference between 20% + cash on cash versus 8%.  But I am not retiring soon and I have an aggressive strategy.

Grant Van Der Jagt · Answer

Dave Ramsey lectures on how to Debt Snowball. I like to tell people to never get rid of a "productive amortized debt". Here are some great financial reasons to leverage your debt potential. But don't forget about homestead exemptions and advantages of being a popper in most states. If you get injured using these financing options, just swipe your debit card and pay the bills. There is no refinance.

http://www.wikihow.com/Follow-the-Mortgage-Accelerator-Plus-Program