reinvesting using financing

7 Replies

I have just been able to purchase my first 2 properties with cash. I had to do so as I am permanently disabled so have very little verifiable income. I did use nearly all the cash I was able to set aside to do so. It was recommended to me that I now take money out of those properties to purchase more with financing. Obviously my cash flow on the 2 would go down and I would have new cash flow from more properties. But the cash flow from those would also be affected by having mortgages. What is the benefit of doing this? I do need to read up on this but thought I would throw this out there too.

@Timothy Nelson - The benefit would be to grow faster. With interest rates so low you can generally get a better return on your money by investing in more properties. So if the interest rate is 4.5% and the new properties have a ROI of 10% then you are making 5.5% on the loan

Brie Schmidt, Real Estate Agent in Wisconsin (#57846-90) and Illinois (#471.018287)

economies of scale... the theory is "better to make $50 at 20 different places than 2 properties making $500 each".

@Timothy Nelson , they key, as @Brianna Schmidt  mentioned above, is that your financing should allow you to actually earn more than you were previously.  So, if your 2 properties each earn you $500/month then refinancing will definitely lower their cash flow, maybe to $300/each let's say.  But, if it allows you to acquire another property that earns you $500/month again, then you are now making $1100/month total instead of the $1000/month you were originally making.  

Plus, as mentioned by @George P.  , you have diversified over 3 properties rather than just 2.

        One of the best benefits of scaling up a little is the effect of vacancies.  Vacancies are your largest expense.  When you have a tenant turnover you not only have no income (rent) coming in but you generally have to spend money to clean up, paint, etc.  With your 2 properties one vacancy cuts your income in half--a big hit.  If you have 4 properties and 3 are rented while one is vacant your cash flow is much better.  There is a limit, of course, to how much you want to manage but it is not really much harder managing 10 than 2. 

       Also, as your portfolio grows and your cash flow increases you may reach a point at which you feel it makes sense to hire a property manager to deal with the tenants and rental prep.  Connecting with a good property manager does not eliminate the work you must do but it should be easier for an owner to monitor a property manager than monitoring tenants.

Yeah, thanks all. I did sit down and do the math (could have done that first!) and understand why I should do that. Awesome!!

it depends on your ultimate goals, but refi will allow quicker growth and more long term cf

All depends on what you want. If you want to grow slowly, but have very low risk, than avoid debt. I have a friend who bought 8 houses and now is goal is to pay off all his mortgages as fast as possible. I, on the other hand, want to buy as much as possible. But you will definitely be able to grow faster with debt.

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