First Property, Cash or Finance?

3 Replies

Hello, I am a first time investor, in a small market. My target is a 30k to 50k buy and hold property for long term income. I am contemplating paying cash for my first property, to lighten the stress of ownership while learning the ropes. However, the lure of multiple financed units, using cash for down payments would produce slightly higher returns. (Higher Risk/Higher Reword). My Naivety tells me to go slow and safe. Can this be contributed to the "FEAR FACTOR"  or does it sound like good strategy to purchase the property outright? 

@Quintin Richard

I personally don't ever think that having a property paid for is a "bad" thing, however there are some things to make you aware of..... If you purchase a property in cash are you going to have enough reserves for a roof that need replaced in year 1? Replacement of HVAC in year 1? Also, a big tax write off can come from your mortgage interest in which you pay each year. Also, if you want to grow, you will probably refinance the equity back out of this property in order to do so, so you could eliminate that step by just putting 20-25% down payment that most lenders require. Hope this helps. Good luck!

You have to do what you are comfortable with. Having the mortgage payment is definitely stressful, because it means there is some money coming out of your pocket every month if you have vacancy. If you had 4-5x as much cash to work with, then paying cash to give you peace of mind and then refinancing later would be an okay way to go, but the potential down side of buying a $30-50k property is a lot scarier (to me) than leveraging something more expensive. What can you get for $30-50k? In my market, anything in that range is in terrible shape and in a less than desirable neighborhood. 

The not-stressful thing about the mortgage payment is that you know exactly what it is every month. Your mortgage payment is not going to start leaking, need to be replaced, stop working, start a fire, flood, have termites... and all the other things that can go wrong with properties and tenants.  It is a very safe risk, because you know exactly what the worst that can happen is (you have to pay it out of pocket if you don't have a tenant). You might think being sure to have enough money to cover the mortgage payment is stressful, the tenants you'll get in a place that cheap will be more stressful, and possibly more expensive than the mortgage.

Along the lines of what @Josh Mitchell   said: on a property that cheap, will you actually make any profit on a 10-15 year timeline? What's your profit after you've replaced each of the big ticket items once?  Very cheap property can be great for flipping, but rarely works for buy and hold.