1 cash or 2 leveraged? That is the question.

New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes

Hola! I'm on the verge of purchasing my first RE investment (s). Keeping neighborhood classes out of the argument and risk aversion is irrelevant, what would YOU do? As far as finances and tax advantages go!? Scenario #1 Purchase one property for $42,500 cash. Gross rent: $750 Scenario #2 Purchase two properties for $61,900 each. Leveraged (25% down, which is $15,475) Gross rent each $750 Debt service of about $242

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Michael H.

Rock Hill, SC · Member since 2015 · 104 posts · 209 votes

I have done extensive research and 100% of foreclosures are on properties with a mortgage.

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Daniel P.Pro Member
Investor · Winchester, VA · Member since 2017 · 104 posts · 70 votes
9y
I personally like getting 2 instead of 1 but there are many other important items that I would want answers to before I could endorse one over the other. With that said, you should do what you feel most comfortable with (in my opinion).
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
2, but it depends on your goals. I want to own and control $100m in property. Can't do that paying all cash as then it's game over real soon
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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
I'm curious why your second option that has properties that are 30% more expensive rent for the same amount? Looking back what I would likely do is pay cash for the cheaper property, then later refinance out once the value goes up and get all of my cash back and own it with none of my cash invested anymore
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Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
9y
The more you can finance, the more you make, the more you can scale, and the more flexibility you have.
Having houses paid off provides very little benefit, of any kind, just misled emotional security (not actual increased financial security).
That said, one property for 42K @ 750/month is better than the other units. So you may not want to buy these specific units, but whatever you buy, you should finance.
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Steve K.
Denver, CO · Member since 2017 · 265 posts · 234 votes
9y
@John G. , I'm with @Cody L. , the rent looks better on #1. I'd buy it and leverage it....
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Andrew Cummins
Saint Louis, MO · Member since 2017 · 1 post · 0 votes
9y
John,
You're probably looking at the short term monthly cash flow (not much different) and the risk mitigation of not having a mortgage. But that's very short sighted. The beauty of real estate is the low interest leverage, that is, controlling the whole asset while only putting a portion down in cash. Play out your scenario 5, 10, 20 years down the road and advantages of leverage will become obvious.
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John G.
OP
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
9y
@Cody L. My goal right now is is to create enough cashflow to quit my desk job.
You're right, the rent for the cash property should be a little less, something like $725. (Guess it's a good rental market!)
@Alexander Felice As my goal is cashflow (for the long-term), having a house paid of increases this.
@Andrew Cummins The risk I was referring to was actually the neighborhood class of the $42k property vs the other two.
I've been reading everywhere that banks don't let on something like this $43k house as it's not worth the effort for them. Is this only true for some banks, not generally?
A little more detail... cash house is in Jacksonville, the other two are in Indy.
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John G.
OP
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
9y
Doesn't writing off mortgage interest and depreciation from the two leveraged properties also heavily favor scenario #1? I just asked my accountant and he didn't mention this.
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Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
9y
Except that youre chasing short term, low cash flow. A person who uses debt for cash flow in the long run will always make more. If you really cared about the long term, you would use available debt since it makes profitability much more efficient.
In the long term, leverage beats cash every time, in every aspect of profitability.
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John G.
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New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
9y
Damn, it seems pretty rare to find anyone on the "buy all cash" side of the fence!
So I've decided (as of right now anyway) that I'm going to buy the house in Jacksonvile ($11k down) AND the one in Indy ($16k down), and put some money in reserves for both.
BTW, i never mentioned that these are both turn-key. Morris Invest (JAX) and PARC (Indy).
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Bill Goodland
Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
9y
I know Morris Invest wants you to pay cash for the property, but you could always buy that one cash and try to find a lender to loan like 75% LTV on it. Then repeat once you save more. May be hard to find a lender who will loan on such a low cost property but you may even be able to find private money from family for like 8% to allow you to expand quicker and try to get a blanket loan on multiple properties.
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Account Closed
Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes
9y
Originally posted by @Alexander Felice:

The more you can finance, the more you make, the more you can scale, and the more flexibility you have.
This isn't necessarily true.
We know gross rents on both properties - I want to know what your NET PROFIT is. What's your profit from each one (i.e. how much are you going to actually MAKE)?
You need to factor in variables like landlord insurance; are any of the properties in a flood zone - financed properties will require flood insurance; what is the age/condition of the houses and how much deferred maintenance are you going to have to perform; what are the property taxes going to amount to; a house purchased for cash will have less up front closing costs (no appraisal required, no inspection required) is that a factor in your purchase price; etc. etc.
If you leverage yourself to the hilt, and you have no options for deferred maintenance and they do not cash flow (despite gross rents), then you have NO flexibility. Period.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y
One big question: what do your cash reserves look like? If you're depleted in either scenario, you would be safer owning something for cash. If you have healthy reserves, leveraging is going to create greater wealth faster.
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Teddy Smith
Real Estate Broker · Wilmington, NC · Member since 2016 · 236 posts · 126 votes
9y
Age old question, OP. You'll increase returns, but you will also increase risk. Very hard to default on a property that has no mortgage.
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
"Keeping neighborhood classes out of the argument and risk aversion is irrelevant"
You can't have any sort of meaningful conversation on the matter without considering these things. They are kinda REALLY important to the subject at hand. Risk is never irrelevant. Quality of the properties and their neighborhoods are always important too.
It is kinda like saying I want to try to teach geometry without using Pi or the Pythagorean theorem.
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @John G.:

Damn, it seems pretty rare to find anyone on the "buy all cash" side of the fence!
So I've decided (as of right now anyway) that I'm going to buy the house in Jacksonvile ($11k down) AND the one in Indy ($16k down), and put some money in reserves for both.
BTW, i never mentioned that these are both turn-key. Morris Invest (JAX) and PARC (Indy).
I wish you luck financing ~$50k properties.
I wish you luck buying far away properties in markets you are likely not that familiar with.
I wish you luck buying properties from turnkey providers at full blown retail (or over retail) prices.
I wish you luck ... I suspect you may need it.
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John G.
OP
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
9y
@David Faulkner By irrelevant, I meant that I've already decided that the risk of a property in a lower income neighborhood is one I'm willing to take for a slightly higher return. In other words, I just asking about numbers here. I have and will continue to do my due diligence as far other factors go.
@Bill Goodland I like that idea. Just shot an email to my mortgage broker. By the way, I'd already been pre-approved for financing the 40k property OR the two 70k properties.
@Account Closed I guess I'm putting way too much faith in PMCs placing tenants and minimizing vacancies. But, what I meant by risk was buying in a C-Class neighborhood versus a C+/B-Class.
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John G.
OP
New to Real Estate · the US of A · Member since 2017 · 107 posts · 14 votes
9y
@Bill Goodland Just heard back, I should be able to get up to 75% of the appraised value not to exceed the purchase price if done in the first 6 months!
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Bill Goodland
Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
9y
Originally posted by @John G.:

@Bill Goodland Just heard back, I should be able to get up to 75% of the appraised value not to exceed the purchase price if done in the first 6 months!
Sounds good to me then. I understand everyone else's concern regarding risk and class of neighborhood but as far as I'm concerned, I would go where you see the highest ROI. If you plan to get a loan on the cheaper property I would also just speak to some local agents and see if they could give you a decent sense of whether or not you're paying a fair price for the turn key home, along with seeing the scope of work on the rehab(to better understand future expected capex and repair costs). No way would I pay more than 100% ARV and considering you're paying cash, I don't think you should pay more than 85-90% ARV so you can still pull a significant amount of cash out. Another tip would be to check Trulia crime maps and google street view to make sure there are no red flags that would make it an actual D neighborhood instead of C. Looking forward to hearing about your success no matter what route you choose!
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y
The strangest thing about the leverage verses cash options is that no one ever places any actual value on their cash. They all seem to treat it as worthless.
Very strange approach based on us supposedly being intelligent investors.
I would never replace a 4% mortgage with cash valued at 10%. The numbers simply do not add up.
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Justin B.
Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes
9y
I've seen this type of question asked a lot. The first response is it really depends on your goals and money available. The second response is if those goals are to own as much real estate as possible, using leverage is the way go. For me, had I bought using only cash, I'd have 10% of the properties I do now, much less overall cash flow (although more "per property") and I'd have 10% of the overall appreciation. Plus, I'd have gotten started 5 years later than I did.
If your goal is to get $10k/month income and you have $1M in cash to spend, sure, buy with cash and you're done. No fuss no muss. But without leverage, I (and most everyone else) wouldn't be able to get started (for a long time) or build a portfolio of any real size (in a short timeframe).
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Michael H.
Rock Hill, SC · Member since 2015 · 104 posts · 209 votes
9y
I have done extensive research and 100% of foreclosures are on properties with a mortgage.
5 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Thomas S.:

The strangest thing about the leverage verses cash options is that no one ever places any actual value on their cash. They all seem to treat it as worthless.
Very strange approach based on us supposedly being intelligent investors.
I would never replace a 4% mortgage with cash valued at 10%. The numbers simply do not add up.
The strangest thing about the leverage versus cash options is that no one ever places any actual risk on their leverage. They all seem to treat it as risk free.
Very strange approach based on us supposedly being intelligent investors.
Cash has opportunity cost. Leverage has risk. Both need to be considered. Not all returns are created equal, they must be risk adjusted.
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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
Originally posted by @Michael H.:

I have done extensive research and 100% of foreclosures are on properties with a mortgage.
... and there is also the inverse corollary: It is hard to go broke if you don't owe anybody anything.
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Bill Goodland
Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
9y
David Faulkner I totally agree with you and assume you have much more knowledge and experience than I do. But to me, it sounds like your distaste for leverage assumes that people are not buying smart with significant reserves in case of unforeseen circumstances. It's hard to go broke when you don't owe anybody anything but it's also damn near impossible to get wealthy. I would rather have an abundance mindset and make sure that I can justify my investments based on the top 5 "well what if this happened" questions that I hear from family and friends than live in fear of the sky falling on the real estate market again. From what I can tell, even in the worst real estate crisis in modern history, I don't think too many people who bought for cash flow in stable markets with at least 65% or so LTV on their overall portfolio got hurt but then again I could be wrong.
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