I have done extensive research and 100% of foreclosures are on properties with a mortgage.
I ran your numbers quickly and basically you are getting about the same ROI either way...maybe slightly more with cash.
I assume 25% is to include closing costs and other fees.
Not sure if its possible to get a mortgage for less than 80k (after down payment). Most banks have a minimum.
IMO, cash is best here.
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.
I'm not at all against leverage ... I think it is a powerful tool for growth if used with great care, but one must also be aware and respect the fact that it can also be a powerful tool for destruction. Whenever I see arguments get tilted far to one side, I feel the need to chime in and show the other side of the coin. I live and invest in S.Cal for the last 15 years (through the great recession) so believe me, I understand volatility and risk management. In hot markets, everyone is pro leverage and I tend to play it conservative. Of course, nobody thinks they are over leveraged until there is a recession, when your model is stress tested, that is when you get to find out if you are over leveraged or not. Equity, cash reserves, and high quality cash flow (from good, stable tenants) is what will save you in this case ... cash flow alone won't do it, and cash flow from low quality assets won't either ... I bought plenty of foreclosures who were once owned by folks who made that mistake. When the market crashes, and there are buying opportunities everywhere, that ironically is when people say the sky is falling and all leverage is bad, and that is when you want to leverage up most (but still sensibly) IMO to take advantage if you want to grow your portfolio. Also, as you progress along in your investment career, growth becomes less important than wealth preservation ... this is when many investors tend to go lighter on the leverage because their portfolio is already large enough and protecting it is more important than growing it. Never risk something that you have and need to buy something that you don't have and don't need. Also, just to stir the pot a little more, I disagree that it is damn near impossible to get wealthy without leverage ... "If you're smart, you don't need it; and if you're dumb, you shouldn't be using it." -Warren Buffet. So, in summary, it is not at all black and white IMO as some may think ...
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.
I believe we are negotiating different points though. You're speaking of under insuring for flood, or miscalculating maintenance costs, incorrect property tax assessment.
These things are irrelevant to which is more profitable, cash or leverage, because they apply to both and aren't mitigated by either. They are a symptom of mismanagement, and mismanagement will make any strategy ineffective. for example: If you pay cash for a house and didn't account for a 10K roof and don't have the funds to repair then It doesn't matter which asset management strategy you prefer, you're toast!
So I would say we both get to be correct ;)
@Alexander Felice I am speaking from the fact that if you aren't making a profit, then you CANNOT scale up and you have NO flexibility. It doesn't matter if you own the house outright or if it's financed.
If you go the route of paying cash, and you aren't making money, then you're going to end up paying money out of your own pocket in order to not lose the house. You aren't going to be able to scale up because you don't have a profitable pool of money to pull from on your next deal.
If you go the route of financing, and you aren't making money, then you're going to end up paying money out of your own pocket in order to not lose the house - and you aren't going to get any more financing because you aren't making any money.
Without knowing what your net income is (which the OP doesn't in his original post), then you don't know if you're making money. Making money is absolutely relevant. Accounting for factors like insurance and property taxes is absolutely paramount.