Hey , my name is Eli i am 19, i live in upstate newyork,i am looking forward to get started in real estate, i have a house that my father gave me before he died that is completely paid off and worth like 150k , and here the multi family homes are very cheap like i could buy a multi family home that is 3 units for just 55k and could return me an income of 1500 to 2000 a month in total ,what should i do if i sell my house ? Should i put multi down payments and buy a lot of multi family homes or should i buy 3 or 2 that are completely paid off and then buy others with a loan? Thank you
@Eli Kfouri You have to answer that question for yourself. Pros of each below. All-in-all I would say unless you KNOW investing and being a landlord is the life for you, buy with cash. You'll more easily be able to exit if you hate it. One big con to financing if you are new is that if you don't know what you are doing and buy bad investments, you'll magnify your losses.
Advantage of buying in cash
- Better price. You can often get a property for less with a cash offer. You can close more quickly and not require repairs. You can refinance (get a mortgage) later at 65% to 75% of the purchase price.
- Avoid closing costs of a mortgage. Just getting the financing will cost you $2K-$3K.
- Better cash flow. This does not mean your money is working harder for you. It means that all the income after taxes, insurance, repairs, and capital expenditures go in your pocket. With a mortgage, besides interest, you are paying down principal. Your net worth is growing as you pay down the principal and increase equity but it is not money in your pocket.
- Easier to sell if you decide being a landlord isn't for you. You've avoided the extra costs of financing, you don't have to worry about covering the mortgage if you are really desperate.
Advantage of buying with financing
- Leverage. That means you get a better return on money invested. Without going into the math, you may be able to buy four properties with financing compared to one with cash. If you do it right, you could make twice or three times as much (not four, that would require 0% interest loan) as you would if you bought just one property for cash.
- You can often finance a greater percentage when buying than with refinancing. For instance, 80% vs 65%. If you live in the house you could get an FHA loan and finance 95%. Then move in a year and do it again.
- Buy more properties. The less you have in a property, the more properties you can buy.