1st time to invest in rentals. what to do if $600,000 in cash?

7 Replies

Have a house in San Jose, Ca. Planning to sell. Will have $600,000 equity after I sell. Planning to buy apartment units cash in an area with good cash flow. Will this be a good idea to buy cash? I just realized that you have more cash flow if you pay cash. Hubby and I will continue to work for now since both of us work in a medical field and hopefully wants to retire soon with passive income.

Don't buy all cash to get higher cash flow.  The net result is going to be a loss.  Here's why.  The elimination of the mortgage payment (added CF in your mind) isn't enough to cover the out of pocket cost to you.  

Before this makes sense, you must understand there is a difference in cost to you between your own home and a rental property.  Cost to you = whatever you have to spend (out of pocket)...and NOT what you don't have to pay for.  In your own home, you pay for everything.  In a rental unit, your tenant pays for everything (through the rent) except the down payment.

So, if you get a loan, the cost to you on this rental property will be $120k (20% of $600k).  If you pay cash, the cost to you if you pay cash is $600k.  Why is this important?  You must first recover all your out of pocket costs (though CF) before you start to make a profit

Now which one really is the least expensive (lowest cost to you( way to go?

As others have said, don't buy cash. Do a lot of research before you need to 1031 and figure out what you want to buy. I'd buy a value-add small appartment in the midwest if you are going for cash flow.

@Rhyna Orillaneda , have you thought about using your house as Airbnb to get active cashflow? If you have that much equity, you should consider refinancing it, and purchase another property with it and have dual cashflow. Double the depreciation, and interest write off. Happy to walk you thru it if you like.

You get more cash flow but it doesn't equate to higher returns. It equates to significantly lower returns when you compare it to you how much you had to put into it. So the higher cash flow is the return on the full price of the property you paid in full for, whereas with leveraging, the lower cash flow is only in relation to how much you put down, which probably isn't much. So the returns actually end up being higher, despite the seemingly lower cash flow, with leveraging.

Originally posted by @Joe Villeneuve :

Use your cash to buy flips only...that way you will get it back to use again, and again.  Leverage rentals.  Let your tenants pay it off through the rent.

Mr. Joe, you are a genius Sr.