Advantages of Paying Cash for a Rental?
Hello, in the next year or so I will have 50,000 saved to buy a rental with cash. I have almost all of my consumer debt paid. Are there any advantages such as owning a property in your name? The only thing I see I will not get an ROI at 1,000 a month for 4-5 years or so. I don't want to finance and be stuck with a mortgage if I do not have a tenant. Advice & tips are greatly appreciated. I'm a Newbie.
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Leverage is one of the most powerful tools in the real estate investors toolbox and not using it is like a carpenter choosing to not using a hammer. Leverage is using borrowed debt or equity to increase your return. The leverage is also known as the mortgage. In real estate you can often buy a property for 20-25% down. Let's say that is a $100,000 property, you will only need to have $20,000 to $25,000 to make the purchase. On the other hand if you want to purchase $100,000 of stocks or bonds you will need to fork over $100,000 cash. In the future, as you gain more properties, there's even a possibility you can leverage the equity you have built in properties you have held for a while to purchase additional properties. That basically means you are buying more properties without having to spend any of your money. Back to the $100,000 property that you purchased for about $25,000 of your own money, we can assume the property meets the 2% rule so the rent is $2,000 per month. We will also assume your expenses are 50% of the income so you have $1,000 per month to cover the mortgage of about $500/month which leaves you with $500 per month in your pocket per month or $6,000 per year. This equates to about a 24% cash on cash return.
Your fear of having a mortgage while not having a tenant is a valid fear but that is why you need to buy right. For example, don't buy in an area where the population and household count is decreasing or where the unemployment rate has been historically higher than average. When you buy you should account for the market average vacancy rate and have enough in a reserve account to make it through those times where you have a vacancy or need to make repairs.
I'd get familiar with your market and the BP calculators because they account for the expenses, including vacancy. BP also does webinars on a regular basis that can help you gain a better understanding of the underwriting.