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.
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.
Hey Brandon. Welcome aboard. I would recommend not using your own money on a rental or at least not all of it. With rentals, the tenants pay down the debt service. The majority of your own money should be left alone as reserves (repairs, roofs, tenants not paying, closing costs). You'll be able to scale so much quicker by using OPM (other peoples money)
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.
One of the biggest advantages of paying cash for properties is getting your offer accepted over other offers that have contingencies. And equating buying a property without leverage and a carpenter not using a hammer is a silly analogy as a carpenter can't accomplish his work without a hammer but a cash buyer of rentals certainly can. Hope you're able to find one of those 2% properties and get your REI career under way.
@John Teachout cash offers come with contingencies too. @Brandon Coffman not sure how long it took you to save the $50K but think about when you spend that on 1 property. It will take you similar time before you can buy the next one using this methodology. Also, you better not spend all $50K because you are going to need some reserves for the unexpected. If you have reserves then the place being vacant for a month or two is not as big of a deal to be concerned with. Lets say you used $15K as a down payment on 1 house and finance the rest with a bank. You got $35K left. You can potentially buy another property with financing and have $20K in reserve. Just another way to look at it. Obviously the real numbers depend on your market and area you are buying in. Good luck!
...we can assume the property meets the 2% rule so the rent is $2,000 per month.
LOL. As long as we are assuming, lets go with 1% interest, 25% appreciation, 0% vacancy, the property is rezoned commercial, Amazon and Facebook get into a bidding war on your property.
Hi @Brandon Coffman! There are advantages and disadvantages of owning property in your own name. You will see arguments for both owning in your name and in an LLC. I don't believe there is not any right answer and is a personal preference.
Why do you believe you won't get an $1,000 monthly ROI after 4-5 years? Is it because of having a mortgage on the property?
It is possible to cash flow $1,000 per month on a property. It comes down to conducting proper property analysis and selecting the right property in the right market. If you are looking for cash flow, which it looks like to me, you will want to look for those markets that are cash flow plays, such as the Midwest or Southern states.
It is possible to purchase rental properties in cash and still cash flow well. I purchased my first three multifamily rental properties in cash. It all comes down to analysis, analysis, and analysis. Get good at it along with knowing what you want, and you will be able to find these nuggets.