Buy 1 outright or finance 2 or 3?

8 Replies

Hello everyone - newbie here with one property in ownership, a so-far/so-good performing double. Cash flowing at ~$200/month/unit.

Have $30K in cash and want to make the next deal or set of deals. We all have goals and my goal is acceleration to 40 units in 5 years, each unit producing roughly the numbers above. In my market, doubles can be had for $50K and will produce after everything but income taxes (PITI, PM, vacancy, etc etc) ~$200/unit/month. For this next move - I am looking at a decent 33K property that will get $1000/month in rents as a potential outright cash purchase - or - using the $30K as down payments to purchase 2 or 3, 30-50K properties using conventional financing (provided my DTI ratios are within margins at that point to get mortgages 2 through ??)

Thoughts/comments/advice? Thanks!

I would check with the sellers to see if any are able/willing to hold paper for you. It will save you a fair amount on closing costs. This will stretch your budget even farther.

Otherwise I always recommend leveraging your cash. If your numbers work out nicely, your tenants pay you to build equity in your properties.

You need two years of tax returns before most banks will count rental income towards your gross income.

Mortgages for less $50K each can be difficult to obtain. So I would check out Seller financing or Local banks and/or credit unions for financing. The availability of financing or lack of it, will dictate what course of action to take.

Real estate is the place to grow your money up. Paying all cash for a property and holding it free & clear is a waste of time. You might as well put your money in a high yield savings account down at the bank.

Always use leverage to buy. Let the tenants pay down the mortgage and let appreciation/inflation increase the equity. At some point in the future, harvest that equity and either 1031 into a larger asset or invest in a higher yield producing business. In your case, buy a lot of apartments, then sell off the losers and pay down/off the 40 you want to keep.

My buddy told me the other day that if an investor cashed out his equity on the 30 homes he is currently holding, and assumed all the debt, that buyer would get a 2% return.

I started with notes and condos. Got into houses. Then small apartment bldgs. Now I own commercial. That would have never happened if I paid for my first house all cash and held it free & clear.

Ian, I am in a very similar position as you are and am looking for the same answer. I struggle between the two options, and keep coming back to paying cash for the first then using the equity to finance the second. I am looking at condos. Please let me know what you decide, as well as you reasoning and I will do the same if you are interested.

I'm with Aaron on this one.

Assuming everything is equal, 3 properly leveraged properties will out earn 1 thats paid off.

You get 3 streams of income, resulting in 3 sets of cash flow, 3 sets of depreciation, 3 mortgages being reduced and the security of 3 cash flowing properties to cover vacancies for each other when they come up.

@Ian C. ...leverage wisely..I'm starting to pull cash out on free and clear to continue building my portfolio while prices are still low...However, I plan to do at about 60%..

Thanks everyone, definitely leaning towards the 2-3 purchases. Will keep you posted.

I'm in the same situation, Ian, I have one property, and some cash. I'm having trouble finding loans for low cost properties. Will check out the smaller local banks. Any other ideas? I'm also looking in the $50K range.

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