# Math check: Cash vs Mortgage - Rental returns after tax

4 Replies

Hi Everyone!

This is my first non-introduction post, hoping this great community can help me out! I'm also new to real estate investing, so please give feedback and point out mistakes!

I'm looking at a \$70K SFH that rents for \$850, I'm buying cash but thinking about whether to finance (delayed mortgage) or not. I'm looking to build up a passive income stream over time, but I make a good salary at present. Here's my comparison between the two options, can you please check my maths?

**Cash**

\$70K cash payment

\$10200 annual rent, or \$9690 with 5% vacancy

Expenses: \$1600 tax, \$500 insurance, \$969 property management (10%), \$510 repairs (5%), \$510 capex (5%)

Net Income: \$5,601 or 8% of \$70K before tax

Property tax is 26% land, 74% improvements, so \$51,800 depreciated over 27.5 years is \$1,884 per year

\$5,601 income, of which \$3,717 is taxed, \$1,884 tax-free

Assuming 40% tax rate

= \$3717 * 0.6 + 1884

= \$4114 after tax (5.88%)

**Mortgage**

\$14K downpayment (20%)

Mortgage: 4.5% at 30 years fixed on \$56K

\$10200 annual rent, or \$9690 with 5% vacancy

Expenses: \$1600 tax, \$500 insurance, \$969 property management (10%), \$510 repairs (5%), \$510 capex (5%)

\$3408 Mortgage payments (\$900 principal, \$2508 interest in the first year)

Net income: \$2193 before tax or 15.66% on \$14K

Property tax is 26% land, 74% improvements, so \$51,800 depreciated over 27.5 years is \$1,884 per year

\$2193 income, \$1209 taxed, \$984 tax-free (1884 depreciation - 900 mortgage principal)

Assuming 40% tax rate

= 1209 * 0.6 + 984

= \$1,709.4 after tax (12.21%)

Does my calculation look correct?

I know I'm just treating the 5% capex as deductible when it's not (to simplify things), it would need to be depreciated over time. How would factoring this change the comparison?

Just strictly looking at the rent-to value ratio, you found a pretty good one (assuming little rehab is required to make it rent ready), so congratulation!

You always get a better return on your money by having a mortgage. I'll vote for the delayed cash-out refi. You tend to get a better mortgage if you wait for 6 months. Once you get the money back, invest the money. Much better use of your money, IMO.

@Soh Tanaka Thanks for that! I didn't realize you get a better mortgage after 6 months - what sort of rate improvement can you expect and why?

@James Hartley - You might want to talk to a lender for the exact difference, but I think owner occupied gets the best rate, then a rental, then a cash-out refi rental with 6 months seasoning, and finally delayed-cash-out refi, which doesn't have any seasoning time. In terms of why, I don't know. It's just how the rule is written.

You left out a deduction on your all cash purchase. If you assume a opportunity value of 10% on cash then you need to deduct the equilivant of the value of the 56K that you would otherwise have to invest else where.

That is an additional cost of \$466/month to pay for the dead equity which will bring your profit annually on the property itself to \$0.

It could be a good investment if mortgaged but is a bad investment with dead equity. The property is a liability when purchased with all cash.

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