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?


$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%)


$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?

Thanks in advance!

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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