Cash purchase for Single Family Rentals or?...

5 Replies

So here's my theory. I have no rental property now. Going into this I am considering paying cash for a SFR every 12-18 mos. In my area (East of Dallas TX) inexpensive homes go for 200K. Is there a downside to buying one at a time and having them all paid off? I just want the residual income from the property. Not sure I am as concerned with having 10 houses all leveraged, VS 2 completely paid off. I like the 200K range as that changes who you are dealing with somewhat. I know every time I moved out of a rental, the landlord couldn't believe how good of shape it was in.

I know of people that is doing what you are doing, not many, but if you have financial resources to do it, it's great. Being a NYC investor, I am well aware of the up and downs of the market, and I have a feeling the market had a great run up since 2008-2009, and your strategy would insulate you from market down turns.

If you concentrate on SFR's, then you would have to have a strategy of managing them after you picked up a few. So the issue would be if you own several SFR's worth $200,000 each, with leverage, wouldn't it be more efficient to own a small apartment building or strip mall somewhere. Of course, on-line shopping had affected the value of commercial properties somewhat.

So the answer is, no big downside, though you can build up your portfolio faster is you use a little leverage. The key is cash flow, so if you purchase in good areas, mortgage free, your cash flow is pretty much guaranteed.

The down side of buying with cash is you are losing money. You would do better investing in a REIT or income fund than buying SFHs.

If you consider mortgages are at 4% and the value of cash to most investors is a minimum 10% return you are losing 6% annually on your cash. To look at it another way all you are earning is the mortgage savings which at 4% is not worth crossing the road to invest.

What you want to do is consider the return on your 200K at 10% is equilivant to $1732/month. Deduct that from the monthly rent on a property and what is left is what the property itself is actually generating on it's own. You will likely discover the property, after all other expenses, is deep into negative cash flow.

Paying cash turns a investment property into a liability not worth carrying when you realise it is only your own money that you are using to BUY your cash flow.

Paying  Cash to generate cash flow is not investing.

Nothing wrong with this approach. Don't buy into the leveraging stuff. Yes, it is smart to be strategically leveraged somewhat, but I'm with you. I pay cash for all of my houses and sleep well at night knowing that I won't lose all my investments if the equity starts to drop due to a housing market crash.

Also, paying all cash allows you to make low ball offers which will save you a lot of money up front when you make the initial purchase.

Best of luck!

@Derek E.

The only difference is you will be losing your own cash in equity instead of the banks money. No reason in either case to lose the investment. 

I do understand there are hyper conservative investors, I do not understand why they invest in real estate. I prefer to earn money off of someone else's risk, ergo leverage. 

Originally posted by @Thomas S. :

@Derek E.

The only difference is you will be losing your own cash in equity instead of the banks money. No reason in either case to lose the investment. 

I do understand there are hyper conservative investors, I do not understand why they invest in real estate. I prefer to earn money off of someone else's risk, ergo leverage. 

No. The difference is you go from owning 25 homes and living large to struggling to make payments and lose all of your hard work.

I prefer to sleep well at night knowing I'm safe. 

SOME leverage is ok for me, but not much. 

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