Quote from @Robert Quiroz:
Hello All,
I will have around $1M in capital that I'm looking to generate 8-10% CoC returns for the purpose of replacing active income. I've decided to go the financing route to protect the value of that $1M against inflation over the next 40 years. However I wanted to get people's opinions here for discussion. I've listed some considerations below for financing vs buying in cash for multifamily home. I'm looking at MFH $450k and up in the Ohio markets (Dayton, Cleveland and Columbus).
Cash:
- Higher CoC returns
- No risk to being having negative cash flow with a loan (excluding capex)
- Buying/negotiating power with speed of transaction
- No interest payments
- No risk of foreclosure
Financed:
- Possible exponential equity growth
- Growth of initial investment is leveraged ~4x and most likely beat inflation in a decent area
- Mortgage interest tax deductions
- Better financial efficiency from more doors
- Better diversification across more properties
Are there other considerations I'm missing? The ultimate goal here is to retire as soon as possible and not wait to grow equity over 5-10 years to be able to retire.
@Robert Quiroz
Hi Robert,
Just an observation... you have "higher cash on cash returns" under all cash deals - it depends on how you view that. If you are talking about "Rate of return - then that actually belongs under "financed" - as with financing you only have to put 20% (max) down on the property - therefore your cash on cash return (as a percentage rate - which is usually how it is viewed) will be better with a financed property. The total cash returned will be less on a financed property - but in all actuality it is better to finance because you would be able to do far more deals with your $1mm and ultimately you would come out way ahead financing all your properties. Not only due to better cash on cash - but because of appreciation on more properties - which is where much more money is made than on the cash on cash side.
I know you mention $400,000+ multi-family properties - but the numbers below will work out the same regardless of price point - I just chose simpler numbers to make the calculations easier to follow:
Example: $100,000 house - $1,000/month rent, $100 taxes/month, $100 Insurance/month - 7% on Financing
Cash Versus Financed:
Cash:
$100,000 invested. $12,000 in gross income, less $2,400 in expenses = $9,600 yearly return
$9,600/$100,000 = 9.6% cash on cash return
Financed:
$20,000 down - financing $80,000 at 7%
Monthly payment (P&I for 30 years) $532
With Taxes & Insurance $732/month
Net income: $1000 - $732 = $268/month * 12 months = $3,212/year
$3,212 / $20,000 = 16.08% Cash on Cash return
I would also point out that interest payments aren't really a negative on the financing side, because your tenant pays all the interest. It also gives you a tax deduction as well. So interest really doesn't bring a 'down side' in the big picture.
Appreciation Example:
10 - $100,000 cash properties appreciating at 6%/year = $40,000/year appreciation
50 - $100,000 financed properties ($20,000/unit down) appreciating at 6%/year = $300,000/year appreciation
In addition - you get to depreciate 3.3% of your properties each year.
3.3% depreciation on $1,000,000 in cash properties = $33,000 in depreciation
3.3% depreciation on $5,000,000 in financed properties = $165,000 in depreciation.
All the best!
Randy
