Cash vs Mortgage on 31K Rental Property

7 Replies

My first post and rental property purchase! I'm closing on a 31K rental property.  I have cash, but am considering getting a conventional mortgage and possibly buying a second rental property.  Here are the two scenarios.  Any insight/advice would be appreciated.

Scenario #1: Pay cash.  Mostly depletes my savings.  I would have to wait for up to 8 months before purchasing another property. Monthly cash flow: ~$410 when rented after expenses

Scenario #2: Get a mortgage.  Wells Fargo is quoting a 30yr fixed at 5.875%,  Closing fees: $1800, 20% down, Monthly payment (P&I): $140.  Monthly cash flow: ~$260 when rented after expenses


  • Purchase Price: 31K
  • Rehab: $9K (I'm cash flowing this)
  • Expenses per Month (Taxes, PM, Insurance, Capex, etc): $240 (Scenario #1), $390 (Scenario #2 with mortgage payment)
  • Rental Income Per Month: $650
  • Cash Flow: $410 (Scenario #1), $260 (Scenario #2)
  • ROI per Year: 12.3% (Scenario #1), $18.4% (Scenario #2)



Scenario #2 sounds like a better option. I'm surprised that Wells Fargo is willing to give a $25,000 mortgage.

I would leverage it. might be able to get better rates from a local bank or credit union.

@Ahmad Chaudhry leverage your credit do not deplete your savings. But if you can get a loan under 40k conventional that’s awesome.

@Ahmad Chaudhry definitely leverage what you have if you can get a loan. I would also seriously inquire why your rate isn’t around 4%. 5.875% is crazy high compared to what the market is at right now. Good luck!!!

Wells Fargo is giving you a 30 yr fixed, at 5.875% and at a loan amount of $25K?

Definitely do that over paying cash. I would check to make sure you know what the prepayment penalty is on it.  

If WF is offering that, I'm sure other banks in the area would too, see if you can get a lower rate, it may be a little high for conventional, but we don't know your credit standing. It also may be a compensating factor for lending at such a low amount. 

I would echo everyone else and say leverage the property. With such a small mortgage and healthy cash-flow, there is no reason to deplete your savings. Leverage and buy another property.

Thanks for the feedback everyone! I'm still shopping for better rates, but right now it seems Wells Fargo is the only bank in my area offering mortgages on loan amounts <40K.  I think the higher than average interest rate is due to the lower loan amount. My credit score is 810. There is no prepay penalty, so I'll be trying to pay this off as soon as possible. I'm a bit hesitant due to the $1700 of closing costs tied to getting a mortgage, but I suppose it's still the better path so I don't deplete my savings.

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