Cash vs Mortgage on 31K Rental Property

[Ahmad Chaudhry]

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

Summary

• 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)

Thanks,

Ahmad

[Soh Tanaka]

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