Cash out & pay 1 property in full or put 20% on 2-3 properties?

Question

Hello there I'm new to the forums, and to real estate investing....my question may be simplistic :) I am considering pulling $55K from my primary home to pay for an investment property in full. The reason(s) being I can't find a mortgage at a reasonable rate for under 50K, but also I want to offer cash to hopefully get the deal. My plan was to cash out the primary (I have around 75K in it) and use for several downpayments instead of one in full cash payment, but then this property came along. Not sure if I should pass on this one, and try to leverage my primary for more than one property. Wondering if anyone might have any insight on this situation? Thanks in advance for any help.

Eric James · Answer

I would leverage for more than 1. Your ROI for an all cash purchase will probably be very low.

Account Closed · Answer

It can work out, maybe.  But you should have a way to pay for some repairs upfront.  Such as the day after closing you get a call from the tenant that their hot water heater breaks, or the furnace just died.  Those kinds of things.  If the numbers work that's great.  Just have some reserves somewhere.

Account Closed · Answer

I was just meaning if you used the entire 55k on the purchase cost do you have the funds to be able to fix it up or pay any other things that come up before it is rented out. or if the 55K gets you everything including.  Based on what you said you won't be fixing the place up with that money.  But at least it is rented out.  However, is it who you want to be renting it out to?

Account Closed · Answer

It all depends on your end result you are wanting.  Yes your ROI will be lower if you pay all cash for it.  But what is your end goal.  Do you just want to break the ice and get a property?  If so do you have reserves to cover closing and any rehab you have to do before you are able to rent it out along with holding costs until it is rented.

If your goal is cash purchased properties and you can float the costs go for it.  But don't rush just to rush.  Find the right property in the right area for your situation.

Elizabeth Enlow · Answer

Account Closed You're right, I wouldn't have any more funds to fix it up immediately. I would hope to put the net profits back in over the course of a couple of years to get the major repairs done. Is this a valid strategy? I don't need the cash flow right now, I have a 9-5 and just want to get started. As for the renters, well, they are obviously not my choice, but they are there, it appears they pay, and they have been renting for 3+ years.

Elizabeth Enlow · Answer

Thanks for all your replies so far!

@Nick Slayter Yes, I do want to get my feet wet! I am by nature quite cautious. I thought perhaps that once I'd brought this new property up to scratch in a year or two I could do a cash out refi on it for another property.

Account Closed The thing is, yes, I do want more than 1 property, but in the range I'm looking I keep getting beat out by cash offers and I can't get a mortgage for such a small amount.  So in order to get my first property and the deal I want, cash seems to be my best option?

Omar Khan · Answer

@Joshua Hollandsworth I've got a lot of land in the Dakotas and Canada to sell you . When can make a deal? :)

@Elizabeth Enlow Maximum cash flow varies from person to person. For instance, if you're willing to be a slumlord, you should invest in Class D properties with all the hassle attached to it. Most slumlords quickly burn out. If you're version or maximum entails a combination of passive management and capital appreciation, then the asset you buy will be very different.

The point I'm making is that there is no one tried and tested approach that will be ideal. What asset you buy is dependent on your expectations, your opinions on passive vs. active management, your capital, ability and willingness to take/manage risks, liquidity needs and time horizons (amongst many factors).

Elizabeth Enlow · Answer

@Omar Khan Yes I would say it was a C type property. Not D, definitely, but C. It is in a 75K property area so around here that's not too awful. However you raise a very valid concern. May I ask, how would you suggest investing (without quotes!) this 55K for maximum cash flow? My problem with looking at B properties, is that the cash flow diminishes to almost nothing. My goal is to replace a portion of my current income with rental income as soon as possible, so I'm mainly considering cash flow. It seems that it's a matter of investing in more B properties at lower cash flow per unit.

Omar Khan · Answer

@Elizabeth Enlow At the #s you've described: sub-$60K investment, 14% cap rate you are probably dealing with a C- or D type property.

Unless, you have prior experience in collecting rent from deadbeat tenants, I would highly suggest you to stay away. At that level, investors confuse paper returns with actual returns. Your biggest impediment, assuming this is a C- or D type property, will be long-term rent collectability.

Don't be enticed by the low entry point. You'll "invest" your money and you buy yourself a headache.

Cash out & pay 1 property in full or put 20% on 2-3 properties?

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