All cash or nah in Memphis
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThis time, let me try to give you an answer without the "clouds" in the way.
The bottom line is this...math.
1 - If you put $150k cash into a $150k property, and the property has positive CF, that property costs you $150k.
2 - If you put $150k cash into a $150k property, and the property has negative CF, that property costs you $150k...plus, all the negative CF...and is a bad deal.
3 - If you put $30k cash into a $150k property, and the property has positive CF, that property costs you $30k.
4 - If you put $30k cash into a $150k property, and the property has negative CF, that property costs you $30k...plus, all the negative CF...and is a bad deal.
...but,...
5 - If you put $150k into a property that only gets $1000/m in CF ($12k.yr), it will take you 12.5 years to recover your cost ($150k). That means you don't start making a profit until the middle of year 13...and that's a terrible deal.
6 - If you put $30k into a property that only gets $500/month in CF ($6k/yr), it will only take you 5 years to recover your cost ($30k)...and that's a great deal.
...further more...
7 - If you spend $150k on one $150k property all cash, you own $150k in property value. If your PV appreciates 10%, you only gained $15k in PV and free equity.
8 - If you spend $150k, $30k per property (DP), that's 5 properties worth $150k each, which means that $150k is now buying you $750k in PV, and that 10% appreciation will get you an additional $75k in PV, and free equity.
52 Replies
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesExcept the score of this game is based on dollars. How do these percentages translate to dollars...both now, and how they impact the future dollars that are compounded from them?
Quote from @Bob S.:
Quote from @Account Closed:
Quote from @Bob S.:
Quote from @Nic S.:
I have about $150k to invest into my 5th property. I am leaning towards and all-cash buy in Memphis with a fantastic turnkey operator. My focus is on cash flow.
What am I not thinking about??
I am leveraged on the other 4 properties and like the idea of having a paid off asset.
All my deals are cash, as is ,this way you get a better deal. 10- 15% NET caps, then if you refi COC is much higher,
With 8% rates? Sounds sussy.
this is why we only deal in cash, But even still, 8% rate with 15% net ,still ahead of the game
Good Luck
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes3y
Quote from @Joe Villeneuve:
Quote from @Nic S.:
I have about $150k to invest into my 5th property. I am leaning towards and all-cash buy in Memphis with a fantastic turnkey operator. My focus is on cash flow.
What am I not thinking about??
I am leveraged on the other 4 properties and like the idea of having a paid off asset.
Why do you want a paid off asset?
Why do you want to minimize the power of your cash?
Why do you want to lose money from the day you buy?
Why do you want to pay full price for your property, instead of having your tenant pay for the vast majority of it...for free?
Why do you want to buy your cash flow?
Why do you want to lengthen the time before you get profit?
Why do you want your $150k in cash to equal $150k in Property Value, when it could be worth $750k instead...from the start?
Why do you want to have the future percent appreciation applied to $150k in PV, instead of $750k?
Why do you want to start at a loss, and lose even more money exponentially starting from the day you close?Why, oh why?
Your posts really make me think
- Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes3y
Always use OPP- "other people's money" if you can. If you can't get a loan, then cash is fine while the rates are higher right now- and then you do a new loan and pull cash-out when the rates drop. Alway be making your money work hard---- NO couch potato money sitting around not working.
- 3yDean HarrisBusiness MemberReal Estate Agent · Memphis, TN · Member since 2015 · 1k+ posts · 1k+ votes
Im still trying to figure out why anyone buys TK?? :)
CrestCore Realty4.713 Reviews - 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Luka Milicevic:
Quote from @Joe Villeneuve:
Quote from @Nic S.:
I have about $150k to invest into my 5th property. I am leaning towards and all-cash buy in Memphis with a fantastic turnkey operator. My focus is on cash flow.
What am I not thinking about??
I am leveraged on the other 4 properties and like the idea of having a paid off asset.
Why do you want a paid off asset?
Why do you want to minimize the power of your cash?
Why do you want to lose money from the day you buy?
Why do you want to pay full price for your property, instead of having your tenant pay for the vast majority of it...for free?
Why do you want to buy your cash flow?
Why do you want to lengthen the time before you get profit?
Why do you want your $150k in cash to equal $150k in Property Value, when it could be worth $750k instead...from the start?
Why do you want to have the future percent appreciation applied to $150k in PV, instead of $750k?
Why do you want to start at a loss, and lose even more money exponentially starting from the day you close?Why, oh why?
Your posts really make me think
Is that good or bad? LOL
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 31k+ posts · 20k+ votes3y
Quote from @JD Martin:
I definitely vote "nah". Probably the only chance I'll have this year to use "nah" in a sentence :)
How do you know it's a fantastic turnkey operator?
Nah dawg....You can use it in a multitude of situations. Believe in yourself the same way wholesalers believe in their ARVs!
- 3yDean HarrisBusiness MemberReal Estate Agent · Memphis, TN · Member since 2015 · 1k+ posts · 1k+ votes
Quote from @Joe Villeneuve:
@Joe Villeneuve I'm happy to chat with you or email with you. Shoot me a PM and I will explain my reasoning. Its crystal clear though.
CrestCore Realty4.713 Reviews - The 150 K is earmarked specifically for real estate investment. It does not include any of my savings or checking accounts if that is the question. I think another thing that I’m considering is the DTI I’m not sure if I could qualify for another house given I already have five loans and a single income family. I know they are things like DSCR loans and the like which carrier higher interest rates me into my cash flow like I mentioned, the beginning of post cash flow is what I am going after now.
Quote from @Dave Skow:
@Nic S.- do you have a lot of cash over and above the 150K - if so - go for it .....if not - I would recommend saving some cash and leveraging a bit ...maybe take a loan out for 50% ltv .......these days - Cash is King
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesGo ahead and PM if you like, but I don't see why you can't answer my question here if it's that "crystal clear".
Quote from @Dean Harris:
Quote from @Joe Villeneuve:
@Joe Villeneuve I'm happy to chat with you or email with you. Shoot me a PM and I will explain my reasoning. Its crystal clear though.
@Nic S. I usually would say always use leverage, some of us my be coming to a spot where it may make sense to pay cash short term then refi later on. Here's why:
If you are thinking buying turnkey, i assume you are looking for extremely passive ownership, as do I. From my experience a truly turnkey property from a full service provider is probably going to have an actual COC return of about 4-10% annual based on the actual year with a leveraged property. Un-levered may be a bit lower. Probably not the best idea to borrow at 7-8% while losing money in certain years. if you want to get a property during the high interest rate environment then i may look at paying all cash now, then refinancing as soon as interest rates made sense. The bigger return overtime will probably come from appreciation and you don't want to miss having appreciation on several leveraged properties. Just my two cents
- 3yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Quote from @Joe Villeneuve:
Quote from @Reed Rickenbach:
Quote from @Bob S.:
Quote from @Joe Villeneuve:
That means:Quote from @Bob S.:
Quote from @Joe Villeneuve:
In most cases you are an example of "stepping over a dollar to pick up a dime".Quote from @Bob S.:
Quote from @Nic S.:
I have about $150k to invest into my 5th property. I am leaning towards and all-cash buy in Memphis with a fantastic turnkey operator. My focus is on cash flow.
What am I not thinking about??
I am leveraged on the other 4 properties and like the idea of having a paid off asset.
All my deals are cash, as is ,this way you get a better deal. 10- 15% NET caps, then if you refi COC is much higher,
Nope I like having zero debt. If I choose to refi then my COC is much higher. Having over 80 doors is not so bad with zero debt,
All the best
1 - You like losing money by leaving it on the table,
2 - You like to pay full price for a property (even if you get a deal, paying all cash is paying full price)
3 - Minimizing future appreciation gains by sticking all the cash in one property,
4 - Maximizing your exposure, and thus maximizing your risk,
5 - Lengthening the time it takes to turn a profit,
6 - Paying to have a tenant, instead of having the tenant pay you,
7 - Minimizing the value and buying power of your cash,
...there's more, I would have stopped at #1.Leaving money on the table, never. All my purchases are always about 50% of the arv. Full price, sure if full price is 45k, with 10k in rehab and value is 125k, I will pay " full price" all day long, LOL. at 20% NET CAP its all good. I do not like debt, I like owning things outright. Maybe its because in my late 20s I had a 10k a month nut just to break even. Well, when things went south, it got ugly fast. So maybe this is my " fear" Cars, boats, personal home, and investment properties I like to own fee and clear. Having loans/ debt is not a bad thing IF you know how to maximize your returns. SO, one way is not right or wrong, just different,
All the best
This is usually the case with this argument. One side is arguing with logic and one with emotion/personal anecdote. The all-cash buyer is aware of the lower returns but has a personal reason for doing so... and that should be the end of the argument.
No argument, just verifying the facts. Like you said, it's either logic or personal, or the way I would put it, math or emotions. Trouble is, when the choice is between logic and emotion, emotion usually wins the battle, but in the end loses the war.
One of the things I hate about reading some of these posts, is it is hard to tell the tone of the conversation. Many of your posts across the site are really good Joe. I don't agree with them all, but I respect your views and learn from many of your posts. But this one comes across not like advice on what to do, but condescending (the way I read it) and from the view that regardless of personal goals/expectations, there is only one right way to invest in real estate. In my opinion, your points are great but they lose their appeal because it is so argumentative. It is so, "I'm right and any other way is wrong".
If the reasons are personal for investing a particular way, isn't that strategy the right one? I personally hate holding real estate with long-term leverage. I like using leverage to acquire, but seek to reduce the principle in the shortest time period possible. Why? It's personal. My learned experiences and experiences watching others for the past 25 years tells me leverage is good when used correctly and can wreak havoc when even slight mistakes are made.
Now, when I have my assets paid off, I can re-leverage and use that same dollar a second time. Or like me, use the same dollar a third time. I'm not investing for the cash-flow today so I structure debt for principle reduction and quick pay-off. But, that is my plan and the one that I am comfortable with. I've had many investors who I respect try and tell me that I should use leverage differently, but when I look at my portfolio, I sleep well.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
If I offended someone, I'm sorry, but it's not me...it's the math talking. LOL. Math is never wrong, or emotional. It can't be rationalized by using emotions...it has no emotions. There are no "participation trophies" in math. You're correct when you say those that will use emotions to make their decisions are correct...for them. However, that doesn't change the math.
On a side note, if I had equity building up in my properties, losing money and exposing my property to lawsuits (more and more as it grew),...that's when I have a hard time sleeping at night. LOL.
On a side note, right next to the one above, refinancing isn't using your money again. If it was your money, you wouldn't have to pay for it. It's the banks money, and they are "selling" it to you...that's what the bank's business is,..."selling" virtual money. Your money is the equity that is used as collateral. You're leveraging your money, not using it again.
That's not to say refinancing doesn't work...it does, but not as well as selling the property. Keep in mind, when you sell, you're maximizing the power of your equity, and increasing your CF. When you refi, you're reducing the power of your equity, and reducing the CF of the property you're refinancing. The BRRRR method is a linear return. Selling is exponential...and much faster and profitable.
- 3yAlicia MarksPro MemberFort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes
Quote from @Dean Harris:
Im still trying to figure out why anyone buys TK?? :)
There are lots of reasons. I know many professionals that don't have the time to manage rehabs, but they have the funds to deploy and don't want to have a partner. Other people are not comfortable with managing teams or understanding rehabs. Some know that managing tenants is not in their skillset. All of those are valid and cause people to look for TK. I have purchased TK before as well as BRRR and actively manage my local rehabs. I still have to manage the manager, but finding a provider with a good reputation takes some of the build your team challenges out of the equation.
- 3yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Quote from @Joe Villeneuve:
If I offended someone, I'm sorry, but it's not me...it's the math talking. LOL. Math is never wrong, or emotional. It can't be rationalized by using emotions...it has no emotions. There are no "participation trophies" in math. You're correct when you say those that will use emotions to make their decisions are correct...for them. However, that doesn't change the math.
On a side note, if I had equity building up in my properties, losing money and exposing my property to lawsuits (more and more as it grew),...that's when I have a hard time sleeping at night. LOL.
On a side note, right next to the one above, refinancing isn't using your money again. If it was your money, you wouldn't have to pay for it. It's the banks money, and they are "selling" it to you...that's what the bank's business is,..."selling" virtual money. Your money is the equity that is used as collateral. You're leveraging your money, not using it again.
That's not to say refinancing doesn't work...it does, but not as well as selling the property. Keep in mind, when you sell, you're maximizing the power of your equity, and increasing your CF. When you refi, you're reducing the power of your equity, and reducing the CF of the property you're refinancing. The BRRRR method is a linear return. Selling is exponential...and much faster and profitable.
Thanks for the reply - Great points - and again I learn to look at something from a differing view.
I understand your points, I think, but, how does the current market affect your argument? Math may be math, but how do the current market value of a property, the current interest rate environment, even the location of the property affect the math if at all?
On the equity comments. For discussion sake, let's use a $100,000 property. If I put 30% down and borrow 70% and pay it off in 10 years using every dollar from rent and not putting in any additional money. Technically I've earned no return on my $30k, but have paid back the bank their $70k. The next day, I borrow $30k on my equity in the property and purchase another $100k property. Ignoring rates for this conversation, I now have $100k in notes on $240k (original property worth more now) of property and my original $30k still in the first one since I used 100% of the rent to pay it off? If that is the case, I would have used $30k to buy $24OK in property over a 10year period, but have not gained much else at that point. I am trying to see the upside and the downside of this scenario.
If I sold the first property for $140k (plausible over a random 10-year period), I would have $140k and could then use that to acquire $450k worth of property (at 30% down). I would have $140k of my money in, but would own more property, earn a higher gross rent in theory, but would also have roughly 3 times the debt. Faster, likely more profitable, but also possible higher risk.
Early on in my investing career, I used maximum leverage. The fallacy of my thought process was that rents remain stable, interest rates don't matter and price points compared to the market all fluctuated the same. After 2007, I spent 3 years scraping every nickel every month to keep up with debt payments in a declining market. The particular areas I was in did not hold value in price or rent and the properties faced constant repair issues. I share that because the math said I was doing the right thing just in the wrong neighborhoods and price points. I was not emotional, it was just real estate and I was simply following exactly what the economics said I should be doing. Ever since, I have learned that people are a big piece of this puzzle and emotions should come into the equation (in my opinion). Sometimes, the math lines up correctly, but the strategy may call for more caution.
- 3yAlicia MarksPro MemberFort Worth, TX · Member since 2020 · 1k+ posts · 2k+ votes
Quote from @Chris Clothier:
Quote from @Joe Villeneuve:
If I offended someone, I'm sorry, but it's not me...it's the math talking. LOL. Math is never wrong, or emotional. It can't be rationalized by using emotions...it has no emotions. There are no "participation trophies" in math. You're correct when you say those that will use emotions to make their decisions are correct...for them. However, that doesn't change the math.
On a side note, if I had equity building up in my properties, losing money and exposing my property to lawsuits (more and more as it grew),...that's when I have a hard time sleeping at night. LOL.
On a side note, right next to the one above, refinancing isn't using your money again. If it was your money, you wouldn't have to pay for it. It's the banks money, and they are "selling" it to you...that's what the bank's business is,..."selling" virtual money. Your money is the equity that is used as collateral. You're leveraging your money, not using it again.
That's not to say refinancing doesn't work...it does, but not as well as selling the property. Keep in mind, when you sell, you're maximizing the power of your equity, and increasing your CF. When you refi, you're reducing the power of your equity, and reducing the CF of the property you're refinancing. The BRRRR method is a linear return. Selling is exponential...and much faster and profitable.
Thanks for the reply - Great points - and again I learn to look at something from a differing view.
I understand your points, I think, but, how does the current market affect your argument? Math may be math, but how do the current market value of a property, the current interest rate environment, even the location of the property affect the math if at all?
On the equity comments. For discussion sake, let's use a $100,000 property. If I put 30% down and borrow 70% and pay it off in 10 years using every dollar from rent and not putting in any additional money. Technically I've earned no return on my $30k, but have paid back the bank their $70k. The next day, I borrow $30k on my equity in the property and purchase another $100k property. Ignoring rates for this conversation, I now have $100k in notes on $240k (original property worth more now) of property and my original $30k still in the first one since I used 100% of the rent to pay it off? If that is the case, I would have used $30k to buy $24OK in property over a 10year period, but have not gained much else at that point. I am trying to see the upside and the downside of this scenario.
If I sold the first property for $140k (plausible over a random 10-year period), I would have $140k and could then use that to acquire $450k worth of property (at 30% down). I would have $140k of my money in, but would own more property, earn a higher gross rent in theory, but would also have roughly 3 times the debt. Faster, likely more profitable, but also possible higher risk.
Early on in my investing career, I used maximum leverage. The fallacy of my thought process was that rents remain stable, interest rates don't matter and price points compared to the market all fluctuated the same. After 2007, I spent 3 years scraping every nickel every month to keep up with debt payments in a declining market. The particular areas I was in did not hold value in price or rent and the properties faced constant repair issues. I share that because the math said I was doing the right thing just in the wrong neighborhoods and price points. I was not emotional, it was just real estate and I was simply following exactly what the economics said I should be doing. Ever since, I have learned that people are a big piece of this puzzle and emotions should come into the equation (in my opinion). Sometimes, the math lines up correctly, but the strategy may call for more caution.
This is why we have the forums! Your experience in a challenging market gives you tons of insight on how best to prepare for what may lie ahead (or already be here). Thank you for sharing!
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Chris Clothier:
Quote from @Joe Villeneuve:
If I offended someone, I'm sorry, but it's not me...it's the math talking. LOL. Math is never wrong, or emotional. It can't be rationalized by using emotions...it has no emotions. There are no "participation trophies" in math. You're correct when you say those that will use emotions to make their decisions are correct...for them. However, that doesn't change the math.
On a side note, if I had equity building up in my properties, losing money and exposing my property to lawsuits (more and more as it grew),...that's when I have a hard time sleeping at night. LOL.
On a side note, right next to the one above, refinancing isn't using your money again. If it was your money, you wouldn't have to pay for it. It's the banks money, and they are "selling" it to you...that's what the bank's business is,..."selling" virtual money. Your money is the equity that is used as collateral. You're leveraging your money, not using it again.
That's not to say refinancing doesn't work...it does, but not as well as selling the property. Keep in mind, when you sell, you're maximizing the power of your equity, and increasing your CF. When you refi, you're reducing the power of your equity, and reducing the CF of the property you're refinancing. The BRRRR method is a linear return. Selling is exponential...and much faster and profitable.
Thanks for the reply - Great points - and again I learn to look at something from a differing view.
I understand your points, I think, but, how does the current market affect your argument? Math may be math, but how do the current market value of a property, the current interest rate environment, even the location of the property affect the math if at all?
On the equity comments. For discussion sake, let's use a $100,000 property. If I put 30% down and borrow 70% and pay it off in 10 years using every dollar from rent and not putting in any additional money. Technically I've earned no return on my $30k, but have paid back the bank their $70k. The next day, I borrow $30k on my equity in the property and purchase another $100k property. Ignoring rates for this conversation, I now have $100k in notes on $240k (original property worth more now) of property and my original $30k still in the first one since I used 100% of the rent to pay it off? If that is the case, I would have used $30k to buy $24OK in property over a 10year period, but have not gained much else at that point. I am trying to see the upside and the downside of this scenario.
If I sold the first property for $140k (plausible over a random 10-year period), I would have $140k and could then use that to acquire $450k worth of property (at 30% down). I would have $140k of my money in, but would own more property, earn a higher gross rent in theory, but would also have roughly 3 times the debt. Faster, likely more profitable, but also possible higher risk.
Early on in my investing career, I used maximum leverage. The fallacy of my thought process was that rents remain stable, interest rates don't matter and price points compared to the market all fluctuated the same. After 2007, I spent 3 years scraping every nickel every month to keep up with debt payments in a declining market. The particular areas I was in did not hold value in price or rent and the properties faced constant repair issues. I share that because the math said I was doing the right thing just in the wrong neighborhoods and price points. I was not emotional, it was just real estate and I was simply following exactly what the economics said I should be doing. Ever since, I have learned that people are a big piece of this puzzle and emotions should come into the equation (in my opinion). Sometimes, the math lines up correctly, but the strategy may call for more caution.
Current Property Value is based on the Market it is in. Current interest rates impact the mortgage pmt which then impact the Cash flow. Location, as in specific micro-market, impacts the property value.I'm going to rewrite your example because you're missing all the important numbers, but my rewrite will still be the same question you have. First problem with your scenario is based on today's interest rates (7%), with a 30yr amort, in order to pay off the loan in 10 years you would need to have monthly CF of over $1400. Highly unlikely in any economy at that price range. So let's visit "reality Island" (LOL) and try this out with realistic numbers.
1 - Same house - $100k in price
2 - Same DP = 30% = $30k
3 - Same Loan = $70k
4 - Same terms (7%, 30years) = MP = $466/month
5 - Realistic CF = $500/month; $6k/year, all put back in...
6 - Realistic early payoff in 14 years.
7 - Total interest reduced = $48,343
8 - Total added cost to you from CF (#5) = 14yrs * 12 mos * $500 = $84000
...right away, the added cost to you using your CF is $38k more than the reduced interest, but that's not the real problem,...9 - Total cost to you = DP + extra pmts from CF = $934/month; $11,208
10 - At the end of 14 years, you will have paid $84,000 for the property, with no income/profit.
11 - New CF = $966/month; $11,592/year
12 - Number of years to recover total cost (#10) from accumulated CF (#11) = over 7 years.
13 - Bottom line, doing this would mean you wouldn't see a profit for 21 years...and a lot can happen in 1 years, ...what about 21?
14 - Total profit at year 30 (if/when you didn't make extra payments) = $104,328Now, not using the extra CF to pay down the debt, and letting the tenant do it for you:
1 - $100k property
2 - DP = 20% = $20k (why would you do 30% in the first place? That's just added cost to you)
3 - Loan = $80k
4 - Terms (7%, 30years) = MP = $532/month
5 - Realistic CF = $450/month; $5,400/year
6 - NO early payoff in 14 years.
7 - NO interest reduced
8 - NO added cost to you from CF (#5)
9 - Total cost to you = DP = $20k
...here's where the differences start...
10 - Years to profit where accumulated CF pays back your cost (DP) = 3.7 years (not 21)
11 - Profit from CF at year 21 (when the above early payoff started to make a profit) = (21 - 4) * $5400/year = $91,800 (not $0)
12 - Added profit/CF from this point to 30 years, when this mortgage is paid off = 9 * $5400 = $48,600
13 - Total profit at 30 years = $140,400, not just $104,328 (see above), and you wouldn't have to wait until year 21 to start collecting that profit.So, if you could have been paying bills with the CF instead of adding to the mortgage, you need to add the cost of those bills to your cost of early payoff. Also, if instead of making those extra payments, you invested that money, the returns on that investment could be considered a loss, which in turn becomes a cost related to early payoff.
- 3yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Quote from @Joe Villeneuve:
That's really good. Thank you for the breakdown. We've hijacked the thread, but it is worth it to get a good bird's-eye view and I appreciate the detailed way you explained the scenario.
I generally understood the explanation before hand and again, ignoring property values, interest rates and micro-market climates makes sense because they cloud the math (i.e. - don't sell in a down market, don't refinance into a higher rate, etc.). Their could be all types of scenarios where you don't refinance or don't sell, but all things being even and assuming we are making decisions based on the right market scenario, you've illustrated the power of using the 30-yr. mortgage to its full advantage.
I don't use 20% down because of the points charged by GSE to reduce the 25% down to 20%. I'd rather put the 25% down and not pay the points and have the equity. The difference is minimal, but the points can be as high as 3. I'd rather have the equity. I'm on to 30% now because I do non-conforming today and my rates are better at 30% down. After what you laid out, I will likely run out each scenario and let the math show me the differences if that particular lender has options for downpayment percentages.
More than anything, I appreciate the explanation because I can make decisions based on more information. Whether I change or not, I like having the information so I'm not using my bias to just assume the way I have done it over the past decade is still the best way. Lastly, do you have thoughts on interest only loans for real estate?
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesOK. 3 pts on a $80k mortgage is only $2400. You are saving $800/year. That means you paid for 3 years of CF upfront, and you paid for $10k in equity, that you would have been getting for free by letting the tenant's rent pay for it.
Quote from @Chris Clothier:
Quote from @Joe Villeneuve:
That's really good. Thank you for the breakdown. We've hijacked the thread, but it is worth it to get a good bird's-eye view and I appreciate the detailed way you explained the scenario.
I generally understood the explanation before hand and again, ignoring property values, interest rates and micro-market climates makes sense because they cloud the math (i.e. - don't sell in a down market, don't refinance into a higher rate, etc.). Their could be all types of scenarios where you don't refinance or don't sell, but all things being even and assuming we are making decisions based on the right market scenario, you've illustrated the power of using the 30-yr. mortgage to its full advantage.
I don't use 20% down because of the points charged by GSE to reduce the 25% down to 20%. I'd rather put the 25% down and not pay the points and have the equity. The difference is minimal, but the points can be as high as 3. I'd rather have the equity. I'm on to 30% now because I do non-conforming today and my rates are better at 30% down. After what you laid out, I will likely run out each scenario and let the math show me the differences if that particular lender has options for downpayment percentages.
More than anything, I appreciate the explanation because I can make decisions based on more information. Whether I change or not, I like having the information so I'm not using my bias to just assume the way I have done it over the past decade is still the best way. Lastly, do you have thoughts on interest only loans for real estate?
Here's is what makes a deal. 2 things, and they are the same for every deal:
1 - Minimal cost to the REI. This means minimal cash out of pocket since the only cost to the REI with a positive CF property is the COP. So, the lower the DP, the lower the cost. The lower the cost also means less cost to recover, and less time to get there,...and your profit starts only when all of your cost is recovered.
2 - How someone/something else pays for the rest. These are the terms...and the someone else would be the tenant. - Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes3y
Buying all cash defeats the point of real estate, may as well just buy an index fund. You can buy 50% or 60% leverage though if want good returns and low risk/higher cashflow.
- I do all my deals cash, I too do not like debt, I have zero. So buy it . I assume for 150k you can get a nice duplex for about 110- 125 with 900/ 900,,, Or a 4 unit with 800 each ?
Quote from @Nic S.:
I have about $150k to invest into my 5th property. I am leaning towards and all-cash buy in Memphis with a fantastic turnkey operator. My focus is on cash flow.
What am I not thinking about??
I am leveraged on the other 4 properties and like the idea of having a paid off asset.
Quote from @Henry Lazerow:
Buying all cash defeats the point of real estate, may as well just buy an index fund. You can buy 50% or 60% leverage though if want good returns and low risk/higher cashflow.
Nope all my purchases have been cash, with never less then 20% NET cap. Get a much better deal. If I need cash, simply refi
maybe I’m looking in the wrong places in Memphis for 150 K cash gets me a SFR 3/2 with a monthly rent around $1100 or $1200
Quote from @Bob S.:
I do all my deals cash, I too do not like debt, I have zero. So buy it . I assume for 150k you can get a nice duplex for about 110- 125 with 900/ 900,,, Or a 4 unit with 800 each ?Quote from @Nic S.:
I have about $150k to invest into my 5th property. I am leaning towards and all-cash buy in Memphis with a fantastic turnkey operator. My focus is on cash flow.
What am I not thinking about??
I am leveraged on the other 4 properties and like the idea of having a paid off asset.
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