Real Estate Agent · Philadelphia, PA · Member since 2015 · 76 posts · 25 votes
Hi all,
Quick question - in the Fort Lauderdale market, what return would you need to see from a rental property if you were paying all cash for it?
Reason for the question is because I have a potential wholesale deal pending, but it does not fit the mold for a fix and flip whatsoever. Obviously in order to wholesale this I need my end buyer to pay all cash so I'm wondering what return would make that worthwhile.
The reason it's 20% is a simple formula I'll share:
If a property is a 10 CAP (would return 10% if all cash) then I can make 25% with leverage
Let's look at a 100k home that makes 10%. Buy all cash, you make 10%
Instead buy 4 of them with 25% down. Pay 5% interest. Make 10% on your downpayment finds and 5% on your leverage (10% return minus 5% cost of funds). But since you're leveraged it's actually 15% on the borrowed money. Or 25% total.
And assuming appreciation of 2%, the single home would add 2% gain where as your 4 homes add 8% gain.
So really, with leverage you're not just a bit better off, you're 3x or more better off.
Thus why I hate being all cash
The reason it's 20% is a simple formula I'll share:
If a property is a 10 CAP (would return 10% if all cash) then I can make 25% with leverage
Let's look at a 100k home that makes 10%. Buy all cash, you make 10%
Instead buy 4 of them with 25% down. Pay 5% interest. Make 10% on your downpayment finds and 5% on your leverage (10% return minus 5% cost of funds). But since you're leveraged it's actually 15% on the borrowed money. Or 25% total.
And assuming appreciation of 2%, the single home would add 2% gain where as your 4 homes add 8% gain.
So really, with leverage you're not just a bit better off, you're 3x or more better off.
Thus why I hate being all cash