$35000, Tax + Insurance appx $140 Month. Currently rented for $500 Month to Month. Typical rent is higher for the area at $650-725 for a two bedroom.
Home #2 (Looking at several similar properties)
$95000 , Tax + Insurance appx $170 Month. 20% down. 3 bedrooms, 2 Bathrooms. Typical rent for the area is $1050-1100 for a quick turnaround.
I can't seem to decide what the best option would be. Going with a home similar to #2 would allow me to purchase more properties quicker. Less money down, more money saved up for another home. Home #1 would eat up most of the money I have set aside for a down payment. Yet, it will allow me to own the home right from the start . Which would you choose and why?
Have you looked at both properties? What about home #1 with a portion of it financed through maybe a home equity loan?
Dave Ramsey suggests that real estate investors begin with cheap properties and paying cash. I personally like the idea of starting small and conservatively and not getting too crazy with the loan commitments / debt. For my first one, I hope to start with an inexpensive home and try it out. Ramsey also says that when you start with a lower cost property, you will learn the lessons of how to manage tenants, fixes, etc. etc. etc. and you will learn the business.
How much work is needed to have the homes perfected? The fact that its being rented doesn't mean its to par.
Personal preference from your risk threshold to your future goals and time with achieving them:
I would choose one because I have other homes paid for and if money is needed I have a choice of refinancing or a portfolio loan. I'm happy with purchasing one property every 18-24 months. I like the sense of not owing which decreases the urgency of having a tenant if the present one decides to leave. I can divvy the rent between taxes, maintenance, insurance and savings to maintain and reinvest.
I (personally) would only choose two because it's a quicker turnaround if I plan on making another purchase in less than a year. I can build credit for future loans for more purchases.
Purchase the cash property. Find a way to get cash out and purchase another 35K property. 3 properties at 35K will cash flow better than one 95K..leverage spread out...
Analyzing your cash-on-cash return is a common method of comparing investment opportunities. There are tons of articles and posts on BP with more details but here's the quick, simple analysis for Home #1.
$360 cash flow per month ($500 - $140 in expenses). However, you'll also want to budget for maintenance, utilities, and any other expenses. But for the sake of keeping this simple, if you cash flow $4320 per year ($360 x 12 months) on an investment of $35,000 cash, you are getting a 12.34% yearly return on your money.
Do the same for Home #2 and see what you come up with.
On Home #1, who says you have to use all of your own money to purchase it?
The homes need very little done, both are actually in good shape. Newer roofs on both. Just some flooring work needs to be done with house #2 along with new paint.
My plan is to add a second rental property this year. Then another in 12-24 months would be ideal . Which is why I'm thinking of going with the one that requires less money out of pocket.
UOPM ( Use Other Peoples Money) to make money....I still think cash is king so use it wisely.
However I'm sure you'll make a great decision especially with all the advise and insight on this post and website in general.
Shaun Weekes, Innovation Lending Solutions | [email protected] | 949‑610‑3126 | https://www.facebook.com/Innovation-Lending-Solutions-Inc-261955880814516/ | CA Agent # 0L51686
I personally love leveraging my money. It alllows me to get better returns because 30 year rates are so low. It also lets me get better houses that will appreciate and have better tenants. My key in my business plan is having the tenants pay off the mortgage. Therefore I want to put as little in a possible.
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