Should I finance or pay cash on a duplex

Question

I am buying a duplex. I am in contract presently. My question is should I pay cash or finance... Purchase price is $147,500. I am assuming interest rates are around 4% in todays market and if I finance I would put 20% down. The duplex is already rented with two long term tenants paying $1400.00 combined per month. I feel like paying cash returns a much greater cash return per month than obviously financing would. If I finance the property I can still net aprox $400 per month on a 30 year term. The math on a 15 year term will only net roughly $150 per month. Typically I pay everything off as I am not interested in working for the banks. I am completely debt free and the money to buy this duplex would be 75% of my liquid net worth. Real estate is my passive income as I work a 9-5 that produces me more than enough money to live on... Any help, tips, suggestions, and or advice will be appreciated.

Brent Coombs · Answer

@Zac Boelkow, Steve is right; this would have been a cleverer question before you did the deal. By the way, it's not you who'd be working for the banks once financed, it's your Tenants who do! You get to keep 80% of the cash you'd otherwise have "lost" - so you can buy four more deals!

Would you prefer to have one set of tenants giving you a return for one property worth $150k, or, with the same cash, have five sets of tenants paying off five properties, worth $750k? My 2c...

Grant Rothenburger · Answer

@Zac Boelkow If you want to own more properties, I'd finance. If owning the one outright and saving money until you can do it again with no rush sounds better, pay cash. But like they said, offering all cash up front would have been ideal as you may have been able to negotiate more. What are you REI goals?

Thomas S. · Answer

As a novice investor you need to understand that being debt free is a ultra conservative way to invest. Fine for those that are not interested in maximum returns.

Money has a extremely high value to investors.

If you had purchased with 20% down at 4% ($29400) your annual interest payment would be $4704/year.  That is how much cash you purchased for the sum of 147K. That would be considered a horrendously bad investment by most. A 4% return is hardly worth crossing the road for.

IF you had taken the $117600 and invested it in a income fund you could probably get 10%. Instead of saving $4704 you would have earned $11760.

See how buying cash flow is extremely expensive, you will lose $7056 every year.

You need to determine if a mortgaged property with the equilivant cash value invested else where is truly debt or is a diversified investment portfolio a wiser use of your resources.

Steve Vaughan · Answer

I only pay cash if I receive a nice additional discount. I don't like debt either, but if you've already locked the price and terms, it doesn't move the needle enough for me.  There's a lot more costs and hassle to financing it, but I would without the discount.  Get it cheaper next time with cash! Or offer them the option of $138,640 all cash, fast closing right after satisfactory title work and property inspection.

Michael Ablan · Answer

How many rentals are you interested in buying?

Cash is king when acquiring properties.  If you only want 1 building and are happy to sit on that for a couple years, then maybe cash is a good option.

However, if you want to have more than 1, then you should save all of your cash and use it to leverage as many bank loans as you can afford.

Karla Dotson · Answer

Hi Zac – If you had to make repairs, could you do it with $400 a month coming in and still make a profit?  The 15yr, yielding $150 a month is slim for maintenance. That’s 1,800 a year before Maintenance.  I had a SFH with a slim profit for maintenance and had to use some income from my paycheck to buy the furnace. I was able to recover the money over time.

All the best to you!

Should I finance or pay cash on a duplex

Most Popular Reply