All Forum Posts by: Isiah Ferguson

Leveraging is a long term play. You can buy one 100k house for cash and get great cash flow or you can buy 10 100k houses with 10k down. With the latter you have 10 people getting up every day and going to work to pay off your million dollars of debt. Now skip down the road 10
Or 15 years. You can own those 10 properties fee and clear. Let's say that they have appreciated to 1.5 million in value. Now if you did the one house for cash 15 years down the road it's with 150k.

1.5 million vs 150k. I personally will forgo cash flow to get the big payoff down the road. That's the beauty of leverage.

If you're looking at an all cash return of say 7% or better, you should look to use leverage. Less than that and I'm assuming you're doing an appreciation play and cash makes sense here. However, I should point out that mortgage interest is tax deductible on an investment property.
 

Let's say you have $100k to buy a property. You can either buy one property for $100k or use leverage and buy 4 properties with $25k down on each. Let's assume all properties have the same monthly rent and expenses - rent of $1000 and expenses of $300. Your net operating income (NOI) is $700.

1 Property - All Cash

Annual NOI - $8,400
Mortgage Payment - $0
Cash Flow - $8,400
Return - 8.4%

1 Property - 25% Down

Annual NOI - $8,400
Mortgage Payment - $4,824 ($402/mo @ 5% interest)
Cash Flow - $3,576
Return - 14.3%

1 Property - All Cash (if NOI drops)

Annual NOI - $6,000
Mortgage Payment - $0
Cash Flow - $6,000
Return - 6%

1 Property - 25% Down (if NOI drops)

Annual NOI - $6,000
Mortgage Payment - $4,824 ($402/mo @ 5% interest)
Cash Flow - $1,176
Return - 4.7%

Want to acquire multiple properties, but still be conservative? Only buy three properties and keep $25k in cash for added flexibility and comfort. 

3 Properties - 25% down
Annual NOI - $25,200
Mortgage Payment - $14,472 ($402/mo @ 5% interest)
Cash Flow - $10,728
Return - 14.3%

3 Properties - 25% down (if NOI drops)

Annual NOI - $18,000
Mortgage Payment - $14,472 ($402/mo @ 5% interest)
Cash Flow - $3,528
Return - 4.7%

The most conservative thing you can do for your money is use leverage and keep money in cash. Why tie up all of your money into one deal if you can spread it, along with the risk to a few? If you have a vacancy, major repair cost or anything else goes wrong it will kill your return if you only have one property. 

Hi Isiah, depends if you are talking about cash for making offers or parking cash long terms.

Cash for making overs is great if you can and will give you a lot of leverage

Cash for long term generally does not make sense unless you want to be very conservative.

@Isiah Ferguson 

Isiah, I'm struggling with this same issue.  We are currently building our rental portfolio, trying to stay relatively conservative on the leverage to stay safe, but enough that we can spread our funds around and can buy more properties.  However, the purpose for our portfolio is to have sufficient passive income in retirement to make sure that my future medical expenses will be covered.  So I can achieve a final income number by holding a large number of leveraged, modestly cash flowing properties, or a far fewer number of free and clear maximally cash flowing properties. 

It's a challenge to figure out what is the best strategy for us.  Should I snowball the smallest mortgages or should I refinance them and take out equity to buy more?  I understand the issue of putting your money to work, but at some point, holding an asset free and clear might be the best and highest use of that money for me!