Cash vs loan, what is most efficient for faster growth

[Patrick P.]

I am soon going to receive a decently large cash sum (~3 Mil USD) from a company buy-out in a tech company. There are a lot of ways in my head that I have thought about investing this in real-estate. 

Is it more efficient to buy the houses in cash, and then use that rental income to take out additional mortgage, or would it make more sense to pay 15-20%, may a mortgage, but then buy more asset. 

One thing to note, is I carry a mortgage on my primary residence of $248,000, but have a stupid low rate on it (1.875% ARM 7/1 that is only in year 1) and I just closed on a flip/remodel that I will have a $325,000 mortgage on that I intend to flip within 4 months.

I am very new to this, so any tips/tricks on Tax assistance, and how to assess what a property would rent for, would be of great assistance.

[Joe Villeneuve]

This is a very simple math problem, and REI is really nothing but math with $$$ in front (NOT %%% behind).

Loans, loans and loans.

The actual cost to a REI for every property they buy, is only the cash they spend on that property. The debt isn't a cost to the REI since the tenant is covering it. Profits, like in any business, is only achieved after all costs are recovered.

So, the smaller the amount of cash spent on any property, means the cost of that property is less.

Example 1:  $100k property
1 - Buy all cash; Cost to REI = $100k
2 - Buy 20% DP;  Cost to REI = $20k

Note that the CF on the property with no debt may "appear" to be better, it is in fact NOT.  Remember, how much income you get isn't important.  What's important is what you keep.

Example 2:  Same $100k property.  CF with no debt = $10k/year;  with debt = $5k/year
1 - All cash buy = $100k cost to REI; Time to recovery of cost (and start of profit) = $10 years. Total PV = $100k
2 - 20% DP buy = $20k cost to REI;  Time to recovery of cost = 4 years;  profit after 10 years = $30k.  Total PV = $100k

What if both REI started with the same $100k in cash?

Example 3:
1 - All cash buy is the same as it is in Example 2.  Total PV = $100k
2 - 20% DP can do 5 times what they did in Example 2;  Recovery of cost is the same as in E #2;  Profit after 10 years = $150k.  Total PV = $500k

Note that appreciation applies to PV, so the REI buying with debt, starts out with 5 times the total PV, and will appreciate (at the start) 5 times greater than the all cash buyer...and, that increase grows exponentially from that point forward.