Pay for a rental Cash vs. Lending ???

[Steve Shupe]

I am a brand new member here on Bigger Pockets. I have read/ listened to a few of Brandon Turner's books and I get his philosophy but, I wanted to reach out to some others and get some different opinions. So I have yet to purchase my first rental property and I am struggling with this decision. Should I buy my first rental in cash or should I obtain a loan and only put down the required amount (25%)? Obviously the cash deal gets me highest cash flow, on the downside it will take a lot longer before I can do another deal?

What are your thoughts and keep in mind this will be my first rental and I am aspiring to purchase 15+ properties.

[Arpan Patel]

Here is what I would say and calculate into my spreadsheet. Calculate the Cap rate and Loan Constant for your deals. The cap rate is is the ROI if you bought all cash (which you have indicated considering doing). The loan constant is basically the interest rate of your loan if your loan payment itself was an interst only payment. Essentially take your actual loan payment and annualize it then divide by the principal. That is essentially your true cost of capital or your true interest rate that bakes amortization into it. Now, if your cap rate if greater than your loan constant then you are making money buy borrowing. It is the same as saying, I am borrowing at 4% and getting an asset that pays 10% so I make 6%. In this case the loan constant should be less than the cap rate so you are making the difference of percentages because of your decision to leverage the bank or whoever the lender is. We use that as a key fundamental to make sure we are making money by borrowing. I hope that helps!