Leverage Assets VS Solid Assets

[Kenneth Lim]

Hi, I'm wondering which is better? Below are 2 examples of leverage asset VS solid asset. Please help me by contributing your most valuable comments. This topic has been running around in my head all day long. Thanks.

LEVERGE ASSET

Cost Of Property: $40,000
Downpayment: $8,000
Monthly Rental Revenues: $750
Monthly Debt Services & Other Expenses: $550
Monthly Cashflow: $200
Cash On Cash Return: 30%

Pros: Use only $8,000 and the monthly debt service will be paid with money collected from tenants. After debt is fully paid, the property cost me only $8,000 instead of $40,000.

Cons: If mortage rate goes up drastically, in the event tenant moves out, etc.. this could become a liability instead of an asset.
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SOLID ASSET

Cost Of Property: $40,000
Monthly Rental Revenues: $750
Other Expenses: $100
Monthly Cashflow: $650
Cash On Cash Return: 19.50%

Pros: No fear of tenants moving out, no foreclosure risk as I do not need the money collected from tenants to pay the bank.

Cons: $40,000 can be put into many leverage properties that are able to generate even more cashflow and owning more properties. Upon all debts fully paid by tenants, I own even more properties.
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If you're a savvy investor, which would you choose? Leverage or Solid?

In my own opinion, which I could be wrong, I'd prefer leverage assets as they generates more cashflow and I'm able to own more properties with just a fraction of the total cost of the property.

Of course there are downsides to consider as well. If cashflow every month from each property is positive but pathetically small, runs the risk of bankruptcy if mortgage rate turns against you when you own alot of pathetically small cashflow generating assets.

[J Scott]

Originally posted by XM911E3:

If you're a savvy investor, which would you choose? Leverage or Solid?

Without taking the specific examples into account (I agree with Charles they may not be realistic), but to answer this question...

There are savvy investors who would choose Option 1 (leverage) and there are savvy investors who would choose Option 2 (all-cash). There is no right or wrong decision for everyone, but there are two important questions you should ask yourself to figure out the correct answer for YOU:

1. What are your goals and which option best allows you to achieve them?

2. What is your risk tolerance?

Also remember that you can use less leverage that reduces your risk but still provides some benefits of leverage? And your scenario implies that you are using adjustable rate financing, which in my opinion certainly detracts from the leveraged scenario given the likelihood of rates rising over the next several years.