Buy cash vs leverage - is my plan any good?

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Buy cash vs leverage - is my plan any good?

Account Closed
Member since 2019 · 6 posts · 0 votes

Hello and happy Friday!!

I'm looking into where to put some cash and I like the idea of buying something cash and renting it out. The theory is that I can have fewer properties to manage and less debt than leveraging, hoping that I can get good ROI and get to financial freedom with 3-4 fully paid off rental properties within 6/7 years, each mortgage free property helping to finance the next one.

So say I can save 3k per month from the day job. My primary residence is mortgaged at around 2k per month but I can buy one additional property outright now.

Now:

3k per month from rental #1, 3k per month from savings - pump that into my primary mortgage and I can have that paid off in 4 years.

In 4 years:

Buy another rental (#2) with a mortgage and rent it out.

2.5k per month from rental #1, 3k per month from savings, 2k per month from not having primary mortgage anymore . 2.5k per month from rental #2 - thats 10k per month you can pump into payments at that rate you could also pay off in 3 years (10 year mortgage of 350k at 4.25% is about 3500 and you are making an extra 6500 per month in payments bringing it down to 3 years)

So in 7 years I have 5k per month income and I have a mortgage free primary residence, right? That seems simpler than trying to scrape together a couple hundred dollars a month from a whole bunch of properties to get to the thousands of dollars per month I want coming in. 

And a bonus question... am I being unrealistic to look for a market with 15% ROI on a mortgage free STR? Should I aim for more like 10%.

Double bonus question -- WHERE can I get 15% ROI on a mortgage free STR??

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y

You are making a mistake many REI do when they are starting out...assuming numbers instead of using actual numbers. The scenario you laid out doesn't exist. The concept of putting more cash in will pay off a property faster, but without using actual numbers, you can make any scenario look like it works.

When you put your scenario into the real world, the timeline, the dollars in, isn't going to payoff a property in 6/7 years.

Now, the most important part of the answer.

You're missing the power of what leveraging can do with your cash.

1 - The object of REI, which is something you don't find in other investments, it NOT to own it...it's to CONTROL it. In the event you end up controlling the property long enough for your tenant to buy it for you, that's fine.

2 -  The most important Golden Rule of "How Money Works", is this:  Never, under any circumstances, ever...."spend your seed money".  Use it to infinity, but never EVER spend it.  Once it's gone, it's gone. and when you spend it...it's long gone...never to be seen again.

3 -  If you combine #1 and #2...you will ALWAYS profit faster, and greater when you follow both (not one or the other) #1 and #2.

4 - The more of your money (cash) you put into a deal, the longer it takes to make a profit since you have to recover all of your cash before you make a profit.

5 - Following #4, the smaller the down payment, the less money you have to recover...and the faster you will recover it.

6 - If you compare the "use" of the same money on multiple properties vs. "spending" all of it on one property, you will find the proof of #4.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y

    You are making a mistake many REI do when they are starting out...assuming numbers instead of using actual numbers. The scenario you laid out doesn't exist. The concept of putting more cash in will pay off a property faster, but without using actual numbers, you can make any scenario look like it works.

    When you put your scenario into the real world, the timeline, the dollars in, isn't going to payoff a property in 6/7 years.

    Now, the most important part of the answer.

    You're missing the power of what leveraging can do with your cash.

    1 - The object of REI, which is something you don't find in other investments, it NOT to own it...it's to CONTROL it. In the event you end up controlling the property long enough for your tenant to buy it for you, that's fine.

    2 -  The most important Golden Rule of "How Money Works", is this:  Never, under any circumstances, ever...."spend your seed money".  Use it to infinity, but never EVER spend it.  Once it's gone, it's gone. and when you spend it...it's long gone...never to be seen again.

    3 -  If you combine #1 and #2...you will ALWAYS profit faster, and greater when you follow both (not one or the other) #1 and #2.

    4 - The more of your money (cash) you put into a deal, the longer it takes to make a profit since you have to recover all of your cash before you make a profit.

    5 - Following #4, the smaller the down payment, the less money you have to recover...and the faster you will recover it.

    6 - If you compare the "use" of the same money on multiple properties vs. "spending" all of it on one property, you will find the proof of #4.

    2Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Account Closed, to leverage or not to leverage is an oft-debated topic here on BP. Personally, I like responsible leverage, but everyone has their own goals and risk tolerance.

    That being said, the only place you're going to find properties with a 15% Cap Rate (that's what you're talking about) is in the absolute worst war-zone neighborhoods. They will be nightmare to manage and are not for the faint of heart. 

    You may be able to find 10-12% Cap Rate properties in okay neighborhoods, depending on where you're looking. You shouldn't expect very good appreciation, though. You'll need $500-600k in value to hit your cash flow target.

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  • Account Closed
    OP
    Member since 2019 · 6 posts · 0 votes
    7y

    Interesting. So is it a general rule that you get much better cash on cash ROI the more you leverage? But it's a bit riskier as you are in the hole if property values take a dive.

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    7y
    Originally posted by @Account Closed:

    Interesting. So is it a general rule that you get much better cash on cash ROI the more you leverage? But it's a bit riskier as you are in the hole if property values take a dive.

    Leverage enhances your results.  Making up numbers: if you would have had a good property making you 7% before leverage, you will make 15%+ after leverage.  If you have a bad property making you -3% before leverage.  You will make -10% after leverage.

    Also, if you're afraid of using leverage, there's really no point in getting into RE in my opinion.  The entire beauty of real estate is someone will be willing to give you money to invest with.  Imagine asking the bank for a loan to go play on the stock market.  Unlevered real estate performance for entry-level real estate is really quite unimpressive and you can get a similar return for far less work by just buying into the stock market or some high yield bonds.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    7y
    Originally posted by @Account Closed:

    Interesting. So is it a general rule that you get much better cash on cash ROI the more you leverage? But it's a bit riskier as you are in the hole if property values take a dive.

     First, read what Frank said above.

    Next, IF the market takes a "dive", so what.  That doesn't change anything.  You are locked into the mortgage payment.  You still cash flow because you still get rents.

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