Cash or financing for my first two unit rental property?

Question

Hello,

I found a  two unit property  with current long term tenants , should I buy it with cash or finance it? The return on cash is drastically lower .. however I have higher equity ..

Joe Villeneuve · Answer

Equity is just cash that dies.  Equity you buy is the same money you had when it was liquid and in the bank.

Daniel A. · Answer

Hey Zayan,

Really, when it comes down to making this decision, you should take into consideration what your long term goals are. Do you want this one property to be your sole investment? Or are you looking to obtain more properties? Are the terms of the loan you can get reasonable?

Why I ask/mention these questions is that, by and large, the idea goes as follows: Use as little of your own cash as possible to make it go further. Say you have $100,000 of cash to use. If you have the option to get a loan with, say, 10,000 down, then you can get your palms on maybe ten properties. But on the other hand, if you get yourself a house and you pay cash, you can get your palms on one house. One source of income vs. ten. Of course, there is quite a lot more to it than that, but for the sake of simplicity, that's the idea.

If you go with the loan method of finance, you have less of your own money into the deal. While that equates to less equity off the bat, many investors would prefer the approach of having ten properties building them equity (and optimistically padding their pockets each month as well) rather than having their cash tied up in one property while the cash slowly flows back in. And the loan method plays heavily into the concept of not using your own money to fund a business.

Hope this provides some base of understanding.