Pay single family off or finance a unit?

Question

Hello BP My wife and I️ need your advice, we have 138k to invest and we found 3 single family that we made offer. One is 60k which is rented out for 800 a month, the other two is 30k each which equals to 60k, 600 and 675 a month for rent. Last is 18k with generates 575 a month of rental. ALL CAN BE PAYED OFF CASH!!! Then we found an 18 unit complex for 495k which we could make a lower offer. But let just say 495k. So they are asking 100k down and finance the rest 395k. 15 of the units are rented for 575 and the other 3 for 650. Which route would you go for payed off or financed? Thank you BP

Brent Coombs · Answer

@Kush Gulmatico, how do those first three compare with sold comps in those areas? And how does the 18 unit complex compare to the market cap rate for that area?You need to be able to answer those questions thoroughly and accurately before we can even begin to respond usefully. We also need to know: how did you arrive at those answers?I tend to agree with Larry regarding the seeming randomness of your selections, which says to me that you're just itching to spend your money, on whatever looks cheap.But, thanks for asking. You have found the right place fork these questions! Cheers...[As a rule of thumb, using your cash as a 25% deposit, gets better ROI than paying all cash!]

Kush Gulmatico · Answer

@Omar Khan Thank you again, I think I’m way over my head on this one. THANK YOU you’re awesome man.

Omar Khan · Answer

@Kush Gulmatico This happens to everyone - new and experienced. We all have different challenges we have to face. Take it one step at a time (it's sooo hard - I know!). Start by attending your local REI meetups.I would also suggest that you sit down with your wife for an hour or two and write down your goals, why they are important and how will you suffer if you don't try to reach those goals. This is a great way to get both you and your wife on the same page as well as aligning your energies in the same directions. Best of luck!

Omar Khan · Answer

@Kush Gulmatico Putting a down payment of 25% will definitely juice up your ROI but it will also leave you with ample liquidity in case things go south. There is no need to pay off an entire property with cash. What's the point of having resources if you can't leverage them properly?Furthermore, I know it is alluring to invest in lower cost properties due to the high paper returns. But getting those returns in real life can be a major pain. You will have to shake down people for cash and often times that a full time job and you will not be able to get the full amount owed from those types of tenants. By focusing on reasonable, realistic and conservative outlook you can go further in a quicker period then focusing on getting the most money in the first few months.

Larry Turowski · Answer

@Kush Gulmatico There are some red flags here. Your profile shows no experience, your first scenario didn't include closing costs or any reserves, it also included a couple of low end units that are not for the faint of heart. You provide the purchase price and rents but nothing else which tells me you haven't done a serious cash flow analysis.I think you are going forward too fast. Don't let your enthusiasm cause you to make poor decisions. Investing in real estate is great--if you know what you are doing.

Kush Gulmatico · Answer

@Omar Khan thank you for that advice I do need to do more research. I feel like all I’m doing is research but no action if that makes sense.

Omar Khan · Answer

@Kush Gulmatico Regardless of what anyone tells you (or you tell yourself), there is no slam dunk one-size-fits-all type investment. Every investment you make (or don't make - that, too, is a choice) comes with its own set of pros and cons which you have to match to your needs, desires and constraints. It is easy to get into a deal but very hard to get out of one. The viability of an investment - including houses - is dependent on many factor, primarily, among them the price at which you buy an asset. For instance, a $100K house bought at $60K is a deal, the same house bought at $95K is not considered as big of deal. In both cases you bought a house at a discount to the listed price. But the listed price is a mirage. It is either reflective of market comparables or just a made-up number that should look "reasonable". A bit like a shop discounting something by $100 when they had artificially raised the price, first, by $150. Take your time, don't rush into things. Learn, educate and network with your local real estate investors. It might take a few months but you'll be better for it.

Kush Gulmatico · Answer

@Omar Khan Thank you for taking your time to answer my question. I need to re-evaluate my situation, we have these cash sitting around not doing so we figure buy something and have cash flowing in. We have that “putting our money on a house is like putting it in a piggy bank” thought in our head.

Brent Coombs · Answer

Why would you have "second thoughts" about "better ROI"?Repeat after me: BETTER ROI!...

Kush Gulmatico · Answer

@Brent Coombs these properties are below market price, paying a 25% for the down payment would give us better ROI but are having second thoughts, have properties that are payed off or have property that’s finance?