Paying Cash Vs. Loan

[Blake C.]

I am sure this question has been asked 1,000 times so if someone wants to direct me in the right place, I would be very appreciative.

In my town, a normal Cash on cash return is around 6-7% if you are paying cash. There is a good bit of appreciation potential. If you were to put 20% on a 15 year note, you could RARELY cash flow it. It's usually slightly negative.

My question:

I am a conservative fella so I like looking at paying cash for a property, which will give me potential appreciation, and i'd have raw cash flow.

What I am starting to take into consideration, is if I were to say put 20% down on a 100k rental, and I earn 1,000 cash flow, that's a 5% annual COC return. But if it appraises by even 1%, that's an extray $1,000 in equity, bringing my effective return to 10% ($1,000 cash flow and $1,000 appreciation), also, if I amortize it over 15years, I could have another $2,000 paid down in principal (just using a round guestimated number) putting me at $4,000 added in wealthy with $20k put down, giving me a 20% return, effectively.

Am I looking at this correctly?

The thing about my town is you can ALWAYS rent out these rentals so not much fear of vacancy.

My goal is to get to $100,000 in passive income in 10 years.

Does anyone have some suggestions to help me understand what I am doing a bit better so that I can make a more informed decision. BTW, I'm a realtor as well so that helps in terms of shaving off 2-3% commission when purchasing.

Thanks in advance.

[William Brace]

Blake Cannon I wouldn't agree that you would be over leveraged. On a 30 yr mortgage the typical required is 25% down and you would also be required to hold 6 months of reserves meaning a full 6 months of PITI for every rental property plus 2 months for your primary home (if it's leveraged). So your required to have the capital where you could maintain it sitting vacant for 6 months which if you have a nice home and not overpriced on rent, then that's a non issue.

Keep in mind you would in fact be building equity as every mortgage payment included principal pay down.

I'll go full disclosure and say I typically only pay my normal PITI payment but I have on occasion plopped down and extra $20,000 on principal reduction in a year where I didn't acquire any other properties and have a lot of cash sitting on the sidelines. So to me, the 30 year mortgage is more of a safety net for the lowest possible payment if it sits empty. I can always pay more each month on the principal if I so choose. I never saw the benefit from the interest side to go with a 15 or even a 20 year mortgage.