How to determine how many investment properties to buy

[Andrey Y.]

First of all, I really do appreciate all the helpful guides and discussions on here to help educate a new REI such as myself.

We can all invision the statement "It is better to purchase 5 properties at 20% down, and finance the rest, than purchase 1 similar property cash."

I realize there are many variables such as long term goals and market, but I am trying to get your opinion on this. This is for BUY and HOLD type investing. If you had the cash, would you start with putting 20-30% down on a single property, and look for several more in the coming months?

For the most part, buy and hold investing is tricky in Hawaii when demand is high and rental income is not great compared to purchase prices in a currently seller's market.

[Raj Gandhi]

I'm new here but why not jump in, eh?  Disclaimer, I'm an engineer, not a finance person so sometimes I don't know the jargon.  This thread might be dead already but it feels like there isn't consensus.

Regarding the suggestions for soul-searching for the OP (what's your risk tolerance, goals, profit target, etc.), try this: (my) #1 rule of business is don't lose money. Also, my guidelines are: if the (annual) return on investment is >20% then it is "a business", if the ROI is <10% then it is "a hobby". Between 20% and 10% is a struggle. Try using those buckets when you research investments and see if it works for you.

Here are three examples of investing $100,000 in real estate trying to illustrate buying (1) without using leverage, (2) with leverage and (3) with (evil) negative leverage.  I'd never heard the term "negative leverage" but it makes sense.

Assume property cost is $100k, annual rent income is $18k, annual non-mortgage expenses are $10k.  In scenario 1, buy with all cash.  In scenarios 2 & 3, buy with $25k cash down payment and borrow $75k.  Note, in scenarios 2 & 3, you only had to pay 1/4 of your cash to acquire the property.  So, you're going to buy three more just like it (because it is a new complex of buildings, or whatever).  In scenario 2, the 30-year mortgage interest rate is 4%.  In scenario 3 the interest rate is 12%.

   1              2               3          Scenario

$100k     $25k          $25k        per unit cash outlay

$18k        $18k          $18k       per unit annual rent income

-$10k     -$10k         -$10k       per unit annual expense

$0            -$4.3k       -$9.3k     per unit annual mortgage cost

=======================

$8k           $3.7k       -$1.25k    per unit annual profit

8.0%        14.8%       -5.0%     per unit annual profit

$8k           $14.8k       -$5k        annual profit per $100k invested

The point of scenario #3 is that, by borrowing money at a bad rate, one is losing money.  Replicating that over and over multiplies the losses.  Don't do it once and don't do it four times.  This is how businesses fail.

The benefit of scenario #1 is that it is simple and you don't have to answer to a bank.  However, scenario #2 is (the simple version of) what investors want to do.  It makes more money so that you can buy more properties.