COC hit when purchasing with cash

[Kevin Nichols]

We've recently started investing in rental property. We're closing on a duplex this month.

My question is about purchasing rental property with cash. There is an opportunity to purchase another property for about $30K and I feel a cash offer would do better.

But when I run the numbers, the COC is about 10%...about $280/month cash flow after taxes, insurance, and a small maintenance budget.

House: $30,000 cash
Rent: $500/month
Taxes: $1300/year
Insurance: $490/year

Long term, I'm tying up $30K and won't get back to even until 9 years into the rental...and the property appreciation is minimal...properties in this area never appreciate a lot...maybe in this case $5K to $10K in the 9 year period...I would estimate.

So...explain why paying cash is better?

Kevin

[David Roberts]

It seems that a lot of investors that do all cash in on a property they couldn't get with a bank initially, will buy it cheap, fix it up, then end up refinancing their cash back out.

So if your property is cheap at 30k, and you add 10k to fix it, now it's worth say 50k (no idea what the values are in your area but 500 / month for a 50k home seems low no matter where you are lol)...you refinance it at 75% of actual repair value, which is 37.5k back out.  You are 40 in at first, and now you're only 2.5k in after the refi. 

By your numbers you are cash flowing 351 a month, or 14% before the refi.  After the refi you are cash flowing at 155.21/month, with your risk (cash still in) at 2.5k. 155.21x12/2.5k = 74.5% cash return, and you have almost all your initial investment back in your hands.