Leveraging or pay full price?

Question

I have some money to invest and not sure which route to take. I am interested in Texas, Arizona properties where the landlord laws are favorable. Say, I have 150K in  cash. Should I buy just one rental home or leverage out by taking loans against these properties by paying 20-30% down? How do I find a lender on stated income? I am semi retired and looking for cash flow mainly.

David Faulkner · Answer

Single family homes, distressed but in decent neighborhoods. 1980s-1990s, 3+ BR, 2+ Bath, 2 car garage, tile roof, stucco, no HOA, far east Lancaster & Palmdale (past 20th st East but before 50th East). Buy REOs that cannot be financed for cash, fix them up, rent them out, cash out refinance if you like to leverage up on the next one. That way you get a forced equity bump and cash flow in a market within your immediate control, which is really difficult to do out of state. Managing yourself saves an additional 8-10% in management fees, and much much more in re-up fees and over inflated repair bills. Can hit the 1% rule and be all in for under $150k with ~$15k extra forced equity (or more if you are skilled at acquisitions and repairs). Cash flow numbers may look better on paper out of state, but no equity bump and much harder to realize those cash flow projections unless you hit the lottery with a rock star PM (most are far from it). I've invested both in state and out of state, so have seen both sides 1st hand.

David Faulkner · Answer

Are you aware that there is a great rental market about 40 minutes up the road from you in the Antelope Valley? I've been buy-and-hold investing there for over 7 years, have great cash flow, great appreciation, and never once had any legal issues that you seem to fear. Just sayin' ...

If you do buy out of state (not saying you should, but if you do) then pay cash, but still have the house appraised to make sure it is worth what you are paying. Easier to leverage up after the fact than to leverage down if you don't hit your projected numbers and run into some speed bumps (or a brick wall) as is apt to happen out of state. Good luck!

Doug Royce · Answer

Seems like deals are easier to come by when youre paying cash.  Lookup the "brrrr strategy" that is so famous on these forums.  If I had that kind of cash, that is what Id be doing with it.

Casey Miles · Answer

It really depends on your comfort level risk wise. You'll make more $ leveraging the 150k than you will paying all cash on one property. With that said, there is a peace of mind value to having a property paid for. In general leveraging is the name of the game when it comes to rental properties.

You'll want to search for portfolio lenders in the areas you want to invest. I've had luck with local/regional banks. I'm note sure if any do stated income loans anymore but they do consider the cash flow of the properties. DTI is an issue for a lot of investors.

Good luck!

Scott Trench · Answer

Over the long run, your return on unleveraged real estate is likely to fall short of the returns of other, easier investments, like stocks. In that case, it makes little sense to me to invest in properties with all cash, unless you have a system for painlessly dealing with rental properties.

If you want an unleveraged, low-work investment, real estate is probably not the correct path.

On the other hand, it's possible and likely for investors to see excellent returns with a little sweat, hustle, networking, and leverage. The immediate cash flow on a leveraged real estate investment with that $150K will be lower, but your wealth will increase exponentially faster with leverage (assuming the business is run professionally, of course).

Here are some fancy charts demonstrating this point:

I built this spreadsheet out to answer this question for myself about a year ago. If you'd like to download it for yourself, play around with the inputs, or challenge my assumptions and model, you may do so in the BiggerPockets fileplace here:

https://www.biggerpockets.com/files/user/ScottTren...

Hope that helps!

Ziaur Zahid · Answer

David, thanks and you said it all in few lines. I heard the quality of tenants in Lancaster is not great and there are lots of section 8 renters. People say they don't pay rent and damages your investment property. I have not experienced this personally but this is what I have heard.

To refinance do the lenders look at my income or rental income is sufficient to qualify for loan?

Have a wonderful day, sir.

Jeff McDermott · Answer

Invest in a fund like caliberco.com or something like home union.

Be an investor not a landlord!

Diversify with built in management

Ziaur Zahid · Answer

Thanks, David. What kind of properties are you buying in Antelope Valley and at what price range? Also, what kind of rental income does these properties generate?

George P. · Answer

i'd leverage and buy a bunch at a time. just make sure you can contain the holding costs/renovations.

Michelle Masters · Answer

@Ziaur Zahid- Just put his name in the search box above. When you get the search results, click on the People tab on the right side of the screen. :)

Leveraging or pay full price?

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