Math check: Cash vs Mortgage - Rental returns after tax

[James Hartley]

Hi Everyone!

This is my first non-introduction post, hoping this great community can help me out! I'm also new to real estate investing, so please give feedback and point out mistakes!

I'm looking at a $70K SFH that rents for $850, I'm buying cash but thinking about whether to finance (delayed mortgage) or not. I'm looking to build up a passive income stream over time, but I make a good salary at present. Here's my comparison between the two options, can you please check my maths?

**Cash**

$70K cash payment

$10200 annual rent, or $9690 with 5% vacancy

Expenses: $1600 tax, $500 insurance, $969 property management (10%), $510 repairs (5%), $510 capex (5%)

Net Income: $5,601 or 8% of $70K before tax

Property tax is 26% land, 74% improvements, so $51,800 depreciated over 27.5 years is $1,884 per year

$5,601 income, of which $3,717 is taxed, $1,884 tax-free

Assuming 40% tax rate

= $3717 * 0.6 + 1884

= $4114 after tax (5.88%)

**Mortgage**

$14K downpayment (20%)

Mortgage: 4.5% at 30 years fixed on $56K

$10200 annual rent, or $9690 with 5% vacancy

Expenses: $1600 tax, $500 insurance, $969 property management (10%), $510 repairs (5%), $510 capex (5%)

$3408 Mortgage payments ($900 principal, $2508 interest in the first year)

Net income: $2193 before tax or 15.66% on $14K

Property tax is 26% land, 74% improvements, so $51,800 depreciated over 27.5 years is $1,884 per year

$2193 income, $1209 taxed, $984 tax-free (1884 depreciation - 900 mortgage principal)

Assuming 40% tax rate

= 1209 * 0.6 + 984

= $1,709.4 after tax (12.21%)

Does my calculation look correct? 

I know I'm just treating the 5% capex as deductible when it's not (to simplify things), it would need to be depreciated over time. How would factoring this change the comparison?

Thanks in advance!

[Soh Tanaka]

Just strictly looking at the rent-to value ratio, you found a pretty good one (assuming little rehab is required to make it rent ready), so congratulation!

You always get a better return on your money by having a mortgage. I'll vote for the delayed cash-out refi. You tend to get a better mortgage if you wait for 6 months. Once you get the money back, invest the money. Much better use of your money, IMO.