Need advice on best way to scale

[Jim Petrosky]

A few of my friends and I are forming a REI company. We'll have $150k in cash to start. One friend thinks we should buy out first SFH in cash using roughly 2/3 - 3/4 of our seed money and buy another property once we bring in enough rent to afford to buy another house in cash. I recognize from reading this forum that that isn't an optimal approach, but I can't articulate to him and the other exactly WHY or spell out the path I recommend for scaling. I know some people like Joe V. are advocates of flipping once you double your DP, but I'm needing some taking points to convince my partners why it makes the most sense. Any help would be appreciated.

[Anthony King]

@Jim Petrosky what other qualifications does this partner have because your REI company is going to go nowhere fast if he gets his way. The power of leverage. If you need to explain to him why his plan is a terrible one, then I would reconsider his employment with your company.

If you paid cash for a $150k house and make $1500/month rent and assume $750/month in expenses, then your cash flow is $750/month, or $9,000/year. It would take you 17 years to buy another $150k property. What does a $150k property look like in 2040 compared to a $150k property today? A 12"x14" shed will cost $150k in 17 years with inflation the way it is.

Let's also take a look at your ROI for the same example. You are making $9,000/year with $150k buried in the walls of this house. That's a 6% return WITH all the hassle that comes with owning properties. Inflation is 7% right now. Could you make at least 6% investing in literally anything else? Absolutely. More cash in the deal, the lower your ROI. Less cash in, higher ROI. I always put in as little of my own money as possible so I can invest that money in more cash producing assets.

Someone above also mentioned you can buy 4 identical $150k houses, using leverage and get essentially the same cash flow. Not to mention the appreciation and loan paydown on 4 houses instead of one. If you're asking about scaling, your friend is on the extreme wrong end of the spectrum. Buying all cash on a LTR is not a good strategy.