Pay for house in cash, or put 50% down?

Question

We are looking into purchasing an investment home for rental income.  We  have already paid off our home, have 215k in the bank and are looking  to get the investment home for 105k.  Eventually, we may get 1 or 2  other homes to rent out, but right now, we are just looking at this one.

What would you do...and why?

Pay all cash for it, or put 55k down and finance the rest?

If financing, we will probably be hit with about $1,500 more in closing costs apparently, and it will be at a 4% interest rate which equals out to be $16,000+ in interest that we would pay over the life of the 15 year loan.

Several real estate folks have said to only put half down, but we hate debt, and can't stand that a few hundred dollars a month would be going to the bank just for the privilege of borrowing their money. Any people weighing in would be greatly appreciated!

As another side note - this will be for my parents (for now).  They will be paying rent, but not as much as we would normally be getting.

Joe Villeneuve · Answer

@Jason Schmidt I'm 58.  Age is immaterial to good math.  Here's the real math you are looking at for a comparison:

Cash in                              Using Good Debt

Cash in Deal                       $55,000                                       $0Monthly Payment                     $0                             $300/month    ($55,000; 5%; 30 yearsCash Flow                        $800/month                      $500/monthTime/Payoff Loan              0 - No Loan                       0 - your tenant pays it offTime/Payoff Cash                 5 years                           0 - no cash in deal anymoreProfit during payoffs      $0 - It all goes to Cash        $6,000/year - tenant is paying off debt

...........here's the big loss............

Added income from Cash with cash still in house         $0 - it's still in the 1st houseAdded income from Cash with re-use of cash (debt)    $6,000 on next house# of uses for cash with cash still in house                                   1# of uses for cash with cash out of house                     infinite (or the number of loans                                                                                          you can qualify for

Joe Villeneuve

REcapSystemA2REIC

Account Closed · Answer

Get the biggest and longest mortgage you can.  How does it make sense to spend $110, 000 in 2014 dollars to collect a few hundred a month?  How LONG would it take just to get YOUR money back much less any rental income?

Don't fret over interest.  Your tenants will be paying that.  Also read up on the time value of money.  The bank is giving you $88, 000 today for 360 payments that will be eroded by inflation.   You'll come out over the bank if you hold the loan to maturity.

Sylvia B. · Answer

I'll have to go against the flow. Pay for it outright. It's really not just about the numbers. There is an emotional cost to debt that some people don't comprehend. You said, "but we hate debt" so that tells me that you will feel like it's hanging over your head. That is not a good place to be.

We also prefer to be debt free and have paid cash for all of our rentals. The sense of freedom is priceless. Lenders are always there, so if you need the money later you can take out a loan then, perhaps when you find more properties to buy.

Joe Villeneuve · Answer

@Scott Nipp @Jean Bolger HAve it right.  Equity is dead money.  When you pay cash for an investment property, and leave the cash in it, it's not an investment...it's an expense.  When you take the cash out, and keep the "cash moving". it becomes a tool and when the income from the property is greater than the cost of the money to buy it, that property is now an investment.

Look at the numbers, and it is all about the numbers...with dollar signs (and not "-" signs) in front of it.  We are property investors, not property collectors. Emotion is the investors worst enemy...leave it at home.

@Kyle Kelley The cost of the money, is an expense, just like the cost of the kitchen cabinets, the paint, and the carpet.  It should be figured right up front.

Joe VilleneuveREcapSystemA2REIC

Account Closed · Answer

From a straight math perspective its a no brainer. At mortgage rates that are lower than real inflation, do like the govt. Borrow till you drop. In reality though there is a risk to borrowing. If you don't have reserves and income to deal with vacancies etc, there is a reason to pay cash. But I assume your parents will be reliable long term tenants so that risk is low.  Second point is cash flow. If the property will not cash flow with 20% down, its not a great rental unless you expect very good appreciation.  As @Bob Bowling says, get the longest mortgage with lowest down payment you can find. Keep your cash elsewhere and try to get more than 4% return. Then you make more on that cash than what you pay the bank anyway. Finally, interest rates are bound to rise. So in 5 years you may be able to park that cash in a bank for 5% while still paying only 4% on your mortgage.

Jassem A. · Answer

@Jason Schmidt

It's not all glory since I have to deal with some pretty lousy tenants a lot of the time and end up taking about 25% of them to court and then deal with all the trash they left behind and broken windows but it's better (to me) than spending 100k to make the same amount of money in the better neighborhoods.

Jason Schmidt · Answer

@Jassem A. that is amazing....no ... I mean AMAZING.  I simply don't see how my money can be working any harder than paying off a 105k house outright and renting.  The bank gives me nothing on my money ($70/mo) so I'm kind of at a loss.  I'm like on this little cash reserve here and you guys are making your money sing.  Mine doesn't even have a voice.

Jassem A. · Answer

Paying 105k for 700-800/mo in rent wouldn't be worth it to me.  You can spend anywhere from 10k-50k and still get 700-800/mo depending on where you buy at.  I'm negotiating with an owner of a condemned property right now which I hope to purchase for about 2500, do about 3000 in repairs myself and rent for 700-800/mo.

Jason Schmidt · Answer

Thanks guys - I guess I'm having a problem with the whole numbers thing here.  If we charge rent that will cover expenses, the house will be paid off in 30 years and maybe we will squeeze 50-100 bucks out of it a month.  However, if we pay cash, we can get perhaps $700 or $800 each month.  It frankly scares me to think about having 10-20 properties.  I couldn't imagine dealing with all those tenants, but I could see us possibly having 3-5 at some point.

To give you all a more complete picture, I'm 34 and for all intents & purposes am a part time worker.  I do several part time projects.  Nothing too terribly strenuous, but we don't live on much either.  I'd say 40k is what we need each year to live.

In light of this information, any other help ... GREATLY appreciated!

Whitney Tyson · Answer

I think all of the previous posters make valid points. My question is more about you. Are you in a part of your life where you are looking to grow your wealth or maintain your wealth? If you are 25 and just out of college you should probably employ different tactics than if you are in your 50s and plan on retiring in the next 10 years. Leverage is a very big part of investing in real estate. If you only plan on ever having 2 more investment properties I would probably say pay cash, enjoy them as little nest eggs and enjoy the 2-3k a month they will provide. If however you plan on growing your business to 10, 20, or more properties you might be better off putting 20% down on 10 different properties and using the rental income to pay off any mortgages. If the thought of the debt really bothers you, make sure that you get the properties at a 20% discount, this will give you some breathing room in case there is a slight downturn in rent or sale prices in your area. Good luck and luckily for you you are in the right place to have any questions you have answered.

Pay for house in cash, or put 50% down?

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