$500,000 cash on hand; Do I buy outright or divide and borrow?

Question

I am weighing whether or not it's best to, say, buy five 100K properties outright...

...or pay 50K down on ten properties since credit's fine and borrowing is not a problem.

Anyone got advice for me on this?

Of course, in this post I've boiled this down to the thumbnail basics, but it does accurately reflect the choice I'm facing currently. Thanks in advance for any input. Love the site, and very fond of ALL of you out there.

(admin: is the underline function broken? thanks)

Andrew M. · Answer

In my opinion, I would buy 9 properties with $50k down and keep a $50k cushion on hand.  With that much leverage, you'll be chewing up a lot of the free cash flow from the properties that you otherwise would have pocketed and been able to offset vacancy loss/repairs/etc.  I think that's a good idea to leverage because you can turn that $500k into $2.5m (assuming 20/80 cash/debt) which if it has a 10% cap rate is $250,000 annually vs. $500,000 x 10% = $50,000.  Once all the debt is retired you are in a much better position long term.

Brian Beadle · Answer

Like @Richard C. , I don't think it is possible to find ten solid properties at one time, but theoretically if you could I would leverage all the way (so long as you believe in the future strength of your market).  Are you investing for long term appreciation or for the cash-flow? Would you rather control 1.5M with of investment or 500k? At 30% down, you could control 10 150k homes, or 1.5m worth of investment property.  Purely for the sake of example, according to the NAR from 1968 to 2009 the average yearly appreciation was 5.4%. After 10 years your portfolio will have appreciated to 2.44M vs 814k. thats a difference of 1.6M.

Before anyone jumps down my throat, this is purely for a quick example and considers no variables or market crashes (God forbid lol).

I would love to hear the thoughts of some B&H investors on this subject. Great post.

CL Ziegler · Answer

Thanks you all!

For clarity, I gave these details to isolate certain aspects of the decision making process. I didn't mean we intend to run out and just buy anything, fast. I was trying to weigh what portion of the 500K should remain as liquid cash, -vs- how much to pay down on each deal. Also I was trying to weigh the benefits (if any) that borrowing brings, on the expense/tax angle.

Thanks guys for all of your answers. {imaginary cheers emoticon inserted here}

----------------------------------

@Brian Beadle Not ten properties together, but over time. And yes long term moreso than cash flow.

@Jon Strishak "I assumed that when @CL Tumlin mentioned buying "ten properties", he meant he would be doing it one by one over a period of time that would make sense (1 every three months) to allow setting up management etc..." Yes Jon exactly. Thanks for your input.

Thomas Ingram · Answer

As a newbie with no real world experience, I say buy a couple lower priced places outright. Preferably duplexes or triplexes under 100K. Then use all but 50k for down payments and finance another few. That way you have some fully paid for to cover any maintenance or vacancies, plus you have a cushion as Andrew M. mentioned. Let your tenants pay for your portfolio.

Laura Williams · Answer

I like both @Richard C. and Andrew M. suggestions. Leverage if done correctly is going to be more rewarding for you. Richard has a good point in that if you are new to investing there's a big learning curve so best not to buy everything at once cause you learn so much with every deal. Also can take a while to build your team and that can be painful cause you usually find the good ones from dealing with the bad so if you start small with just 1 it will be easier. You can get great deals buying all cash especially distressed properties. So depends on how much time you want to put in.  If you want to stretch your dollar and get more for your money buy cash at a discount and then refinance. If you want a place more rent ready then buy them traditional mortgages.

Brian Beadle · Answer

@Thomas Ingram  In my area a 12plex in distress can be had for around 300k. 30% down, 90k. I would rehab, fix vacancy rates, and hold for a few years. After the complete rehabilitation, I would reassess the property and chose to sell for a profit or hold. I have never done this but the strategy sounds extremely compelling to me.

I would also be buying SFHs outright as well as leveraged. I would then have a rental portfolio diversified in three different strategies.

Account Closed · Answer

You'll always make more profit by using leverage.  Just don't overleverage.

Richard C. · Answer

How is that adding risk?  It's exactly the same amount of risk.  You end with 9 properties at 75-80% LTV either way.

Account Closed · Answer

@Richard C.

I assumed that when @CL Tumlin mentioned buying "ten properties", he meant he would be doing it one by one over a period of time that would make sense (1 every three months) to allow setting up management etc... I don't necessarily agree with the decision to do cash out refi's and buy your properties with borrowed funds (added risk).

Account Closed · Answer

@CL Tumlin

Yes, I concur with @Andrew McDonald .  You seem to be a young guy that's not looking to settle down and retire, so I would leverage and maximize the growth of your portfolio.  However, I would revise your strategy and put just 20% down in order to max out your leverage, while still obtaining the best rates available.

$500,000 cash on hand; Do I buy outright or divide and borrow?

Most Popular Reply