Leasing with an option

[Michael Melchior]

I'm trying to start my investing venture in the st.Louis area, I actually live in the 63010 area code. I'm a licensed  agent also but I just don't know where to start.  Is it a good idea to buy with a large down payment to create a higher cash flow when leasing with an option to purchase? And because of the depreciated prices in North st. Louis county, would it be smart to purchase property there??

[Peter MacKercher]

@Michael Melchior I really advise you to stay out of North County unless you know exactly how to manage those properties and tenants long before you buy. Those properties look great on paper, and it's important to remember that paper catches fire very easily, leaving all those hopes to go up in smoke. The reality just rarely matches the expectations unless you know what you're getting into. There are management companies here that have that class of property down pat, but they also generally don't take on small properties which can leave you self-managing in an area you might not be comfortable traveling to yourself.

As far as using more cash to purchase a property, well, leverage is one of the most powerful aspects of REI. By using more of your own cash you negate that power and limit your returns. Example: $100,000 in cash can buy you one property, or if you use leverage it can get you 3-4. That single unleveraged property will (usually) not produce more cash flow than 3-4 leveraged properties. Of course with that larger scale the demands of managing and your required capital reserves also grow, which is another factor to consider.

A lot of what you decide to do will depend on your risk tolerance, ie, how stressed out you're willing to be by taking on debt. Be honest with yourself since you can go either way, but using cash is a very slow way to grow that locks up your capital in untapped (but remember, not untappable) equity.