Quick Math for newbies like me - Rentals - Finance vs Fully owned

[Xavier G.]

Hello fellow investors,

The results may not surprise anybody and some may think "duh", but I always wanted to put some number down to compare financing a property versus fully owning it (no mortgage) and see the impact on cash flow/equity 10 years down the road. So I finally ran the math (hopefully without any big mistake) with the following numbers (based on rule thumb of 1% (rent/purch price) and 50% expenses rules of thumb to simplify):

 - About $145k cash available

 - House sell price: about $130k

 - Financing with 20% down, 5% over 30 years, Closing costs $3k

- Insurance, tax, Vacation, Maintenance, Cap Ex, Property management, HOA: $650 (or 50%)

 - Rent: $1,300/month (1% rule)

 - No repair cost

Two extreme and very specific cases:

Case 1: Buy the house cash, so only by 1 house in this case, cash flow $650/month

Case 2: Finance the house, but buy 5 houses, cash flow $90/month*5 = $450/month

Case 1: after 10 years: $78k of cash flow, $130k equity for a total of $208k "net worth" + $12k cash leftover.

Case 2: after 10 years: $54k of cash flow, $227k equity for a total of $280k "net worth"

Everybody can draw their own conclusions and figure out which case gets you the more "bang for your buck". None of these two cases actually look bad to me (I thought the no financing would be worse), just a question of what kind of investor you want to be. Case 2 would take 7 houses to cash flow as much as Case 1, hence a lot more hassle. At the end of the 10 years, the 5 houses would get you an extra $73k "net worth", all of which tied into equity.

Now, sure, those are two very simple case and don't account for the typical strategies (BRRR, 100% financing ...) that would get you even more houses/equity in Case 2, but my purpose was more to have a simple hassle vs rewards comparison.

I guess the only real conclusion of this exercise is do your numbers in your market, figure out what your goal is going to be and what it will take to get there.