Should I use Cash or leverage?

[Eric Kristt]

Brand new investor here. 

I have 220k saved in my bank in liquid capital, 700 credit, and about 60k in salary. I am looking to buy and hold a multi-family to live in and rent as my first deal. I know there are many other factors to consider, but I want to know what strategy may be best. Do I leverage off of loans and pyramid up and buy more properties with several small down payments? Do I buy in all cash and avoid interest and all the headaches of loans, or do i mix it up and do a little of both? what do you all think?

[Nicholas Weckstein]

I feel that the best route in real estate investment is to leverage when ever possible.

Here’s why:

Let’s say you find a 220k property in a good area at a 7% cap rate which equates to $15,400.00 in ROI. You would probably see the same return in the stock market, maybe more, maybe less. With real estate being a bit more of an “active” passive income with having to deal with tenants, repairs, bills etc simply parking that money in a good low risk mutual fund would yield close to the same results with less to worry about (minus a stock market crash).

BUT what the stock market lacks is the ability to leverage forward. You can use that money to acquire 4x what you actually can purchase with your cash. That being said you could put say roughly 200k down on an 800k property in a very good area with a cap rate of let’s say even lower than the other one of 6%. Now your talking about 48k a year in ROI. Big difference.

Not to mention that once the property is paid off, you could then cash out refinance 80% of your 800k property and have 640k to put down on a 2.5 million dollar property.

So that’s the long answer as to why leveraging is very important.

Best of luck.