Should you buy a rental property with cash?

[Payton Reid]

I just purchased my primary residence in a new city with cash ($350k) and have another $250k sitting in cash.

Should I buy our first rental unit(s) with cash (after reserving 6-8 months living expenses)? As context, we have no debt of any kind.

I realize interest rates are low but don’t like the idea of taking out a loan if I can avoid it. Also, I realize mortgage interest can be deducted—but so can insurance and taxes which I would still realize.

Just curious on your thoughts. Thanks!

[Tom Shallcross]

@Payton Reid - there's a personal comfort that comes with paying cash, but strictly from a numbers stand-point it's not going to provide your best return on investment.  

Let's say you purchase a second property for 200k that rents for 2k/M. For the first option, you get an 80% mortgage with roughly a 850/m payment.  Let's say after paying all mortgage, tax/insurance, accounting for vacancy/maintenance/capex, you have $300/M left over.  Your first year, you're earning 3.6k on 40k invested (40k is your 20% down payment)

If you bought  pure cash, you eliminate the monthly 850/M mortgage so you now cashflow roughly 1,150 (300+850).  In your first year you're earning 13,800/200k, not as high a ratio as the first example and you're also much less liquid. 

The first option has a higher CoC and more importantly it does not even account for equity paydown (as others will say, the job of your tenant), tax write-off, or ability to scale. Lastly, any appreciation you gain is much sweeter as you are obtaining 100% of the appreciation of an asset while only owing 20% of it. This is the true beauty of leverage.

If you want to dive deeper into the weeds, I can gladly share my IRR spreadsheet that runs my examples with and without financing to show the difference outcomes. I personally tend to buy smaller houses with cash to obtain a better deal/close quick and then refi out after our value-add (hopefully BRRR and keeping no money in the deal).

The strategy is completely up to you as everyone has different objectives and we are all in different phases of our lives, I just wanted to point out the math aspect.