All Cash vs. Mortgage

[Sal G.]

I've signed on a $655,000 condo on the upper east side of Manhattan and we are set to close on Feb 1. Taxes, common charges and insurance will run about $1000 a month and I've found someone to rent it for $3200 a month. Currently, we've agreed to close all cash but given how low rates are (right now I have several banks offering me 4% on a 30 year fixed) I thought it might make sense to finance the property to save some money for our next acquisition (I also think that we will experience a great deal of inflation over the term of the loan, making my future payments relatively low, but that is an entirely separate can of worms).

I keep reading about how using leverage will increase my return, but every calculation I do actually shows me making a lower return on my initial investment if borrow any money. Is there something I'm missing?

Also, I don't have property two lined up yet and I will likely have to borrow to purchase it. Does it make sense just to wait until I find the next property before I put a mortgage on my first, or buy it subject to a mortgage and keep the cash on hand?

Thanks!

[J Scott]

Originally posted by Amit M.:

@J Scott your comments are interesting. Can you share some details on what deals went bad, like city, prop type, price? 2002 was a good time to buy (and refi 1 year later went rates hit bottom). Of course 2008 was top of the market before big crash.

Here's one example...

I rented a house in Cupertino in 2005. Landlord purchased in 2004 for $975K, and I was paying $3450 in rent. In 2008, when it was time to re-sign my lease, I was finding comparable properties for around $2500 (and value of this property dropped to about $700K). He wasn't willing to drop the rent, and I moved out. From what I later heard, I don't believe he was ever able to get it rented for what he wanted, and he went into foreclosure.

While I don't know the details of his financial situation, I presume that he couldn't handle the additional monthly holding costs given the significant drop in market rents.

Btw, that house is now worth about $1.2M according to the comps I've seen on Zillow... :-)