Buy Rental Property Cash Or Have Mortgage?

Question

If you guys had 300k to invest, would you put 80-100k down on 3 properties each making 500-800 after the mtg and expenses OR on one solid 250-280k property with no mortgage and make +/-2000 after expenses?

Does mortgage interest benefit you in some way or is it better to own outright? Thanks again.

Steven Foster Wilson · Answer

Personally, I would not want to use all of my capital. I would rather get a mortgage and able to afford several then just on one out right. If you were also renting it then your renter income should cover the mortgage and give you some passive income.

Craig Clinton · Answer

I would definitely go with the 3 properties with mortgages. Interest rates are still very low. It's better to leverage other people's money. Also, you have more flexibility with the 3 properties. In a few years you can 1031 one property into something bigger and keep renting the other 2 or cash-out refi 2 of the 3 down the road.......much more options.

Bjorn Ahlblad · Answer

If I were a younger investor today I would borrow as much as possible and sit on any cash I had(for reserves and renovations). With inflation you are so much better off paying yesterday's debt with today's dollars. REI is not short term gain which makes it ideal to fund with debt. But it also depends on what segment of REI you are in-the field is so diverse no one rule applies.

Katherine Blazer · Answer

I would do the math. When you buy the 2 or 3 properties what does each cash flow? Does that equal more than the $2,000 you project with just purchasing one. Also when you talk with your attorney what is the benefit from a liability standpoint of having a mortgage on the property. When you talk to your accountant what are the tax benefits of having a mortgage?Consider your risk. If you only have one property and it does not rent for some reason... is there a safety net of multiple properties....

Christine Bellish · Answer

Personally out of those 2 options I would definitely opt for 3 properties all with mortgages because like @Eric Erickson said, your cash on cash will be higher using leverage, and buying 3 properties instead of 1 will spread your risk - if you buy 1 property and something goes wrong all your eggs are in that basket, but if you have 3, the success of your investment isn't only tied to 1 property. That being said, you are also going to have to deal with 3x the tenants, and 3x the expenses in some cases (3 roofs, 3 heating systems, etc). Not a tax professional, but pretty sure you can write off the mortgage interest you pay, which is another benefit to getting a mortgage v buying in cash.

Emily And Eric Erickson · Answer

Your cash on cash % will be higher using leverageYou will have higher peace of mind not being beholden to a lenderUltimately it depends on your overall financial goal - higher growth or super safe returnTrue financial freedom usually includes paying down debt, just depends on when you are at that stage

Jordan Malara · Answer

As others have alluded to above, the answer to this is highly dependent upon so many factors including your overall investing objective or goal. If you are investing for the long haul, then I would say it would be most beneficial for you to spread that capital out and utilize leverage from banks. With the insane amount of inflation we are currently seeing, locking down long-term, fixed rate date is a very smart move. The other important thing to analyze when looking at various investing opportunities is the Debt Service Coverage Ratio (DSCR). This will help mitigate your risk in future market volatility.

Alex Hunt · Answer

Using other people's money is the best way to go in my opinion. With $300k down as 20% you could purchase $1.5 million in properties across as many or as few as you would like - I believe a mix of property types would be best for security/ stabilization. You could also go with a delayed purchase cashout, in which you would be able to get 80% of the purchase price from day 1 of closing up 6 months after closing in cash. Right back to you on a 30 year fixed - $300k purchase get $240k back to purchase another, then 80% again to get $192k, and so forth.

Dwayne Poster · Answer

Mortgage interest is an undesired expense, but, it is a consequence of a loan, which is good, in the sense that you can hold a larger earning asset. Those earnings are weighted in favour of the lender in the early life of a traditional mortgage, gradually shifting towards your benefit as the mortgage matures.The determination of which is the better investment of the two scenarios can only be answered by your expectations of returns on investment, and time commitment, and of course, if they are actually realistic.