Am I doing this wrong?

Question

Thomas S. · Answer

Buying with cash is counter productive to most investment strategies. Conservative investing is one description but I prefer to think of it as hording money. You are taking what is probably the most valuable asset one can have, cash, and basically burying it in a property, dead, buried and forgotten never to be seen again. Cash has a opportunity value to most investors of 10% return or higher and as such when you have it dead and buried it must still earn that return. Contrary to the opinion that equity increases cash flow it is quite the opposite it kills cash flow due to the high value it has.

You could have a mortgage charging 4% interest or you buy with cash worth 10%. The result of using cash is you immediately have a 6% loss on return buy paying off a 4% mortgage. That is not investing it is hording.

When you buy with cash subtract 10% off the top of your rental income, before any other expenses, to pay for the return on your cash invested.

If you pay cash for a $200K property that cash requires $1666/month of the top of your rental income to justify having it sitting there dead. What ever is left from the rent needs to cover all other expenses and produce a profit for the property. If on the other hand you had a 4% mortgage that would only cost $666/month in interest. It is very clear that buying with cash kills the cash flow resulting in often having the property with negative cash flow. Not mush point in investing in a property when it is in fact the cash that is generating and therefor earning the income not the property.

Find a more passive investment for your cash if necessary rather than go to all the trouble of owning properties and having to manage tenants that produce no financial benefit. All you would need is a investment that produces a 6% return and you would have exactly the same income, probably better, without the headaches of tenants, maintenance, midnight calls etc.

Carlos Tavares · Answer

@Maria Marrero I do like the path your on , it has it's own merit! If you do well with w2 job and your cash flowing well with current property and find comfort with that then stick to your plan.

But like others said your money isn't being optimized fully by leveraging across multiple properties and depending on your goals you should find what works with you best.  I would prefer your method but it takes too long and we are a fighting time , but if you do buy all cash your next one will take less then 8 years to save for then even less for 4th.

But as it stands it's not a mistake on your part if that makes you most comfortable. Gives you that sense of security , I can understand that 😊

Kevin Siedlecki · Answer

@Maria Marrero - Check out my blog post about running the numbers to get to your ROI. You can definitely get 10%+ on financed properties. You just might have to expand your search area. Most of us  who do finance wouldn't buy anything that won't hit at least 10% COC.

https://www.biggerpockets.com/blogs/6815/45137-my-...

Chuy Gonzalez · Answer

I like what Sean said...how about getting two houses and putting 50% down on each? Then again, if you can't sleep at night with a mortgage on rental property, its not worth it.

Sean Schexnydre · Answer

As Jeremy said it really depends on your goals as well as your risk tolerance. Paid off rental properties method will give you good cash flow but the growth will be slow, however the risk is relatively low. Leveraging is a riskier method but with risk comes potential growth. Keep in mind you don't have to leverage up to the max available, you can leverage a small portion to speed up the number of properties you acquire. For example instead of buying 1 property per year fully paid for, perhaps you could do 2 both financed at 50% or possibly less. You are able to leverage the amortization of the loan and the relative low cost for the other expenses and come out with more yield for the same amount of principal.

Jeremy Pakalka · Answer

@Maria Marrero It really depends on your overall goals. If you are looking for instant cash flow with equity down the line, keep doing what you are doing. However, if you are not looking for less cash flow and much more equity down the line, I would look into getting loans for each house. The investors I work with use hard money loans to buy and rehab a property. The day the rehab is done and the house will pass inspection, they refinance into more conventional type of loans (mortgage). The advantage is you are bring significantly less money to the closing table, which allows you to buy multiple properties during the same time period.

I would contact a mortgage broker in your area to find out what you can be specifically approved for so you can run the numbers and see what makes sense for you. I also recommend that you put about 2/3 of any cash flow from a rental property into the mortgage on that property and save 1/3 into a savings account for a rainy day. Of course this model only makes sense if you do not need the cash flow each month. The real payoff is when you sell the house down the road or you continue to rent with the mortgage paid off. Hope that helps!

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