Debt Sweet Spot on Rental Property

[Jake C.]

Hi All,

There seems to be 3 common approaches to financing rental properties:

1- Buy in cash. Hold in cash. Debt is bad. 

2- Buy with the absolute minimum necessary out of pocket for the longest possible term.

3- Somewhere in between 1 & 2. 

I am really interested in hearing from the people that have been utilizing the 3rd path. What is your sweet spot for debt?

Let's use the example of a turnkey deal that is 8 units (4 two unit buildings) at a purchase price of $300K and an NOI of about $50K, in an area that will see only very modest appreciation.

What kind of loan terms would you seek to really hit the sweet spot in terms of cash flow/risk/wealth creation?

Using the above example, one landlord told me that he would try to get a 50% loan for a 7 year term amortizing over 14 years. Assuming a 5.8% rate, his annual debt service would be $24K, leaving $26K in cash flow. His balloon payment would be $90K, so he will have paid off $60K of debt. As long as the properties are worth more than 80% of his current purchase price in 7 years, he should have no problem refinancing at his balloon. 

This seems to be a strong balance of cash flow/risk hedging/wealth creation.

Curious to hear your thoughts/approaches!