Buy more properties or put more down?

Question

My Wife and I are buying our second SFR. We were discussing strategies going forward, and wondering to buy multiple properties or put more money down on each deal. Example: As of current, we are planning to buy once a year. When that time comes around, let's say we have $20k to invest from previous year profits. If we are looking at homes that take $6k for the 20% down, do we buy three properties and continue to grow that way? OR, do we put all previous year profits on single new property, eventually paying cash for them? The first scenario grows much quicker but acquires minimal equity. Second scenario grows really slow but max equity. I'm sure this is going to be a very opinion based response, just looking for what experience has taught you. If it helps...my Wife and I both hold W-2 jobs with 2 kids and hope to eventually leave the 9-5 world to do real estate full time. Thanks in advance BP!

Steve Jeffries · Answer

I found this you tube video from Brandon that has another opinion if anyone else is looking in to this question. http://youtu.be/QlEySyfHKns

Steve Jeffries · Answer

Thanks Greg. I have heard about basing calculations on 100% financing in the podcast and forums, just never really clicked. I see what you are saying about keeping the cash vs putting more down, and having tenants create the equity for you. Makes a lot of sense. Thanks for that.

Thomas S. · Answer

You do not fully understand the concept of equity and cash flow. Equity is the money paid by your tenants toward your mortgage and appreciation. It is not the money you put in.First you actually gain no real equity in a property by simply paying more down. It's already your money so how do you see putting that into the property as being a plus as equity. In addition equity in a property must earn a return above and beyond the rent garnered by the property itself. If you have a $500,000 property fully paid off then before calculating your cash flow on the property you must pay "opportunity" money to the equity in the property. This means to make a profit your rents must be much higher. You must always calculate cash flow based on a property having no equity, that is 100% financed at all times to pay for the dead money you have tied up in the property.Also keep in mind a property 100% financed appreciates at exactly the same pace as a property 100% paid off. Every dime of equity had better be earning a great return above and beyond normal positive cash flow otherwise you might as well keep your "equity" under your mattress.

Steve Jeffries · Answer

I knew the answer to my question would be, for the most part, very subjective. All of your comments bring out really good points, and I like for my wife and I to be able to sleep at night knowing our kids will have a secure roof over their head and food on the table. We probably would have been much more aggressive 5-10 years ago. I like having cash flow so that if one of us were to lose the w-2 job, it wouldn't effect us too badly. Once at that point a transition in to focus on equity building/debt free rentals may be in order. Much thinking and planning is in order. Thanks again everyone.

Justin Taber · Answer

Like you said you will likely get a lot of different responses and it depends what your goals are. I'd just add to keep in mind that money is likely as cheap as it will be for a long time, and that you and your wife both have to be able to sleep at night so if being highly leveraged is going to cause too much stress its not worth it. Something to think about! Either way I think its a great plan to buy at least one a year.

Trevor Ewen · Answer

@Steve JeffriesAfter listening the great show with Sharad Mehta I was opened up to how much negotiating power all-cash gives you for single family deals.Ultimately, his choice not to use leverage in his buy & holds is based on personal preference. It was also a unique asset that allowed him to approach these sellers and get things moving, quick. Conventional closings are a PITA, and I can only imagine it's a nice way to get out of it.Beyond that, it's all about personal preference and risk exposure. I like 25% down on conventional, gives me a 5% boost from the bottom end (20%) and usually helps me cover the errors I most likely made.Controlling my own personal finance and spending is a lot easier than controlling local governments, contractors, managers, or tenants. If you can buy yourself a bigger margin for error, you may sleep better at night.

Joe Villeneuve · Answer

The mistake you are making, is you are only considering options that involve "spending" you cash, instead of "using" your cash. This is why you are in a quandary about which of your two choices to move forward with. The answer is, neither one.If you were to use either of these choices, your cash would have only one use...in other words, you are "spending" your cash...as in "going, going, GONE". Unfortunately, you can't hit homeruns this way.You need to use all of it on one property, then flip it with profit, and repeat using those same funds (now with added accumulating profits) to expand the number of cash entries you can have...each flipped cash entry generates profits, that when added with the other profits (on a repeated, continuing basis) allows you to buy with all cash a continuous string of Rentals...with no debt on them.Then, you can refi these rentals as you see fit.

Edward B. · Answer

@Steve Jeffries,@Russell Naylor hit the nail on the head. It totally depends on your goals and objectives. I will tell you what I like to do, though, and you can decide if it fits your situation at all. I like a combination of the two leaning toward leveraging. That is, I will leverage my properties as much as I believe it is safe to do so based on they income they generate. I have my cash flow requirements for each property and will structure the leverage to meet those requirements while pulling as much money as possible out of the properties. This maximizes my ability to diversify and grow my portfolio without taking on too much risk. It is one of the reasons I weathered the crash without getting killed.This works for me because I also have a W-2 job and do not need or want the extra income at this stage. I prefer to focus on growing my portfolio as a whole and investing for the long haul. Just like switching from stocks to bonds as you get older, though, I will likely change my strategy down the road.

Matt Faix · Answer

@Steve Jeffries This is very similar to our situation. My wife and I both work W2 jobs and would eventually like to do this full time. For our goals, we want faster growth at this point so we've been putting the minimum down - in our case it's been 25% on a conventional loan. We realize that this is a bit riskier, but try to buy where we have good equity going in (or can add equity fairly easily with improvements). This allows us to buy more properties earlier on, and will create more significant cash flow/equity/return years down the road. Hope that helps! Best of luck

Russell Naylor · Answer

Probably going to get this answer from multiple people... but it depends on your goals! Leveraging allows you to expand your portfolio and get more cashflow, but obviously buying all cash keeps you up on your equity. Weigh the options and roll with it. Good luck!