hypothetical question, lets see how this goes.

Real Estate Deal Analysis & Advice
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hypothetical question, lets see how this goes.

Account Closed
Property Manager · Renton, WA · Member since 2014 · 81 posts · 20 votes

I have a crazy question to ask all these professional investors. I'm curious to see which way the vote will go. Okay here's the question:

Let's suppose you have 100k in cash.. what would you do??

A. buy one sfh for 100k in cash and be free and clear and receive $1000 a month. 

or

B. Buy five different sfh at 20% down (20k) each. and cash flow $1000 a month ($200 from each house). 

and yes I know the numbers might not never work, but lets say they do and the world is made of candy. 

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Eric McCully
Rental Property Investor · Memphis, TN · Member since 2014 · 57 posts · 33 votes
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B. All day long, B.
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  • Eric McCully
    Rental Property Investor · Memphis, TN · Member since 2014 · 57 posts · 33 votes
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    B. All day long, B.
    2Reply
  • Mitch Coluzzi
    Investor · Des Moines, IA · Member since 2014 · 238 posts · 230 votes
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    First and foremost, a world made of candy would be a sticky place.  Not sure I would be investing in RE there, well... maybe farm land in India and stock in Deere to take advantage of the growing cane market / technology (assuming the need for massive sugar demand to produce building materials).

    To the question, for me... hands down Option B. 

    You are making the same cash-flow AND paying down a mortgage.  Your vacancy expectations will be easier to control with good property management: 1 of 5 units empty for a month is a lot less "expensive" than 1 of 1 unit empty for a month.  Coupled with perceived appreciation; it would be an easy choice for me.  Long-term rate of return will be astonishingly larger.  OPM is a fantastic tool when it is cheap!

    2Reply
  • Account Closed
    Investor · Kansas City, MO · Member since 2010 · 239 posts · 110 votes
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    Cash flow is the number 1 name of the game in real estate investing. Leverage / OPM is a close 2nd. 

    So B would be the option for me. 

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    First of all your numbers aren't right.  If you did Option B2, based on the 80k loan, the payment would only be 400/month, so option  B would actually cash flow 400/month...each.  Even before that I would go with Option B.  With this added info, there's no question.

    Option B

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Let me add this to my numbers...the total comparison.

    Option A Cash flow:  $1000/month

    Option B Comparison:  $2000/month (5 x $400/month)

    Now, what's the question again.  LOL

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  • Account Closed
    OP
    Property Manager · Renton, WA · Member since 2014 · 81 posts · 20 votes
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    Joe your killing me here...lol.  "Hypothetical" lol. Just wondering if the numbers did work.. its still option "b"?? @Joe Villeneuve I thought most people would pick option b too. 

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  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
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    B! hand down!!!! I am in LOVE with leverage AND your tenants paying down your mortgage. On option B, not only are you getting the $1000 in cash flow but ALSO the principle payment too! You are also getting a tax benefit since you have a mortgage. Plus you are locking into a historical low mortgage rate (now as low as last year but historically low for 30 years loans).

    Again as always it depends on YOUR goals!. Take my answer with a deep spoon of salt. That is how I invest.

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  • Brie SchmidtBusiness Member
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    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
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    Option B all day long

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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    @Joe Villeneuve 

      I think Joe really thinks option A  as in you pay cash then refi pull your cash out and rinse repeat... that way you have no cash in the deal.. Option B god forbid but you would acutally have real cash in a deal...

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by @Account Closed:

    Joe your killing me here...lol.  "Hypothetical" lol. Just wondering if the numbers did work.. its still option "b"?? @Joe Villeneuve I thought most people would pick option b too. 

     For me, there is no option A

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by @Jay Hinrichs:

    @Joe Villeneuve 

      I think Joe really thinks option A  as in you pay cash then refi pull your cash out and rinse repeat... that way you have no cash in the deal.. Option B god forbid but you would acutally have real cash in a deal...

    When given the choice between the two options you've given, the answer is only a starting point, a jumping point, to the rest of your REI. Once you put $100k in that first house, and you you have left it there, it just died....unless you refinance in out. Even if you only got $75k out (75%), you'd have a new $75k to work with...and move forward with.

    Don't focus on what a one time use will get you.  Focus on how you can re-use those same funds more than once, when you make decisions of how to use them.

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