So what’s the consensus from the ol’ pros? Assuming one has limited funds and must finance at least 50% of the purchase price…
Option 1: Use very little of your own money, finance the vast majority of the cost, let the renters pay for the property over the long term, pocket small to moderate positive cash flow annually, and one day…years from now… enjoy full, debt free cash flow after the rent has paid off the property. Very little of personal funds used.
OR
Option 2: Finance a smaller amount for the property using personal funds (an amount that can be paid off in 5 - 10 years), pay out less interest, enjoy a higher cash flow while paying on the property, and with the help of renters, have debt free cash flow years sooner.
Land Baron,
I choose answer C.
I don’t use any of my own money. I buy at a huge discount so that I can borrow 100% of the purchase price plus any rehab money and still be below 70% of the market value. I pick up a minimum 30% equity at closing (which the bank likes). Nearly all of my loans are 20 year and all of my properties have reasonable cash flows (using real world numbers).
Good deal are not hard to find, but you do have to look.
Good Luck,
Mike
I expected someone would respond with an option “C”. I’ll probably get a “D”, “E”, “F”,…too! That’s great, though. The more info and ideas shared the better! Thanks.
You mentioned that you carry 20 year loans. That kind of answered my question. Sounds like even if you COULD pay off the loan, you DON’T, but instead let the property pay for itself while still maintaing a satisfactory amount of cash flow.
Yes, I am a newb and still thinking small to get started. The 2-unit property that I’m looking at will probably have about $230 per month positive cash flow after mortgage, insurace, minor maintenance, and property taxes. (That’s at 100% occupancy, which I realize won’t be the case). Plus my do-it-yourself rehab would probably add another $25K equity, but only cost me around $15K. On a positive note, my monthly mortgage payment would be less than $400, so a vacany (or two) won’t give me “the shakes”.
Thanks again, Mike.
Land Baron,
You should do a search of “expenses” and “guru nonsense” on this site. If you only include the expenses you mentioned, you will be disappointed big time when you are actually making little or no money on your rental. It is absolutely imperative that you use real world expense numbers when calculating cash flow for rentals.
Good Luck,
Mike