OK, I found 2 properties. One is a flip project and the other a rental. I can only do one, I will pay all cash for either one. What are the pros and cons of each? Here is the info:
Rental:
Price of property: 145,000
Property tax: 1,600/yr
*No repairs required
*Monthly rent: $1,300
*This property has the potential of being worth $240,000 in 5 yrs. But that’s all speculation.
My dilemma is that I only have 200K cash. I can do 3 flips in a year and potentially make ~80-100K. Or I can buy 1 rental and potentially make 100K in 5 years.
use leverage, doing it with cash is a slow, slow process
flip vs rental are two different animals,rentals are great for long term, flips are great if you need cash,i’m more of a rental person, building cash flow slowly,but flips keep the reserves up
I wouldn’t touch either one of those deals,if I’m going to get $1300 month in rent I better be getting in under $100k, hopefully around $85k or less
As I think most experience investors will tell you…
Leverage the $200k and the bank’s/HML’s/OPM’s money to buy your properties. With that $200k you might be able to ‘do’ 3 or 4 flips with rehab etc.
I would not think that anyone would suggest you use your $200k to buy a rent house in cash. If you stop a moment and think about it… you are using $140k to make $1,200/mo after taxes and BEFORE any operating expenses and vacancies.
Wouldn’t be better to use $28k for 20% down payment to earn you the same $1,200/mo and STILL have $172k in your bank account?
Thanks PachucoBro. If I were to finance 80%, it would be a commercial loan at about 9% interest, so 900 of the 1200 in rent will go towards that. With closing costs, etc. I would be getting more or less the same return for my money. Am I missing something?
Thanks for the input andy. I’m finding that I am losing out on deals because of a lot of cash buyers here in Southern Cali. The ones with cash are the ones that are getting to the top of the offer sheets.
You have to remember that just like politics all real estate is local. You have to do what works where you are. Find out what people in Southern California are doing to make money and do what they do. You also only want to consider what is making money. That may not be who is doing a lot of deals. Real estate is no better than any other investment except for leverage. You may have to buy the houses with cash and then refinance to get your cash back out to get some leverage. That is probably what they are doing. But learn what they are doing to make sure you make money and not just buy houses. The goal is not to buy the house the goal is to make money.
PachucoBro and andydallas are right the way to make money with the $200k is to buy 10 houses with $20k down each instead of buying a house for $200k
My 2 cents:
I wouldn’t touch either of those deals. I have no experience with flips, but I would want a house generating 1300 in rent to cost 100K or less. The exception is if you are banking on appreciation and planning on selling for a profit soon. If it were me I wouldn’t have much of my RE portfolio in that category.
Having cash is great. Use it, but use it smart.
Buy that house all cash, but re-finance it, lather, rinse repeat.
Whenever I buy a house with cash, I also make sure it would cash flow if I were to use conventional financing.
Cash offers can get you better deals and faster closings.
Always check in your area the statistics for a loss vs.gain so you can measure whether it will be an advantage to the keep or hold on to a property and rent it or sell it.
Mike I agree but I feel that way with every house I ever see in California. I have no idea how they make money in California. Of course it would be presumptuous of me to say they I know all of the ways to make money and that you can’t make money in California. Instead of saying you can’t make money I say find someone that does know how and mimic them.