If someone could purchase 2 or 3 homes for rental purposes up front, would it be better to purchase these homes with the cash or finance all of it, or finance some of it…
Thanks!
I’m guessing here, but… if the buyer was qualified, and the properties had a solid, positive cash-flow… then, you finance to the hilt and keep buying more properties.
Am I missing something here? Is there any reason not to leverage your position with debt-financing? What’s the catch?
There is no catch. I want to purchase some properties, but I hate debt… So I wasn’t sure if buying properties and paying a huge downpayment, or even paying off the house would be a good idea. I know people struggle with positive cash flow, so wouldn’t that solve the problem? I guess I am confused… If you can purchase a property with cash, and rent it out… then its all positive cash flow isn’t it? Plus I am not paying the bank their interest?
Don’t “hate” debt…embrace it and make it your friend/business partner!
You should HATE bad debt – high interest credit cards, car loans, boats, etc., etc. and LOVE good debt – student loans, mortgages on investment properties with positive cashflow, etc.
Leverage is the path to real, long-term wealth! (Oooops…just gave away a guru secret for free…oh, well…)
Keith
Hey,
Debt is good and bad. You have to be comfortable enough to sleep at night, so use a level that is good for you. Remember that even “good debt” is leverage and leverage cuts both ways. If you make money, you make a lot more with leverage. If you lose money, you lose a lot more (percentage wise) with leverage.
If you don’t like debt and have the cash, then cash out a property and work through the expenses and income for a year until you are comfortable with it and then finance some of it if you want to pull money out to do more deals.
I know people that will finance everything they have to the hilt to do “more deals”. Often that is when the house of cards comes crashing down. Others like Dave Ramsey promotes even investing with cash only. One conservative investor that I know is comfortable at 50% owed on his investments. He figures that no matter what happens in the market, he is safe at this level.
So my two cents, is buy with cash and then ease into the debt it that suits you better. You will be much less likely to fail that way.
DB
Thanks for the help guys! Much appreciated!
The way to really answer your question would be to do an ROI analysis. Say you put 10% down and the property increases in value by 5%. That means your 10% is now worth 50%. If you put down 20% and it went up 5%, then you have a 25% return. That’s where leverage comes into play and why some people prefer to maximize their leverage. If you only have 100k and put 5% down and ignoring closing costs and all that, you could get into 10 properties whereas with 10% you’re only in 5 properties. You can basically make a lot more when you’re in 10 instead of 5, but it’s a lot more riskier. Having someone not pay you the rent hurts you a lot more when you don’t have a big down payment.
Personally I’d say that if you had the cash, you may be good with a 20-25% down payment. You can get decent 1st mortage rates for non owner occupied at that rate. If you go up to 90-100LTV on the financing, then you could be talking about rates in the 8-10% range depending on your credit score. Also most properties are bid up to the point where if you do 100% financing, there’s very little cash flow if any and usually it’s negative so doing less is probably the way to go depending on your area.
Oh, and even if you pay cash, it can still be negative, there’s always taxes, water, insurance and maintenance. It goes negative when the units aren’t rented out.
Well put Henryinma!
NDI