Someone answer my real estate question please

[OneforfreedomParticipant 930]

Hi there,

Can someone explain the following to me? Why is leverage/using a bank loan to finance real estate a good idea over just paying all cash for it? For example, if I make enough to buy a small low-cost multifamily property in cash, why shouldn’t I do that? Why should I only invest 20% and have the bank finance the rest?

The way I see it, yes the cash-on-cash return is greater with bank-financing, but you have the note to pay back. Whereas if I pay all cash, I get everything from the rent minus expenses such as insurance, maintenance, management, and I don’t have to pay the note.

[MGTOWmonkey aka No More Fucks To GiveParticipant 6635]

Relax and have a cup of coffee, the guys will chime in asap. You just posted 30 minutes ago so give them some time to unwind and I’m sure your answer will be answered in droves.

Never lose sight of what brought you here.

[OneforfreedomParticipant 930]

MGTOWmonkey aka No More Fucks To Give wrote:

Relax and have a cup of coffee, the guys will chime in asap. You just posted 30 minutes ago so give them some time to unwind and I’m sure your answer will be answered in droves.

Good suggestion!
But I’m very patient no worries. Just curious- what gave you the impression that I’m anxious or that I need to relax?

[QcummerParticipant 652]

That type of question tells me that you need to learn the basics of loans, amortization, down payment, taxable income, deductible interest, etc..

[OneforfreedomParticipant 930]

Qcummer wrote:

That type of question tells me that you need to learn the basics of loans, amortization, down payment, taxable income, deductible interest, etc..

Do you have a recommendation for a good source to learn such concepts from? Any books in particular?

[QcummerParticipant 652]

i recommend the internet. Lots of good stuff you can find on there. 🙂

[EntropyParticipant 902]

You know what they say, there is never a STEALTHY MGTOW around when you need one…

"Compare your lives to mine and then kill yourselves" -BBR

[UmbreonParticipant 152]

I’m in the “no loans unless it’s dire” camp. Interest is a pain!

Let’s say you get a nice little three family apartment using a 100,000 dollar loan plus some cash you had. The property is worth 500k.
Each unit pays 1500 rent every month. 4500 total.

You do your own groundkeeping. Mowing, planting, and general upkeep is around 200 a month.
The average tax on property out where I live is 0.74%. That’s 37k a year (3,000 a month) based on the property value.
Note- property tax raises as property value goes up so this actually will be more over time. I’m ignoring that right now for simplicity’s sake.
Let’s say the home owners’ association demands 500 in dues monthly for the property

The property is making 800 a month before taxes. 9600 a year total.
You’re still working a part time job that earns 15k a year.
You owe 2,861.25 in taxes (238.44 a month)

If you pay your taxes out of what the apartments earned you, your total income from the property per month is 561.56
At 6% annual interest All of this will be paid towards the loan for the next 37 years.
No profit until it’s paid off….

If you tighten your belt and pay your taxes out of your pocket , your total income from the property per month is 800 a month.
At 6% annual interest All of this will be paid towards the loan for the next 16.5 years.
No profit until it’s paid off….

Calculator so you can play with this

Please note that this has been a best-case scenario with perfect luck. No floods, fires, vandals, bad tenants or other major things going wrong. If ANYTHING goes wrong, it’s going to take longer and be expensive.

Beauty fades, dumb is forever.

[MGTOWmonkey aka No More Fucks To GiveParticipant 6635]

Oneforfreedom wrote:

But I’m very patient no worries. Just curious- what gave you the impression that I’m anxious or that I need to relax?

Just read your title alone and it was posted right after you posted one before this one for the same advice,that led to my conclusion,if i’m wrong than my bad. The guys are here so good luck with your investments.

Never lose sight of what brought you here.

[BeerParticipant 11832]

The goal is to find properties with a net positive cash flow even while they are mortgaged. If you can’t do this the property probably isn’t too great of a choice as an investment…look for something with a better return…maybe a different neighborhood or the next town over with lower taxes. You don’t want to invest in a property that is going to cost you money each month even if you have a tenant paying you rent. Basically you don’t want to buy a property that will cost you 1000 a month to own you can only rent out for 500 a month, you want to find something you can own for 500 a month and rent out for 1000.

So taking that into account, let’s assume you have 100,000 dollars and there are a bunch of apartments near you for sale for 100,000 apiece. You could buy 1, maybe it cost you 200 a month to own and you rent it out for 1000…you could potentially make 800 a month. Or you could put 20% down on 5. Maybe each cost you 700 a month to own with a mortgage and you could rent it out for 1000 a month, meaning could potentially make 5×300=1500 per month.

Plus you’ll have 5x the mortgage interest, property taxes, depreciation, and maintenance expenses to write off. Plus if you own 1 100,000 dollar property and its value goes up 2% next year, you made 2,000 dollar in appreciation, where as if you owned 5, you’d own 500,000 worth of property, so that same 2% appreciation would net you 10,000 instead.

Leveraging is probably the biggest advantage real estate has over stocks, which is also why real estate investing is far from risk free, and if you aren’t going to leverage what are your choices? You’ll probably end up saving for 10+ years to buy your first property in cash…are you going to put that money into savings accounts/cds that don’t even keep up with inflation while you save, or are you going to throw that money in the market during that time? If you end up going in the market it pretty much defeats the entire purpose of going after real estate to avoid market risk, and if you don’t go in the market you’ll literally be losing money to inflation because the return on everything else sucks so bad right now.

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