Have a significant amount of money saved up and ready to invest? When it comes to real estate investing, you’ve got options! In this article, we’ll compare the processes of buying a rental property with cash and getting a loan, complete with examples and figures, so you can make the right choice.
Summary:
Just because you can buy a rental property with cash doesn’t mean you should. Consider all of the benefits and drawbacks of this strategy:
If you have a $250,000 property with a $200,000 loan balance, your mortgage payment would be roughly $1,264.14. If you bought that property with cash instead, you’d have no mortgage payment, and that $1,264.14 would be cash flow.
Let’s use the above example and say you get $2,000 a month in rent ($24,000 a year) and have about $300 in monthly expenses ($3,600 a year).
Cash Purchase: $24,000 (rent) - $3,600 (expenses) = $20,400 (cash flow) / $250,000 (cash price) = 8% cash-on-cash return
Loan Purchase: $24,000 (rent) - $15,169.68 (yearly mortgage payment) - $3,600 (expenses) = $5,230.32 (cash flow) / $50,000 (down payment) = 10.5% cash-on-cash return
By putting up less money, the return on the money you invested is higher!
Take advantage of Rent to Retirement’s low 5%-down loans on new build rentals!
Without a mortgage, you could speed up the homebuying process and close faster. What’s more, buying in cash makes your offer more attractive to sellers and could even help you negotiate a better price.
If you have $250,000 and are buying with cash, you’ll only be able to purchase one $250,000 home. If you use leverage and put 20% down ($50,000) instead, you could buy five $250,000 homes in the same amount of time!
Regardless of whether you purchase your rental property with cash or traditional financing, you can still take a depreciation deduction. This allows you to use your property’s normal wear and tear to help offset your rental income.
On one hand, paying cash for a rental property means you won’t be paying interest at all. However, this also means you won’t be able to claim interest deductions on your tax returns.
Now, let’s do the math on how cash versus leverage works for rental properties.
For this example, let’s assume you’re buying $250,000 properties that require at least 20% down ($50,000). The loan would be a 30-year fixed-rate mortgage with a 6.5% interest rate. These properties bring in $2,000 a month in rent, with a 3% annual rent increase and property appreciation. Your yearly expenses amount to $3,600, increasing 2% each year.
Scenario 1: You buy one house in cash.
Scenario 2: You buy five houses with 20% down.
End of Year 1:
|
Total Rent |
Total Expenses |
Total Cash Flow |
Total Appreciation |
Total Loan Paydown |
Total Return |
ROI |
|
|
Scenario 1 (Cash) |
$24,000 |
$3,600 |
$20,400 |
$7,500 |
$0 |
$27,900 |
11.16% |
|
Scenario 2 (Loans) |
$120,000 |
$93,848.40 |
$26,151.60 |
$37,500 |
$11,177.25 |
$74,828.85 |
29.93% |
Let’s model that out now over the next five years:
|
Cash Purchase ROI |
Loan Purchase ROI |
|
|
Year 1 |
11.16% |
29.93% |
|
Year 2 |
11.51% |
31.98% |
|
Year 3 |
11.87% |
34.10% |
|
Year 4 |
12.24% |
36.29% |
|
Year 5 |
12.62% |
38.57% |
Buying in cash might increase your monthly cash flow, but using leverage helps you accumulate properties faster and significantly increases your return on investment—especially over a longer time horizon!
If you’re only buying properties with cash, it’s going to take you a long time to scale your portfolio. With Rent to Retirement’s 5%-down financing, you could buy several turnkey rentals with that same cash. We also have new build incentives like lower purchase prices, interest rate buydowns, closing credits, and cash back at closing to further boost your cash-on-cash return!
The best part? These properties are newly built or renovated and often come with property management already in place. This means you’ll have less maintenance, fewer repairs, better tenant screening, and more stable cash flow!
Leverage can be risky, but there are steps you can take to help mitigate your investing risk. Ensure you’re buying a high-quality property so you’re not hit with expenses on day one. Investments like turnkey rentals are newly renovated or built, meaning they require less maintenance. These properties also often come with management in place, which could help with tenant retention and increase your cash flow!
Thinking of buying a rental property with cash? Make sure you do the following:
Getting a mortgage can make your cash go further, but keep these crucial tips in mind:
Get your next rental for 5% down and a lower interest rate!
Regardless of whether you’re buying a rental property with cash or getting a mortgage, a great deal is a great deal. As long as the numbers pencil out, choose the funding option that makes the most sense for you and your long-term goals.
With Rent to Retirement’s turnkey rentals, you have multiple options. Buy the property in cash, put 15%-20% down, or take advantage of our 5%-down loans—along with your choice of new build incentive!
No, buying a house in cash is not a tax write-off. You can, however, depreciate the property, which allows you to take deductions for wear and tear.
Unless you’re also living in the property (a strategy known as “house hacking”), most lenders will require you to put at least 15%-20% down. If you want to put less money down, take advantage of Rent to Retirement’s 5%-down loans for new-build turnkey rentals!
Yes, buying a rental property with cash is completely legal. In many cases, it can make your offer more enticing to sellers and help you close faster.