Realestate investing: Take out a loan or pay just paying cash?
February 5, 2010 by
Filed under realestate rentals
As a general rule of thumb for a new real estate investor, are people generally better off taking money out of there savings accounts and paying cash for a rental property or are they better off taking out a mortgage thus keeping cash available?
Taking out a loan is usually a poorer option than paying in cash. At some point you have to decide whether the time value is worth the interest rate of a loan.
Generally you want to use other people’s money (ie. banks). The reason is that cash, say $100,000, will only buy so much property (1 house or so). Whereas if you put that same amount down as down payments you could potentially buy between 5 and 10 or more properties. This would mean that you would benefit on the appreciation of 5-10 properties or if they were all similar you would potentially benefit from $1,000,000 in real estate holdings versus $100,000 that you obtained with cash. In long term investing this is very important as appreciation and compounding interest carry much more weight over time. For instance, if your $100,000 property that you paid cash for increased 15% over the next 3 years (5% average per year which is the national average), You would have a property worth around $115,000. But if you had used the $100,000 as down payments on 10 homes each worth $100,000 and the same appreciation occured you would then have a value of $1,150,000. Which is better, a $15,000 gain or a $150,000 gain with the same money? Keep in mind, this does not take into account insurance, taxes, closing costs, etc…, but if you invest for the long haul those items will basically be very miniscule when compared to your profits. Another benefit is that you can deduct the interest on the mortgages and any repairs. This is how to make it big in real estate. There are other avenues like short sales, flipping, etc… but in the long run holding and renting can make you rich. For more great answers on numerous topics like car buying, finances, credit and debt repair, safety, etc… please visit http://www.mdwholesale.com.
Marcia Clark
I say that from a business perspective that you can maximize your investing potential by financing part of your investment. It allows for you to mkae money on the property, but yet not show such a profit every year off of it. I would tell you to look at the taxing end of it which should make it all seem logical. Check out an investment property calculator to show you taxing advantages of it.