The Money Mustache Community

Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: isaakthepirate on July 06, 2015, 10:07:10 AM

Title: Duplex all cash or 4-plex with a loan?
Post by: isaakthepirate on July 06, 2015, 10:07:10 AM
It seems like the popular wisdom I've read is that the more units, the better (if you can manage them). But similar wisdom says all cash is going to be the best. I know the numbers are the final call, but if you've had experience, what would you prefer - an all-cash duplex or a loan to get a 4+ unit property?

Thanks!
Title: Re: Duplex all cash or 4-plex with a loan?
Post by: iamlindoro on July 06, 2015, 10:34:24 AM
I definitely have never felt that the conventional wisdom is that all-cash is best.  Rather, leverage without *overleveraging* is best IMO (and closer to the broad opinion).  That is to say, you should put down an appropriate amount to be able to weather a market downturn.  What is better if you have $100K and are buying, say, $50K properties that rent for $1000/month?

Cash:

Two properties purchased
$2000 total rents per month
- $1000 in expenses (50% rule)
-------------------------
$1000 cashflow/mo


25% down, 4.5% interest rate:

Four properties purchased
$4000 total rents per month
- $2000 in expenses (50% rule)
- $760 in mortgage (~$190/month/property)
-------------------------
$1240 cashflow/mo

In addition to just cashflowing more on the same amount invested, you have diversified your investment and are more capable of weathering a vacancy.  You have 2x the chance of appreciation.  Where people get themselves into trouble with financing is when they try to "hack" it such that they only put a couple percent down (or nothing down), leaving themselves open to being in serious trouble if a bubble bursts, a recession, etc.

Above are very quick spitball numbers, but hopefully it makes some sense.
Title: Re: Duplex all cash or 4-plex with a loan?
Post by: zephyr911 on July 06, 2015, 01:10:45 PM
It seems like the popular wisdom I've read is that the more units, the better (if you can manage them). But similar wisdom says all cash is going to be the best. I know the numbers are the final call, but if you've had experience, what would you prefer - an all-cash duplex or a loan to get a 4+ unit property?

Thanks!
For growth, leverage is absolutely the way to go. Financing at 4-6% and earning net returns of 10% or greater (as a rental should) dramatically increases your total earnings, both in absolute numbers and as a percentage of cash invested. The only reason you'd want to de-leverage is as a late-phase strategic move to reduce risk and simplify your finances. Many people do this after establishing large rental portfolios.

All my rentals are financed at 75-80% right now, and paying down the loans is the last thing on my mind. I'm paying anywhere from 3.375% to 5.75% on them. The *worst* property is netting about 7% after all expenses, and the good ones are running much higher.
Title: Re: Duplex all cash or 4-plex with a loan?
Post by: isaakthepirate on July 06, 2015, 03:22:03 PM
Awesome, thanks guys. Very helpful.