Author Topic: Paying Cash vs Mortgage on Less Expensive Properties  (Read 2285 times)

tralfamadorian

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Paying Cash vs Mortgage on Less Expensive Properties
« on: July 15, 2016, 02:54:22 PM »
Hi guys!

I've been looking at some small homes in a college town in my area.  Home prices average ~40-60k and I'm debating whether to pay in cash or with a mortgage.  I've found a lender that will work with loans as low as $25k.

I know traditional wisdom says that 30 year mortgages >> cash in most cases when rates are at <= ~4.5%.  But at some point the relatively larger percentage of closing costs are going to outweigh the increased investment returns and tax incentives of the mortgage.

I've googled around (and in the forum) but haven't found an opportunity costs calculator or spreadsheet to help decide where that break even point is. 

Thoughts?

tralfamadorian

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #1 on: July 17, 2016, 09:25:04 AM »
Where have all the spreadsheet nerds gone?  ;)

So, I went ahead a cannibalized a couple different spreadsheets I found on biggerpockets.  Math mistakes abounded but I think this version I made is usable.  (The 'suggested inputs' are not mine; the inputs on the left are mine and much more conservative).  I also have not yet included tax benefits though I may go back and change that. 

https://goo.gl/mpMiiA

If my numbers are correct, the break even point for a small mortgage on a property with a purchase price of $50k is approximately 6.5 years in.  Before then, the fixed mortgage costs outweigh the investment benefits of placing those monies in the market. 

MakeSmarterDecisions

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #2 on: July 17, 2016, 09:53:10 AM »
Sorry - not a spreadsheet nerd :)  But I'll share what we did.  We took out a mortgage on a cheaper property (75K) and wish we didn't. It was at a higher rate than you list - but now we want the cash flow so we are paying it off in the next few weeks. The bank headaches were a real pain and we should have just bought it outright to begin with. If we did it again - we'd save and do the work to get mortgages for more expensive properties. Often you are limited on how many loans you can have (it was 4 in our case).

Sdsailing

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #3 on: July 17, 2016, 11:49:37 AM »

What will really eat up cash are the higher Expenses that are the result of the lower income tenants that you will have when you go into that price range.

tralfamadorian

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #4 on: July 17, 2016, 12:30:43 PM »

What will really eat up cash are the higher Expenses that are the result of the lower income tenants that you will have when you go into that price range.

But isn't the property quality/neighborhood (A,B,C) more important than strict price in regards to the quality of tenant? 

I currently have a one property worth x and another worth 3.5x in different towns but they are both what I would consider A-/B+.  Tenant quality has been very good for both.  Obviously the first property is bringing in a much higher rent, but the carrying costs are higher as well.

The new properties I'm looking at are in a third location and I would say B/B-. 

Sorry - not a spreadsheet nerd :)  But I'll share what we did.  We took out a mortgage on a cheaper property (75K) and wish we didn't. It was at a higher rate than you list - but now we want the cash flow so we are paying it off in the next few weeks. The bank headaches were a real pain and we should have just bought it outright to begin with. If we did it again - we'd save and do the work to get mortgages for more expensive properties. Often you are limited on how many loans you can have (it was 4 in our case).

Thanks for your thoughts!  Do you think the bank process was more onerous than any other mortgage? 

I'm not at four mortgages yet but I have thought of it for the future if I decide I would like to pick up a few of these little guys.  I know Fannie Mae offers a 5-10 mortgage program but I haven't spoken with lenders about it so I don't know how many offer it. 

edit: got squiggly about real # on the interwebz
« Last Edit: July 17, 2016, 03:57:32 PM by kellyincville »

MakeSmarterDecisions

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #5 on: July 17, 2016, 01:45:52 PM »
Just a ton of paperwork - and lots of fees that we could have put to better use. But I disagree with Sdsailing to a point. Definitely depends. We have put very little money in to our unit - same tenants for 4 years and they are awesome. We didn't rent to college students though.

Kroaler

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #6 on: July 18, 2016, 03:48:51 AM »
Sorry - not a spreadsheet nerd :)  But I'll share what we did.  We took out a mortgage on a cheaper property (75K) and wish we didn't. It was at a higher rate than you list - but now we want the cash flow so we are paying it off in the next few weeks. The bank headaches were a real pain and we should have just bought it outright to begin with. If we did it again - we'd save and do the work to get mortgages for more expensive properties. Often you are limited on how many loans you can have (it was 4 in our case).

Glad I came across this thread.   I was wondering about a situation very similar to yours.

MakeSmarterDecisions

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #7 on: July 18, 2016, 07:25:07 AM »
We screwed up not just paying it off to begin with. I think the fees (we are in NY state - land of the fees) - were around $4,500 (with points, etc.) and still only got a 5.89% rate.  Not a smart move (after buying the place wasn't really the smartest move for us). I write about decision making and shared our story - an emotional buy on this one.  It is working out OK - but still may bite us down the line.

Drifterrider

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #8 on: July 18, 2016, 07:35:09 AM »

What will really eat up cash are the higher Expenses that are the result of the lower income tenants that you will have when you go into that price range.

Why do you think your expenses go up as a result of lower income tenants?

Drifterrider

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #9 on: July 18, 2016, 07:38:22 AM »
Hi guys!

I've found a lender that will work with loans as low as $25k.

WHO?  I've found a lot that don't want to loan below $50K because of the closing cost being a high percentage and the lender having to complete more paperwork due to "High closing cost loans"

I did find one that would  (in NC) and they offered 4.6% with a buy down to 4.3% (20% down) but the bank fees alone were $1,000.

tralfamadorian

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #10 on: July 18, 2016, 07:59:18 AM »
WHO?  I've found a lot that don't want to loan below $50K because of the closing cost being a high percentage and the lender having to complete more paperwork due to "High closing cost loans"

I did find one that would  (in NC) and they offered 4.6% with a buy down to 4.3% (20% down) but the bank fees alone were $1,000.

Not all of these have online instant quotes and I haven't contacted them yet as I'm not at that point in the process but these were all lenders recommended to me:
TD Bank (current online quote of 3.625% 30yr with points)
BankFirst
Trustmark
BB&T (recommended by several ppl)
Aimloan (40k bottom for online applications and also showing 3.625% 30yr with points- they may be more flexible in the phone with a smaller loan.  I have used them for a more average sized loan and was happy with rate and service.)

Drifterrider

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #11 on: July 18, 2016, 10:51:51 AM »
Again,  Who did you find that would loan as low as $25K?

tralfamadorian

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #12 on: July 18, 2016, 11:34:47 AM »
Again,  Who did you find that would loan as low as $25K?

Banks #1-4 listed above...did you think I was just throwing out random names not pertinent to the discussion?
Bank #5 for 40k and possibly lower with a phone call


edit for clarification
« Last Edit: July 18, 2016, 11:39:44 AM by kellyincville »

Drifterrider

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Re: Paying Cash vs Mortgage on Less Expensive Properties
« Reply #13 on: July 18, 2016, 12:55:00 PM »
Again,  Who did you find that would loan as low as $25K?

Banks #1-4 listed above...did you think I was just throwing out random names not pertinent to the discussion?
Bank #5 for 40k and possibly lower with a phone call


edit for clarification

Since you used the phrase "I haven't contacted them yet", yes I did :)