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Mortgage vs. Cash Purchase: Starting Real Estate Investing -

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  • Mortgage vs. Cash Purchase: Starting Real Estate Investing -

    I'm looking at starting real estate investing in 2018. Trying to determine the best way to proceed: buying home in cash vs. mortgaging. I know this is a long debated issue with many articles on the topic, but was hoping those of you with experience (good or bad) could share your expertise and opinion.

    Common sense and the voice of Dave Ramsey is telling me cash purchase only, but I can't help but do the math for mortgage financing which has me leaning that way....

    Thanks

  • #2
    Dave’s advice is applicable to the average US household with a single digit saving rate at best. It’s not applicable for high income professionals saving a large portion of their income and investing amounts approaching / exceeding their mortgage balances in taxable accounts.

    If you are early in your career with many years of a stable high income ahead of you, get the mortgage. If you already have a large nest egg and don’t need to increase risk in your portfolio through leverage to meet your financial goals, pay cash.

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    • #3
      Okay, are you talking about primary house - cash vs mortgage; or investing in direct real estate properties?

      You have to also determine commercial or residential -- two very different clientele and options.

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      • #4
        Leverage can cut both ways. That said, putting 25-30% down on a property should provide better returns than buying it outright for cash if it’s a decent price and will cash flow reasonably well.

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        • #5
          I'm talking about investing in residential real estate rental property.

          Thanks for insight so far. Doesn't sound like anyone regrets mortgage financing for this investment.

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          • #6
            You lose any big wealth compounding effect from real estate without the leverage. It seems to be something people get, but dont get. When people talk about "real estate can make you wealthy", they are really talking about leverage and of course the tax advantaged nature.

            I think a reasonable amount of leverage, ie, a down payment of around 30% will get you a decent amount of safety and likely cash flash most of the time. You could also add a whole other property with still some safety.

            It does cut both ways but if you're particularly concerned that you're buying a bubble, put 40-50% down or simply wait.

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            • #7
              Exactly what zaphod said....leveraged buys can be somewhat like naked options. You have a lot more exposure, it growth is pretty good.

              A really nice key is to have the spouse be actively engaged in the trade....750 hours a year. This allows to offset losses and depreciation against ordinary income. While in your growth years this is huge and allows growing your portfolio nicely then convert to cash flow properties in the future

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              • #8
                Why is common sense telling you cash purchase only? I think that demonstrates a fundamental misunderstanding of the real estate investment process.  Dave Ramsey doesn't apply to this, only to a primary family dwelling (and even then it's generally poorly applicable to us).

                Real estate investing, especially for single-family homes, should basically be done with as much leverage as is possible or reasonable and primarily as a cash flow instrument over a net-worth one.

                Deducting the principal as depreciation over 27.5 years and deducting the mortgage interest and property tax as expenses makes it more advantageous to do more on leverage, plus the less equity you have in the house, the less of a target you are for a suit since you hold less assets. On top of that, assuming the property appreciates at least on par with inflation while your loan principal becomes worth relatively less current dollars, the longer term benefits you there as well.

                You can always put your profit into the principal and pay it down further to accelerate paying off the loan, or save up the cash-flow profits to put a down payment on your next investment property, and repeat the process ad infinitum until you have an array of income-producing investments which, as long as your cash flow is positive and your loan is less than the asset backing it (minus transaction fees), then the business stays in the black.

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                • #9




                  Exactly what zaphod said….leveraged buys can be somewhat like naked options. You have a lot more exposure, it growth is pretty good.

                  A really nice key is to have the spouse be actively engaged in the trade….750 hours a year. This allows to offset losses and depreciation against ordinary income. While in your growth years this is huge and allows growing your portfolio nicely then convert to cash flow properties in the future
                  Click to expand...


                  Can you elaborate on having a spouse actively engaged in the trade?

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                  • #10


                    Can you elaborate on having a spouse actively engaged in the trade?
                    Click to expand...


                    IRS Pub 925.

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                    • #11
                      It can go both ways, depending on the person's situation. For investment property, I've done both. Currently paying all cash for mobile homes. Been great for cash flow so far. Regarding your primary residence, you'll have to look at your income and expenses to see if it's worth it. Good luck!

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                      • #12
                        Without leverage why even invest in RE? its a pretty terrible investment otherwise.

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