I have about 150K that I am wanting to invest in a rental property. I was all set to find my property and my realtor suggested that instead of buying the property with cash, that I use that money to buy several properties which I would have smaller mortgages on. I really don’t like the idea of taking on any mortgages but I want to make the most of my money. What is your advice?
Jarred, Grand Junction
Great question! I will start by applauding you, looking to purchase investment properties right now to diversify your investment portfolio is a great idea!
To assess which is the best route for you and your family, you must determine what your long term goals are and how much risk you are comfortable with. I do not believe there is a right way and a wrong way to purchase investment properties, just different ways. There are two ways to look at the purchase of your properties and that is either to purchase with cash, which is the route that presents the least amount of risk or purchase with a mortgage which will introduce some limited risk.
To make a cash purchase makes great sense, because it creates an instant income source. If you need to quickly generate income, then a cash purchase is the best way to proceed. When you purchase with cash, and therefore have no mortgage, you also remove the risk of market rent fluctuations, because you can easily “go with the flow” and adjust to any potential rent changes. Also, with no mortgage you should be able to easily weather a month or two without a renter. If your risk tolerance is low or you need to generate month to month income, cash is your way to go.
On the other hand, if you take your $150,000 and put $75,000 down on two properties then you have doubled the long term investment potential of your $150,000. This should still “cash flow” nicely for you and allow you to have room if there are rental market fluctuations. This will allow you to take advantage of the favorable market and also take advantage of low interest rates that remain historically low. You will be somewhat leveraged, but if done correctly and thoughtfully, and as always with the help you’re your accountant, you should be able to create a wonderful long term return with a little, but limited risk. Make sure to plan it out, be deliberate, but be ready to act when the right thing comes up!
The best thing here, you are taking positive steps toward your goals, thinking things through and are willing to look at all the angles to make an informed decision! Reaching for your goal, is the first step in obtaining it! Great job. Feel free to call if you need further information.
The Kimbrough Team
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