Question:
“Do you think it’s smarter to buy one rental property for cash, or buy 2-3 with mortgages?”
Answer:
Yours is a good question about risk and leverage. Let’s look at some things you can do with $250,000:
Example #1 – Bad
$250,000 can buy you a $250,000 CD that pays you 1%. No leverage, no risk, and no reward (actually a loss) given that inflation is over 1%.
Example #2 – Good
$250,000 can buy you a $250,000 rental for cash. No leverage, no risk, but likely multiple returns:
a) Positive cash flow
b) Price appreciation (probable)
c) Likely tax deduction for depreciation (wear and tear)
Example #3 – Better
$250,000 can buy you two $500,000 rentals ($1,000,000 total) with 25% down on each. Leverage, small risk, likely large returns over time:
a) Positive cash flow (possible)
b) Loan paydown
c) Price appreciation (probable) – 4 times that in example #2
d) Likely tax deduction for depreciation – 4 times example #2
Owning multiple rentals with mortgages is a great way to leverage your capital. Just be careful not to over-leverage yourself or buy at the frenzied peak of the market.
Remember: More wealth has been made in the U.S. through owning real estate than anything else.
