Should I Pay Cash or Finance Real Estate Investments?
Do you want to purchase cash-flowing rental real estate? Are you are asking the question: should I pay cash or finance real estate investments?
Assume that you have enough to pay cash and pay for the property outright. But do you want to do that?
In order to determine if you want to pay cash or finance real estate investments, let’s compare the return on investment.
When looking at the return on investment, you use a very simple calculation. You take what your earnings are divided by what you put in.
If I put in $1 and it turns into $2, my earnings are $1. I made $1, divided by what I put in, which is $1, equals 100%.
Now if you follow that simple math, let’s carry this forward into a $100,000 property.
Where Does Real Estate Fit in the Cash Flow System?
We are evangelists for cash flow because cash flow is your ticket to time and money freedom.
Investing in cash-flowing assets is part of the third stage of the Cash Flow System.
Once you have a stocked emergency/opportunity fund, you now have a pool of capital that’s ready to invest. To accelerate your cash flow, you need to identify cash-flowing assets and develop an acquisition strategy.
Real estate has long been an asset choice of the wealthy to create cash flow income.
Pay Cash or Finance Real Estate Investments?
Imagine you were in a position to pay $100,000 cash for the property. And you earn a return of $10,000 per year. Now if you profit $10,000 per year, you get to keep all of that. So let’s take the $10,000 divided by the $100,000 that you put into it. That is a 10% return on investment.
What if instead, we finance? If you finance with a 20% down payment, you will have $20,000 in the deal.
But now you’re going to earn the same $10,000 per year in cash flow, but you will have to pay back a loan. So that’s going to reduce the amount that you keep.
Let’s reduce that $10,000 down to $4,000 because you’re paying back the loan.
Now $4,000, which is what you made, divided by what you put in, which is $20,000, is a 20% return on investment.
This is an important factor to consider when deciding to either pay cash or finance real estate investments.
So you can either use all $100,000 that you have and earn a 10% return with that money, or you can put $20,000 in, which is only 1/5 of the cash, and earn a 20% return.
What if instead of only doing that, you bought five properties? You’re going to earn a 20% rate of return on five different properties. That’s $4,000 of income per property, times five properties.
Now you’re making $20,000 versus $10,000 in the previous example. You’re doubling your returns with the same investment.
Consider the power of leverage when deciding whether to pay cash or finance real estate investments.
Create Your Time and Money Freedom
Book a strategy call to find out the one thing you should be doing today to optimize your personal economy and accelerate time and money freedom.
Success leaves clues. Model the successful few, not the crowd, and build a life and business you love.
Scott Carson is the Founder and CEO of We Close Notes. He’s a distressed note buyer, real estate investor, entrepreneur, educator and podcast host. If you’ve heard of investing in non-performing notes and would like to gain an insider’s perspective, this is your opportunity to learn. As you expand into any asset class, the first…Read More
We often get the question, should I use a Self-Directed IRA for real estate investing? When you’re looking for the capital to get started in real estate, one of the most common sources is money inside of 401k’s and IRAs. However, using tax-deferred retirement plans to invest in real estate is a really bad idea.…Read More
See How One Business Owner
Increased Their Cashflow by $97,000/year
(And How You Can Fix Your Hidden "Money Leaks" Too...
Without Working Harder or Sacrificing Your Lifestyle)