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.
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Economic Value Added (EVA) is a little-known, but impressively effective measure to boost your profitability. Coca-Cola, AT&T, Quaker Oats, CSX, and Briggs and Stratton helped the term rise to prominence when they adopted EVA in the 80s and 90s. Focus on this insightful accounting measure resulted in an overwhelming increase in business value, stock price,…Read More
As a residential agent, Pat Hiban sold over 6,000 residential homes, earning the title of Billion Dollar Agent. He’s also the host of Real Estate Rockstar Radio, best-selling author of Six Steps to Seven Figures: A Real Estate Professional’s Guide to Building Wealth and Creating Your Destiny, founder of Rebus University and Big Profit Agents…Read More
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