I recently bought a two unit rental property in cash. I bought it because it’s the house next to mine, it was in poor condition and the previous owner was offering a pretty good price.
The house was in such bad shape that I couldn’t get a mortgage for it. (I tried and the bank wanted a lot more repairs than the seller could do.) Buying cash was my only option.
I fixed the house issues and should now be able to get a mortgage on it. I wonder if I should do this or if I should leave all my money at home instead.
The conventional wisdom seems to be that it is stupid to tie up money in investment property. On the other hand, the house is currently fully rented and my annual profit on the house (after deducting taxes, maintenance and other expenses) from rents should be around 10% of the purchase price. annual.
For me, 10 percent is a pretty good rate of return for a relatively low risk investment. (And I’m not even counting the appreciation in the value of the property, because I know that’s a bigger question mark.) It’s almost certainly better than what I could get on the stock market.
I guess other real estate investors would mortgage the property and then use the money they get out of it to buy other investment property, presumably with mortgages. In theory, if I get a mortgage that allows me to turn 80% of the value of my existing rental property into cash, I could buy four more houses (at 20% less each) in the same price range as the rental. that I already own.
However, it seems riskier. Obtaining a positive cash flow from any rental would be much more difficult if they are mortgaged. I would depend essentially on the appreciation of the properties to derive significant wealth from them, and that is a risk. I would also be concerned that if I lost my job or had multiple tenants move out at the same time, I would have a hard time making the mortgage payments on all the rentals.
So, it seems wiser to me to stick with a return of around 10% on the money I have already invested in a rental rather than buying several more that will probably bring little or no return. liquid returns. (I’m also not impatient to have to manage several other properties.) Does that make sense, or am I a dumb investor?
By the way, I have a lot of personal savings, my personal home has no mortgage, and I have virtually no debt. (I say “mostly” because I have a few small student loads that are currently on-hold, so I won’t pay them off until they are due.) So I don’t have much else to do with it. money currently invested in rental property other than investing it elsewhere.
–
D Stanley
Obviously, getting a mortgage on the property means you are paying interest, which reduces your profits for that property. If you rent it out at 10% of its value and have a 5% mortgage, your return net is only 5% (IF it remains rented). Of course, you can buy another property, invest it, whatever, in order to get a better return.
Suppose you bought another property equal to the value of the first property (which is unrealistic because you would like to avoid PMI, but it makes the math cleaner). And you also rent it for a 10% profit. Your return goes from 10% on one house to 15% on two houses (since the mortgage eats 6%). However, the risk has increased considerably.
Here is the risk of mortgaging the property:
You now have an expense fixed which is supported by income variable . What if your tenant suddenly moved and it took you months to find another one? Do you have enough cash or other income to maintain the mortgage if you have no rental income? What if you need to replace the air conditioning or fix a faulty plumbing?
Can- do you? Sure, but you have to be sure to take the risks involved into account. Keep 6 months of liquid mortgage payments (not in stocks or CDs) to make sure you can weather any storm.
Does this make sense, or am I a stupid investor?
NOT borrowing money to invest is NOT stupid. Some investors can tolerate this kind of risk while others cannot, but it is by no means stupid. In fact, many would say that investing borrowed money IS stupid (not just mathematically, but for other reasons).
—
