Let’s suppose you’ve got $80,000 burning a hole in your bank account, earning a whopping .0000005 percent (give or take a couple of zeroes) in interest and you’re thinking about investing that money in real estate.
Being adverse to carrying a mortgage, you decide to use the entire $80,000 to purchase a house free and clear. Simple enough?
First off, you’ve got to find a place which, in the current market, is damn hard to do. Having the ability to make a cash offer is a great thing but still leaves you in a pile of offers with the dozen of your friends who also have the cash to spend. Odds are, you’re not going to purchasing that $80,000 listing but rather a $68,000 listing that has run up in price through the beauty of multiple offers/highest and best scenarios.
Okay, so now we’re going to say you find a place. If everything breaks correctly and if it’s in the right spot, you might pull down $800 a month in rent. For this example, I’ll say there’s no homeowners association payment to worry about because most homes in this price range are older and outside the HOAs (unless we’re talking about the outlying communities like Buckeye, Queen Creek/San Tan Valley or Maricopa, in which case you also can reduce that $800 pretty quickly.)
So, here’s where you stand: $80,000 in cash = $800 a rent, less property management fees. (We’re throwing city sales tax on top of the rent as a pass through.)
Happy with that? If so, great, but humor me for a minute …
Let’s take that same $80,000 and leverage it. We’re going to take it and turn into down payments on two considerably newer $150,000 homes.
Rent will vary based on location but let’s say the rent on these two homes turns out to be $1,200 apiece.
Your gross rent is $2,400. Your combined mortgage payment at a 5 percent interest rate (which likely is higher than you’ll actually pay) is $1,150 and we’ll also assume a $45 per month HOA on each of the places. $2,400 – $1,150 – $90 = $1,060.
With these being newer properties, the potential for appreciation is far better than it is on an older, cheaper home. With the increase in rent, theoretically there will be an improvement in the quality and stability of the tenants as well. There also are tax benefits through mortgage interest, depreciation on two properties versus one, etc.
And, with all else aside, the basic equation for the latter scenario is $80,000 = $1,060 less management fees.
Check my math but I think $1,060 is right about 25 percent higher than $800. Same amount of capital outlay and a 25 percent higher basic return.
Seems like a simple equation to solve, if you ask me.