Cash or OPMWhen looking for a potential property you need to first know how you are going to pay for it. If it is cash, OPM (Other Peoples Money). If it is cash you need to calculate your Break-Even. Meaning with the rent you expect to get how long before you get your money back. This will be the period you start to actually see a profit. This may be acceptable if you are in your 20's or 30's, but if your 40+ it may not look so attractive. It really depends on your life plan and when you want to retire. Some people may be fine with retiring at 70 and some may want to retire at 50. Either way when you use cash you are essentially tying up your principal money for x amount of years. Now to compare you need to figure out how much you could make by tying up your money in another investment over the same amount of time. Right now some of the top ranked mutual funds are showing over the last 10 years they have made 8.67%. Once you have figure this out we need to see the difference in amortization total interest.
I used Interest.com mortgage calculator to figure the total interest of $150k @ 5% over 30 years. The total interest over the life of the loan is $140,000. Now take this number and compare it to another investment.
Let's not forget that our other investment could be anything, but it could also be more property. I say this because the bank will loan up to 80% of a properties value meaning you only need 20% down. If a piece of property was $100k that would be $20k down. How many properties could you get at this rate? If you got 5 you would be right. This of course is using OPM.
What if you went the FHA route? You can put 3.5% down on the mortgage but you would have to live in it for at least one year. You could wrap the rehab in a 203k as well. If you would like to know more about a 203k loan go here.
According to foxbusiness.com The 6 Best Tax Deductions for 2017, Maurie Backman, www.foxbusiness.com, published December 18 2016
"Homeowners can save thousands by deducting their mortgage interest. If your mortgage is below, $500k or $1 million if you file jointly, you write off the interest paid for the year. You can write off property taxes, points on your mortgage, and private mortgage insurance premiums if you are single and make less than $54k or $109k or less as a couple."
No one can tell you whats best for you because it depends on your goals. What is good for you may not be to someone else. So try to take all these things we have talked about into consideration when deciding how to invest in real estate.
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