You have $100k to invest in income property. You aren’t bound by geography, and are currently interested in growth, not cash flow. For the next 10 years you have one goal: Growth. How should you approach this? What strategy will you employ? Are you comfortable with low down payments? What is a low down payment to you? Are you willing to sacrifice some growth for a perception of increased safety? The price range in the area on which you’ve settled is $200-250K. Let’s take a look at your options.
- You can put 20-25% down and play it relatively safely. This results in a maximum of two purchases.
- You can put $0 down, creating negative cash flow, but having a massive cash reserve. Think Tarzan.
- You can put 10% down, break-evenish, buy three properties, and have $25k in reserves.
If you stick to the lowest price of the range, (Say $210k) 20% down plus closing costs will get you two deals with about $8k left over. With that much down you should have no problem with negative cash flow, though it’s certainly no guarantee. You’ll own props worth $420k. Good job.
If you put $0 down, and you’re my client, you have such a large ordinary income with such humungous cash reserves that any monthly operating loss would go almost unnoticed by you – until your wife came storming in with the bank statement. You could win big with this strategy, very big. Or a one year blip on the radar could send you back to the “No Money Down” course you bought to see just where you went wrong. In my world only professionals use this and only with much thought, and in specially designed circumstances.
If you opt for the 10% down scenario and stick to the lower prices (Again $210k) you end up with three properties, and about $25k in the bank as cash reserve. Your props will not cash flow, but they will for the most part pay for themselves. Once the $6-9k in tax savings from well over $20k of depreciation is factored in the cash flow is positive indeed. You’ll own properties worth $630k. Way good job.
Next: How do these approaches compare when put side by side? How do each perform in exactly the same market?