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?
Jeff,
when I read this, I thought how every frickin person with “large ordinary income with …hummungous cash reserves that any monthly operating loss would go almost unnoticed..” should immediately go see you and get started.
So why didn’t I find you when I was makin’ the big bucks in the “day job”?
When you have the big complicated “day job” you get distracted and may not think about the “big picture”…”the plan”.
It wasn’t until I got downsized and desperate 5 years ago that I thought much about “purposeful planning”.
So now that I have the TIME to devote to being a full time investor, I don’t have the INCOME to qualify for the 10% down scenario you spoke about above.
This has not stopped us from doing some massive growth in the last 4 years. But, still, isn’t it ironic? what I could do with what I know now with a three figure salary and a big sominex account. Hee hee!
What have I learned? Start early and plan especially if you are making the big bucks.
One of the keys for any investor is the ability to keep focused when life isn’t cooperating with their Plan. One of the foundational principles of Purposeful Planning is flexibility when outside forces (Murphy?) decide it’s your turn in the barrel.
I’ve found that calm, proactive adjustments to circumstances that threaten to derail an investor’s stated goal is the best strategy. I’ll bet in no time you’ll have elegantly streamed past any current detour.
After all, aren’t all detours temporary to a real Investor Warrior?
Jeff, So true. It is important to NOT give up when Murphy shows his face.
Thanks for the well written advice.