Why do investors finance rental properties instead of paying cash? The simple answer is that LEVERAGE increases ROI (return on investment). Let’s start with a simple example:
Mrs. Johnson buys one rental property with $100,000 Cash.
Net rent after taxes, maintenance/vacancy set aside, taxes/insurance, etc. is $500/month
ROI is 6% /year not counting any tax benefits and property appreciation.
Mrs. Johnson buys five rental properties with $100,000 down and finances $80,000 each.
Her payment is $400 per month, so her net rent is approximately $100/month each.
ROI is 6%/ year not counting any tax benefits and property appreciation.
But, now let’s factor annual appreciation at 3% and annual rental increases of 3%.
One Property (Cash)
Net Rent without Rental Increases = $60,000
3% appreciation on one property of $100,000 for ten years = $34,391
3% rent increase on one property = $17,566
Total ROI $111,957 = 11.2% /year
Five Properties (Financed)
Net Rent without Rental Increases = $60,000
3% appreciation on five properties of $500,000 for ten years = $152,386
3% rent increase on five properties = 17,566
Total ROI $229,952 = 23%/ year
This is why rich people get richer and smart rich people get filthy rich.
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