Investing in real estate — especially rental properties — can be an excellent way to build wealth and create a nice stream of passive income. Before you get started, there are a bunch of important decisions to make — most importantly, how to pay for the properties. Broadly speaking, your two choices are to pay for your rental properties in full or to finance the purchase. Both have their benefits and drawbacks, so let’s see if one might be better for your situation than the other.
Cash: safe and easy
It seems like a pretty obvious fact that buying a property in cash is the easiest way to do it. You can generally get the best deal by paying in full, as cash buyers are looked upon very favorably by sellers. Paying cash also greatly reduces your risk should the housing market go sour, but I’ll get into that more when discussing financing.
So, what type of returns can be had when buying a property in cash? There is no exact formula, but depending on your market, expect to collect 0.8% to 1.1% of a home’s value in monthly rent, which we can simplify to 1% for calculation purposes. So, a $100,000 investment property can be reasonable expected to produce $1,000 in rent, or $12,000 per year.
