Comparing Cash vs Leveraged Real Estate Investing

In my previous post, I promised to run through concrete numbers to see whether my current all-cash fourplex in Indiana is a better investment than 2 financed fourplexes. Right now, I have $1 million invested in the fourplex. If I refinance the property, I could take out half its equity ($500K) to buy a second one. Let’s run the numbers together to find out which method yields the best results!

One Fourplex, All-Cash

Currently, I have $1 million invested in the fourplex.

Monthly breakdown:

• Rent per unit: $2,200 = $8,800

• Operating expenses (taxes, insurance, vacancies, repairs, etc.): $2,945

• Cash flow: $5,855

Yearly summary:

• Cash flow: $70,260

• Cash-on-cash return: ~7.13%

• After-tax cash flow: ~$50,000 (to keep things simple)

Now let’s run the numbers for two leveraged properties.

Two Fourplexes, 50% cash, 50% mortgaged

The rent per unit and operating expenses don’t change between the one fourplex and two. We just have to double the numbers. The main difference is adding two mortgages.

Monthly breakdown:

• Rent per unit: $2,200 = $17,600

• Operating expenses (taxes, insurance, vacancies, repairs, etc.): $5,890

• Mortgages (6.125% interest rate): $3,038 x 2 = $6,076

• Cash flow: $5,634

Yearly summary:

• Cash flow: $67,608

• Cash-on-cash return: ~6.76%

• After-tax cash flow: ~$50,000 (to keep things simple)

The Winner

Comparing the 2 scenarios shows that the single property cash flows $2,652 more than the 2 properties. This is a result of having 2 mortgages with 6.125% interest rates, rates I got quoted for by real lenders in January of this year. Note that these are refinance rates, which are higher than when purchasing. They’re also for investment properties, which have higher rates than primary residences.

However, I won’t go so far as to say owning one property outright is better than two leveraged ones. The after-tax cash flows for both scenarios are roughly the same. This is because having 2 buildings means I’ll have more real property to depreciate and, therefore, write off as expenses. Additionally, the aforementioned numbers don’t account for principal paydown or appreciation, both of which would be more beneficial in the two-property scenario.

Sadly, there’s no clear winner today. If rates were significantly lower, it’d be a much more obvious choice to pick the two properties. Unfortunately, that’s not the current environment, so I’m likely to be stuck waiting for better rates in the near term. 

What would you do in my position? Tell me in the comments below!