GOOD REASONS NOT TO PAY CASH FOR A CONDO
We entertain some interesting questions while people search for the perfect resort hideaway at the beaches of Panama City or South Walton. One of the "misconceptions" is "I will wait until I can pay cash for my investment". That is a noble thought, but it might not provide the best use of your capital for investment or tax shelter purposes. Tax shelters are not criminal or only for the rich. If you file a short form and take a standard deduction....you got a tax shelter.
So what is a better way to invest if you have enough to pay the full amount of a condo purchase and get a higher rate of return? "Leverage". I do not counsel on taxation and I am not an accountant, but I have found may successful investors will use leverage to increase their investment and rate of return. What's leverage?
Leverage is the use of various financial instruments or borrowed capital to increase the potential return of an investment
How do we use leverage? A rule of thumb we use for condo investment is if you put down 40% of the price of the unit and finance the remainder (60%), the normal income from the unit on a rental program should pay the mortgage, insurance, taxes, HOA, and utilities. (If you do not remove the unit for you and your family during the highest rental periods). So if I pay $200,000 cash for one unit, I receive rent income, depreciation expense deduction, appreciation, and personal enjoyment of the unit. What would happen if I split my $200,000 investment and bought (2) $200,000 units. I finance 50% on each unit (remember the 40% r.o.t.), placed them in an LLC or my favorite is a Sub S. NOW, I get interest deduction on the borrowed money, depreciation on 2 units, appreciation on 2 units, deduct all expenses with renting, checking on, updating, advertising, and protection of personal assets through the corporation. The rents should cover the expenses as long as you do not abuse prime rent time or allow friends and relatives to stay for free or a reduced rate! By using the bank's money and all the advantages your accountant and lawyer will point out, you still have the same personal exposure of $200,000 but you double your appreciation.