I love thinking about money and all the freedom and choices a lot of money gives you. If I suddenly had a rich uncle die and leave me one million dollars free and clear; how would I invest it? I love rental properties and the returns they provide so lets see how many rental properties someone could buy with one million dollars in cash. You could buy the rental properties with all cash, but the cash on cash returns would be less. You could try to finance all the properties but as you will see that probably will not be possible due to banking guidelines. Let’s take a look at how many rentals you could buy and what the returns would be with one million dollars to invest. Here is a great article that goes through how to create one million dollars through investing a modest amount into rental properties.
Why would I invest the one million in rental properties?
I own ten rental properties and they give me over $5,000 in cash flow every month. That is $5,000 is after expenses and accounts for maintenance and vacancies that may come up in the future. I bought all my rental properties in the last 3.5 years and I obtained a loan on each of them. I have invested between $ 280,000 to $300,000 into the rental properties and that $5,000 a month equals a 20% return on my money. I am being very conservative with that $5,000 a month in income, I am actually making more than that, but I am assuming my properties will have some vacancies and repairs needed in the future. That 20% return does not include equity pay down, appreciation or the tax benefits that come with rental properties.
Paying all cash for rental properties with one million dollars
The rental properties I like to buy cost from $80,000 to $130,000. They usually rent from $1,200 to $1,400 dollars and require varying amounts of repairs. The cheaper homes usually need the most work. Assuming I could buy properties for $100,000, I could buy 10 rental properties for cash. I get $500 or more cash flow on my rental properties now, but I have loans on my properties (except for rental property one which I recently paid off). Without a loan on my properties, the cash flow would rise to $850 to $950 a month. If I bought 10 rental properties for cash at $100,000 each, I would make about $100,000 a year from cash flow.
How many rental properties could you buy with one million dollars and a loan?
I am able to buy many rental properties with loans from my portfolio lender. I have to put 20% down on the purchases and my portfolio lender will give me as many loans as I can qualify for. Assuming I could qualify for as many properties as I wanted, I could buy a lot of properties with one million dollars. I talk about how much money is required to buy a rental property in this article. Lets assume I can buy a rental property with $30,000 in cash, which includes the down payment, closing costs and repairs. If I had one million dollars to invest in a rental property with a loan and it takes $30,000, then I could buy 33 rental properties. If I was able to cash flow $500 on each property, then I would make $199,000 a year. However, for most people it is not possible to buy 33 properties with a loan all at once.
Why would it be difficult to get a loan on 33 properties?
In order to get a loan, you must have more than the down payment and money for closing costs. A lender will want to see six months in reserves (reserve usually means mortgage payment plus taxes and insurance) on every mortgage you have. That could equal over $100,000 in cash needed if you have over 30 mortgages. You would have decrease to the amount of properties you bought by 3, to keep enough reserves for the rental properties (assuming you have no mortgage on your personal house). The other issue you will run into when trying to finance a lot of properties is many banks will not finance more than four or more than ten properties. I am lucky that my portfolio lender will, but they still make me qualify for loans. Check out these articles for more information on how to finance more than four and more than ten mortgages. A lender will look at your debt to income ratio when deciding if you can qualify for a loan. Rental properties produce income, but many banks will not count that income on rental property right away and some banks will not count any of it until it shows up on your tax return. Depending on how much money you make, you may be able to qualify for one, five, ten or no mortgages on a rental property, even though you have one million dollars in the bank.
Finding many great rental properties at one time is not easy
When I buy my rental properties, they have to be great deals with great cash flow. These properties are not easily available and I have to be very patient to find great rentals. I always buy my rental properties below market value and it may be months before I see a potential rental property on the MLS that will meet my criteria. If you wanted to lower your potential returns to buy many rental properties at one time, that may be possible. I would want to continue to try to get the best rental properties I could, and there is no way I could buy 30 properties or even 10 right away. Even though it would be awesome to get one million dollars to invest into rental properties, it would not be realistic to think I could invest all that money at once and start receiving $100,000 or $200,000 a year in income. It would most likely take me a couple of years to find enough properties to invest one million dollars into, provided I was getting loans.
On the surface it would be pretty awesome to get one million dollars to invest in rental properties. Realistically, it would not make sense to dump all that money in to rental properties at one time. I would continue to look for those great deals that produce the great returns and they do not come along that often. Don’t get me wrong, I would still love the freedom and choices that one million dollars would give me. It would increase the amount of properties I could buy and give me plenty of money to use in my fix and flip business. If you were just starting out buying rental properties, the smart thing may be to finance a couple, pay cash for a couple. Then establish the rental returns for a year so you could qualify for more loans. Possibly refinance some of the cash purchases and continue to buy more properties every year. Unfortunately the way the banking works operates today, it would be very tough to go out and buy 30 properties with 30 mortgages.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.