Let’s say you’re willing to invest $600,000 in rental real estate. You find the average purchase price of a multifamily triplex (3 apartments) is $600,000, with rental income potential (after one-time renovations) of $6000 per month. You can buy the property in cash and have no mortgage, or you can buy 2 or 3 such properties by financing them. Let’s analyze the finances based on current interest rates of about 6.5% for a 30-year fixed mortgage.
| 1 Triplex | 2 Triplexes | 3 Triplexes | |
| Purchase Price | $600,000 | $1,200,000 | $1,800,000 |
| Down Payment (%) | 100% | 50% | 33.3% |
| Down Payment ($) | $600,000 | $600,000 | $600,000 |
| Mortgage (P&I) 1 | 0 | $3,792 | $7,590 |
| Insurance + Taxes | $379 | $758 | $1,137 |
| Rental Income | $6,000 | $12,000 | $18,000 |
| Profit 2 | $5,621 | $7,450 | $9,273 |
| Increased Profit ($) | $1,829 | $3,652 | |
| Increased Profit (%) | 32.5% | 65.0% | |
| Net Rental Yield ($) | 11.24% | 14.90% | 18.55% |
1 The mortgage (P&I, or Principal and Interest) and the insurance and taxes are based on the Zillow mortgage calculator.
2 Profit in this calculation is just gross rental income minus large expenses, like mortgage, insurance, and taxes. It excludes water, garbage, business license, etc,)
If we ignore closing costs, which are a one-time cost and can be wrapped into a mortgage, we find that for the same $600,000 investment, we can make an additional
- $1,829 per month if we buy 2 properties instead of one (32.5% increase)
- $3,652 per month if we buy 3 properties instead of one (65% increase)
From a net rental yield perspective, which is annual profit divided by purchase price, the ratios for each case are 11.24%, 14.9%, and 18.55%. The yield if we buy just one triplex is already very good (11.24%), but the yield when we buy 2 or 3 triplexes is amazing!
Based on this simple analysis, we can see that for the same investment amount ($600,000), we can make significantly more money if we finance multiple properties rather than pay cash for just one property. But, the financial benefits don’t end here. Since the interest rate was 6.5% (current as of this writing), there is potential to make even more money if we refinance when interest rates drop. Let’s compare the numbers for interest rates of 5%, 4%, and 3%. Note that during the pandemic in 2021, it was possible to get a rate of 3% for a 30-year fixed mortgage on an investment property.
Interest Rate = 5%
| 1 Triplex | 2 Triplexes | 3 Triplexes | |
| Purchase Price | $600,000 | $1,200,000 | $1,800,000 |
| Down Payment (%) | 100% | 50% | 33.3% |
| Down Payment ($) | $600,000 | $600,000 | $600,000 |
| Mortgage (P&I) | 0 | $3,220 | $6,444 |
| Insurance + Taxes | $379 | $758 | $1,137 |
| Rental Income | $6,000 | $12,000 | $18,000 |
| Profit | $5,621 | $8,022 | $10,419 |
| Increased Profit ($) | $2,401 | $4,798 | |
| Increased Profit (%) | 42.7% | 85.4% | |
| Net Rental Yield ($) | 11.24% | 16.04% | 20.84% |
If you refinance to a 5% interest rate, the rental yield for 2 and 3 triplexes jumps to 16.04% and 20.84%, respectively.
Interest Rate = 4%
| 1 Triplex | 2 Triplexes | 3 Triplexes | |
| Purchase Price | $600,000 | $1,200,000 | $1,800,000 |
| Down Payment (%) | 100% | 50% | 33.3% |
| Down Payment ($) | $600,000 | $600,000 | $600,000 |
| Mortgage (P&I) | 0 | $2,864 | $5,733 |
| Insurance + Taxes | $379 | $758 | $1,137 |
| Rental Income | $6,000 | $12,000 | $18,000 |
| Profit | $5,621 | $8,378 | $11,130 |
| Increased Profit ($) | $2,757 | $5,509 | |
| Increased Profit (%) | 49.0% | 98.0% | |
| Net Rental Yield ($) | 11.24% | 16.76% | 22.26% |
If you refinance to a 4% interest rate, the rental yield for 2 and 3 triplexes jumps to 16.76% and 22.26%, respectively.
Interest Rate = 3%
| 1 Triplex | 2 Triplexes | 3 Triplexes | |
| Purchase Price | $600,000 | $1,200,000 | $1,800,000 |
| Down Payment (%) | 100% | 50% | 33.3% |
| Down Payment ($) | $600,000 | $600,000 | $600,000 |
| Mortgage (P&I) | 0 | $2,530 | $5,061 |
| Insurance + Taxes | $379 | $758 | $1,137 |
| Rental Income | $6,000 | $12,000 | $18,000 |
| Profit | $5,621 | $8,712 | $11,802 |
| Increased Profit ($) | $3,091 | $6,181 | |
| Increased Profit (%) | 55.0% | 110.0% | |
| Net Rental Yield ($) | 11.24% | 17.42% | 23.60% |
If you refinance to a 3% interest rate, the rental yield for 2 and 3 triplexes jumps to 17.42% and 23.60%, respectively.
Conclusion
If your goal is to maximize ROI, then it should be clear now that financing the purchase of many rental properties is better than paying cash for fewer properties.