Buying a full property in cash vs. Financing several properties
Investor · Los Angeles · Member since 2022 · 18 posts · 12 votes
Buying a full property in cash vs. Financing several properties
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThe argument is in the math.
1 - Paying all cash costs you more money since you are paying for the entire property out of pocket. When you have a loan, the tenant's rent is paying for everything but what comes out of your pocket...the down payment.
2 - Saying you are getting better cash flow isn't true. If you use the same money as down payments, you can get 5 of the exact same property (20% DP), which means higher Total CF using the same cash.
3 - Appreciation is applied to property values. If you have 5 properties instead of just one, you are getting 5 times the appreciation.
4 - Profits are made only after you have recovered all of your costs. The cash out of pocket is your only cost. If you pay all cash, you have to recover 5 times as much cash as you would if you only used the cash as a DP.
5 - If you need to pay more than a 20% DP in order for the property to cash flow, then don't buy the property. All that added DP is doing is paying for all that negative CF upfront.
25 Replies
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
The argument is in the math.
1 - Paying all cash costs you more money since you are paying for the entire property out of pocket. When you have a loan, the tenant's rent is paying for everything but what comes out of your pocket...the down payment.
2 - Saying you are getting better cash flow isn't true. If you use the same money as down payments, you can get 5 of the exact same property (20% DP), which means higher Total CF using the same cash.
3 - Appreciation is applied to property values. If you have 5 properties instead of just one, you are getting 5 times the appreciation.
4 - Profits are made only after you have recovered all of your costs. The cash out of pocket is your only cost. If you pay all cash, you have to recover 5 times as much cash as you would if you only used the cash as a DP.
5 - If you need to pay more than a 20% DP in order for the property to cash flow, then don't buy the property. All that added DP is doing is paying for all that negative CF upfront.
- Member since 2019 · 7k+ posts · 4k+ votes4y
The biggest advantage of real estate is the ability to do leverage so financing is always better, especially if you could do a 10-15 years mortgage. This is biggest advantage as you can't do leverage like this with stock or even REIT purchase.
Say you have 1 mil in cash, thing is is we don't know which market will have 15-20% IRR. But what we know is the west coast has a much better appreciation, so you could invest $250k each in each CA,UT,OR,or WA. 10 years from now, one of the houses will be a home run.
So diversifying your bet is possible, with financing. - 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Carlos Ptriawan:
The biggest advantage of real estate is the ability to do leverage so financing is always better, especially if you could do a 10-15 years mortgage. This is biggest advantage as you can't do leverage like this with stock or even REIT purchase.
Say you have 1 mil in cash, thing is is we don't know which market will have 15-20% IRR. But what we know is the west coast has a much better appreciation, so you could invest $250k each in each CA,UT,OR,or WA. 10 years from now, one of the houses will be a home run.
So diversifying your bet is possible, with financing.You're better off with a 50 year mortgage than a 10 or 15 year one. Let the tenant pay for the mortgage, and max out the CF...and you don't know for sure what will happen in 10 years.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Quote from @Eric V Harding:
This year has given us an opportunity to dig in to what we've wanted to do for a long time, BRRRR.
For our opening move, we could go all in and cash only with a nice turnkey property in Florida via a REI partnership firm. This seems like the best option as financing isnt an issue and the monthly cashflow will be muscular. However, it may take awhile to build equity in the property and thus buying a second property and repeating.
What is the argument for breaking up that cash and using it for down payments to several properties in the same market with the same REI firm? Would lenders even allow this?
Joe nails it. Just crunch the numbers on one property and see what your return is if you pay 100% cash, then do it again with 50% down and 20% down to see the real difference. If you buy all cash, you aren't using leverage to increase your return, you're paying for the property instead of your renters, and you're missing out on some tax benefits (mortgage interest is tax deductible). Buying all cash gives you security, but it kills your return.
The DIY Landlord Book4.7248 Reviews - Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes4y
You get to scale at a faster rate. I don’t recommend this if you’re new to RE. Mortgage payments can feel like an anchor if you’re not budgeting rehab and time correctly. There’s a lot more room for error when you’re paying cash
- 4yPatrick DruryBusiness MemberReal Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes
@Eric V Harding
If you can choose between cash or financing, go with financing. The only time to use cash would be if you couldn't get lending (either property or yourself doesn't qualify), or if it's only the offer gets accepted( some type of competitive situation or the seller is fixated on cash). It's not ideal, but if you have to pay cash to get a good deal might be worth it. At the end of the day, you could always get delayed financing and pull 75%-80% (depending on the lender) of your money out right away and on to the next deal. Delayed financing is based on the lower of the purchase price or appraised value. You are not going to be able to pull more money out right away. If you wanted to do that you would need to wait 6 months then you could get a cash-out refi. Check the BP forums, this question has been asked a lot. - 4yJon KellyPro MemberInvestor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
@Eric V Harding reread your first 2 sentences again. They are completely contradictory.
Your goal has always been to start BRRRRing? Now you have some cash and the first thing you are going to do is the complete opposite of a BRRRR?
I'd reconsider the strategy. A lot of good posts on this thread for you to follow.
- Specialist · Southlake, TX · Member since 2021 · 213 posts · 157 votes4y
Joe was spot on. If you have the opportunity between choosing the purchase method, I would say finance. Interest rates may be higher now but having a resident paying down your mortgage on borrowed dollars is the best option in my opinion. You can get several properties and reap the benefits of appreciation on multiple properties. @Eric V Harding Feel free to reach out if you want to discuss. Best of luck with all your future investments!
- Member since 2019 · 7k+ posts · 4k+ votes4y
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
The biggest advantage of real estate is the ability to do leverage so financing is always better, especially if you could do a 10-15 years mortgage. This is biggest advantage as you can't do leverage like this with stock or even REIT purchase.
Say you have 1 mil in cash, thing is is we don't know which market will have 15-20% IRR. But what we know is the west coast has a much better appreciation, so you could invest $250k each in each CA,UT,OR,or WA. 10 years from now, one of the houses will be a home run.
So diversifying your bet is possible, with financing.You're better off with a 50 year mortgage than a 10 or 15 year one. Let the tenant pay for the mortgage, and max out the CF...and you don't know for sure what will happen in 10 years.
Yeah if you look from the CF. But I'm more into equity building and I have my equity target. With 50 years mortgage there're very little that goes to principal , the lender makes money a lot haha...w/ 15 years mortgage, I make money and the lender make less money lol :)
- Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes4y
@Eric V Harding Buy cash and you should be able to get a price discount on the buy side. Then turn around and refinance it into a long term loan. Leverage allows you to scale quicker, have a higher rate of return and utilize tax benefits.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesNo, you pay more money when you have a 15 year mortgage than a 50...and yes, it depends on having positive CF. That means the tenant is buying the property for you. When you have negative CF, or when you have less CF by choice (15 yr vs 50 yr mortgage), you are spending what could be greater CF on your property. The only true equity buildup comes from appreciation, and when the appreciation is greater than 30% of the property value, you are losing money.
Quote from @Carlos Ptriawan:
Quote from @Joe Villeneuve:
Quote from @Carlos Ptriawan:
The biggest advantage of real estate is the ability to do leverage so financing is always better, especially if you could do a 10-15 years mortgage. This is biggest advantage as you can't do leverage like this with stock or even REIT purchase.
Say you have 1 mil in cash, thing is is we don't know which market will have 15-20% IRR. But what we know is the west coast has a much better appreciation, so you could invest $250k each in each CA,UT,OR,or WA. 10 years from now, one of the houses will be a home run.
So diversifying your bet is possible, with financing.You're better off with a 50 year mortgage than a 10 or 15 year one. Let the tenant pay for the mortgage, and max out the CF...and you don't know for sure what will happen in 10 years.
Yeah if you look from the CF. But I'm more into equity building and I have my equity target. With 50 years mortgage there're very little that goes to principal , the lender makes money a lot haha...w/ 15 years mortgage, I make money and the lender make less money lol :)
When you buy a property, and put 20% down, you are buying a property worth 5 times what you paid for it...and the initial equity you are paying for. When the property reaches, let's say, 40% of the PV, the cost of the property in equity is only buying you a PV worth 2.5 times what the equity is paying for it.
Now, if you sold that property, and used that sqm equity as a 20% DP, that equity is now once again buying you a property value worth 5 times what you are paying for it.
Example: $200k property with positive CF
1 - Cost = $40k (20% DP)
2 - Initial equity = DP = $40k
3 - Property value = $200k
Property appreciates to $40k...
4 - Cost in equity = $80k
5 - PV = $240k
Sell the property at $240k...
6 - Equity on next purchase = DP = $80k
7 - New PV = $400k (not just $240k)...that's a $160k loss
8 - Cash flow goes up substantially since you now have 2 properties
You want to build equity? Keep your cash (DP = equity and CF) moving forward, not sitting on its arse. - Member since 2019 · 7k+ posts · 4k+ votes4y
just take a look at the equity/appreciation chart and total payment, 15 years mortgage total payment obviously is very small compared to 50 years mortgage.
Also I'm more into equity appreciation rather than CF. - Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes4y
You can argue this topic until you are blue in the face. Same argument as stocks vs real estate.
Neither method is better than the other. They just have their advantages and disadvantages.
Buying all cash allows seriously diminishes your ROI, but you have no debt.
Buying on leverage provides a higher ROI, but contains more risk.
At he end of the day, it all comes down to what you feel comfortable with. If it was me personally, I would rather leverage my purchase at 80%LTV. Leverage is one of the biggest benefits of RE investing. I would also make sure I had enough in reserves to cover any costs that will arise from owning properties.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesREI is always a greater return than the SM...even if the SM has a 15% return per year vs 5%/yr in REI. Percentages lie....dollars don't.
Quote from @Luka Milicevic:
You can argue this topic until you are blue in the face. Same argument as stocks vs real estate.
Neither method is better than the other. They just have their advantages and disadvantages.
Buying all cash allows seriously diminishes your ROI, but you have no debt.
Buying on leverage provides a higher ROI, but contains more risk.
At he end of the day, it all comes down to what you feel comfortable with. If it was me personally, I would rather leverage my purchase at 80%LTV. Leverage is one of the biggest benefits of RE investing. I would also make sure I had enough in reserves to cover any costs that will arise from owning properties.
The more equity you have the more risk you have because of what's is at risk...the cash/equity. The property is just the place it sits in. The loan is the lender's money they are putting at risk. - 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
forgetting all cash vs. financing - i wanted to address 2 other items in your post
1st point - turnkey is not BRRRR
if you can't force substantial appreciation immediately, it may take many, many years to have enough equity to refinance cash out. turnkey is just about the opposite of BRRRR
2nd point - down payments for several properties - depends on your DTI and the loan type
ask one or more lenders
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes4y
Quote from @Eric V Harding:
This year has given us an opportunity to dig in to what we've wanted to do for a long time, BRRRR.
For our opening move, we could go all in and cash only with a nice turnkey property in Florida via a REI partnership firm. This seems like the best option as financing isnt an issue and the monthly cashflow will be muscular. However, it may take awhile to build equity in the property and thus buying a second property and repeating.
What is the argument for breaking up that cash and using it for down payments to several properties in the same market with the same REI firm? Would lenders even allow this?
Ok, let's keep this to it's core simplicity: How many mortgages would you like your tenants to pay down/off for you? 0, 1, or many????
If all you ever do is cash-flow alone, your missing 75% of the math game of it all.
- 4yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
@Eric V Harding
Paying cash for a house enables you to use that money for your home purchase and nothing more. Once you lock in the purchase of the home, that money is inaccessible unless you decide to refinance the property.You can leverage the financing as its one the most used methods in real estate, but if you find yourself in a hot real estate market and on the verge of a bidding war, you may want to consider a full cash offer as an opportunity to close the deal quickly.
All the best!
NETWORTH BUILDERS5236 Reviews - Specialist · Dallas, TX · Member since 2010 · 511 posts · 252 votes4y
Buying One property at 300K cash...After 5 years if property is 400K = Total gain 100K
Buying 4 properties using 25% down.... after 5 years if property is 400K = Total gain 400K
Caveat, there is more cash flow in single cash property but there will be significant amortization in 4 properties..
Just trying to making it simple :)
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Quote from @Shital Thakkar:
Buying One property at 300K cash...After 5 years if property is 400K = Total gain 100K
Buying 4 properties using 25% down.... after 5 years if property is 400K = Total gain 400K
Caveat, there is more cash flow in single cash property but there will be significant amortization in 4 properties..
Just trying to making it simple :)
Almost.
Buying a property all cash for $300k...if after 5 years the PV goes up to $400k, it isn't a gain of $100k...it's a loss of $200k.
Cash flow from 4 properties with debt will always be greater than 1 property without debt.
The rest of what you wrote is accurate.
- Investor · San Antonio, TX · Member since 2017 · 31 posts · 33 votes4y
@Joe Villeneuve
It depends on your situation and goal. If you’re looking to grow then use leverage to acquire multiple properties. If you’re looking to stop working and enjoy the cash flow without the liabilities, then paying all cash could work. But I wouldn’t empty all my reserves to buy a house with cash.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesIf you paid $300k in cash for a property, and the CF was $2500/month ($30k/yr), it would take you 10 years (assuming you didn't have to pay cash for anything else) just to break even. Paying all cash, and getting a higher CF on paper, doesn't mean you are getting a higher profit in real life. All you did by paying all cash is pay what amounts to all the interest on a loan up front.
Quote from @Courtney Walker:
@Joe Villeneuve
It depends on your situation and goal. If you’re looking to grow then use leverage to acquire multiple properties. If you’re looking to stop working and enjoy the cash flow without the liabilities, then paying all cash could work. But I wouldn’t empty all my reserves to buy a house with cash.
If that same property used a 20% DP ($60k), and your CF was reduced to $1250/m ($15k/yr), it would only take you 4 years to break even. That would mean by year 10, you would have made $90k in profit...even though your CF was half.
Rent means nothing by itself, until you see how much rent you keep = CF. CF means little by itself, until after you recover your costs = profit. - 4yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Joe is right. For mortgages, get the longer ones. Your payments are lower and yes over time, you pay more in interest, but interest rates are still low and your tenant is paying your mortgage for you. The lower payments will also give you higher cash flow which will allow you to save your money more quickly to buy other rentals.
The only time I'd think about paying cash is if you are maxed out for loans or it an amazing deal and you need to buy it quickly. In the latter case, I'd then get a mortgage after I bought it. the argument for higher cash flow when you buy a property outright means that you have a lot more money tied up in that property (20%). So if you'd cash flow $1000 a month on property that is fully paid vs $200 with a mortgage, had to put 20% down, you could have used that money to buy 5 properties and on paper cash flow the same amount. BUT down the road, you have 5 properties, staggered vacancies and tenants paying down 5 mortgages. Plus rents go up over time, so a $50 increase in one year is $50 on one property, but $250 on 5 properties.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesI wish I could vote more than once for this comment.
Quote from @Theresa Harris:
Joe is right. For mortgages, get the longer ones. Your payments are lower and yes over time, you pay more in interest, but interest rates are still low and your tenant is paying your mortgage for you. The lower payments will also give you higher cash flow which will allow you to save your money more quickly to buy other rentals.
The only time I'd think about paying cash is if you are maxed out for loans or it an amazing deal and you need to buy it quickly. In the latter case, I'd then get a mortgage after I bought it. the argument for higher cash flow when you buy a property outright means that you have a lot more money tied up in that property (20%). So if you'd cash flow $1000 a month on property that is fully paid vs $200 with a mortgage, had to put 20% down, you could have used that money to buy 5 properties and on paper cash flow the same amount. BUT down the road, you have 5 properties, staggered vacancies and tenants paying down 5 mortgages. Plus rents go up over time, so a $50 increase in one year is $50 on one property, but $250 on 5 properties.
- Investor · Los Angeles · Member since 2022 · 18 posts · 12 votes4yCan you expand on that, Joe? Seems like a point I should get to know.
Quote from @Joe Villeneuve:
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