My Money vs. Their Money

10 Replies

Hello all. I wanted to get your opinion as to whether it is better to get a lona to purchase a property or if it is better to pay cash if I can? What are the pros and cons?

Thanks.

Stanley

Hey Stanley,

You will undoubtedly get responses saying NEVER use your own money. I always look at this from the perspective of interest and return. I won't every pay cash for something if the interest rate is lower than what the returns of investing the principal would be. For example, I never advocate paying cash for a car, actually I never advocate buying a car you should lease, because the interest rate your paying for the loan is almost certainly going to be less than what the same money would earn if you invested it. 

If an item is $100k and the interest rate is 5%, I would much rather take the loan save and invest the cash, and earn an 8% return while paying 5% interest on the money.

If those numbers start to favor buying cash, either from higher interest rates, or lower probable returns, then look at paying cash for it.

Adam

Hi Adam. Thanks for the breakdown. Those numbers make sense to me.

Stanley

@Adam Hershman has an interesting point of view.  After all, banks are in the business of interest rates.  They pay out small interest rates to savings accounts and CD's while charging higher interest rates on loans paid out with other people's money to whom they are paying the lower rates.

I love leverage. Whatever gives you the most control and financial gain vs personal risk is the way to go in my opinion.  Dave Ramsey would say, never borrow for any reason and save up enough money to buy outright.  Robert Kiyosaki would say that savers are losers and you will be on the fast track to wealth if you use leverage wisely.  So, if you believe in bad debt vs good debt, then use good debt to speed up success. On the other hand, if you believe all debt is bad, pay cash and take longer for the same result.  It's up to you.


This question is easy in my opinion.  If you invest in rental real estate, "all cash",  your returns will be diminished.  You can get similar gains in the stock market or being a money lender and do nothing.   Rental real estate takes hard work.  You should be paid for that.

Real estate is about leverage and making your cash on cash return 50% to infinite.  This comes with debt.

Honestly, you can make 8-10% in the corporate bond market any day of the week and do nothing.---this is what buying real estate with cash will give you. (real estate does have the upside of depreciation, appreciation, built in equity etc. but I dont think that is enough)

You need leverage to make 50-infinite% returns.

If you use your own money, you will never catch up.  Simple math.  Example:

1 - You buy a property for $50,000 of your cash = money out of pocket.  You get a return of $400/month = $4,800/year.  Now, if nothing goes wrong (ha, ha), you will be in the negative for 10.4 years.

2 - You leverage that property, using only 10% out of pocket, and you'll only make $200/month = $2400/year, and out of pocket for only 2.08 years.

or

3 - You leverage it all based on a high enough ARV when you buy. You only get about $160/month = 1900/year...but that's all you money. You are positive from the first month.

I am enjoy the philosophies of both Dave Ramsey and Robert Kiyosaki.  However, I can see some value in the use of loans, but my question would be in what situation.  Also, is taking out a loan considered leverage?  If that's the case, in paying back the loan, the way Robert Kiyosaki explains it would be much, much more than the stated amount when you really get down to it.  I guess another question would be how do I balance the philosophies of these two great money men?

Stanley

@Stanley E.

That is a very good question.  I have been through Dave Ramsey's FPU and have been doing his baby steps for over a year with my personal finances.  I understand he is very adamant about doing the same with business too.  Some will say that he could do that with all his millions of dollars he gets from his courses and books.  But someone just starting may never get off the ground if they wait until they have all the money they would need to buy. . .                                           While agreeing with Dave on personal finances, I also have read all of Robert Kiyosaki's books and have ace'd his cash flow 101 game.  I understand his philosophy of good debt vs bad debt and I tend to agree with him on that even though I also understand where Dave is coming from when he refutes the premise of good debt. . .             I have implemented both philosophies simply by going through the debt snowball in my personal finances but using leverage(debt, or others people's money) for investments.  Following Robert's premise of avoiding doodads helps to keep positive cash flows and have some money set aside for investments.  I see the two philosophies as being able to coincide if it is done similarly. Understanding of course that Dave would probably scold me.  When I make as much as he does per year, I may stop using OPM.



Originally posted by @Stanley E. :

I am enjoy the philosophies of both Dave Ramsey and Robert Kiyosaki.  However, I can see some value in the use of loans, but my question would be in what situation.  Also, is taking out a loan considered leverage?  If that's the case, in paying back the loan, the way Robert Kiyosaki explains it would be much, much more than the stated amount when you really get down to it.  I guess another question would be how do I balance the philosophies of these two great money men?

Stanley

 Hey Stanley,

Anytime you are using money that isn't your own to purchase something (a.k.a debt) it is considered leverage. The term is more traditionally used in an investment setting, and isn't  usually used when referring to a 30 year mtg etc.

That being said, I stand by my original post. The only logical way to approach this is from the perspective of financial analysis. You need to look at each situation individually and analyze it like you would any other financial transaction. What are the income/capital appreciation opportunities, what are the risks? Paying cash for something means that you have money tied up. It's much easier to get a loan on a piece of property than it is a personal loan. Is there inflation risk to using your own money, what does the time table look like?

As you can see there is no simple checklist that makes these decisions black and white. A lot of the future risk and reward is going to be somewhat speculative itself, so you can see why there are hundreds of thousands of finance professionals who do this every day for a living. Another way to think if it is every time you want to purchase something, be the loan officer for your personal bank account. Put emotion aside, look at the facts, and make a decision based on the financial analysis you've conducted. 

Originally posted by @Joe Villeneuve:

If you use your own money, you will never catch up. Simple math. Example:

1 - You buy a property for $50,000 of your cash = money out of pocket. You get a return of $400/month = $4,800/year. Now, if nothing goes wrong (ha, ha), you will be in the negative for 10.4 years.

2 - You leverage that property, using only 10% out of pocket, and you'll only make $200/month = $2400/year, and out of pocket for only 2.08 years.

or

3 - You leverage it all based on a high enough ARV when you buy. You only get about $160/month = 1900/year...but that's all you money. You are positive from the first month.

This is true, but you're also taking on an outsized amount debt. If you don't have tons of income this could make other transactions in your life more difficult, buying a new car, credit cards, etc. Additionally, there were plenty of investors who were heavily leverages in their RE investments in 2007 thinking life was grand, and a year later the sky was falling. Again you can't look at it from the perspective of one rule "never put money down because X reason" because it's not realistic. If one way was the best way to do it hands down, every time, then there wouldn't be a discussion, that would just be THE WAY you did things. Don't get caught up in the "programs" as I call them, and think that one solution would be the best solution to every problem, life just doesn't work that way.

Adam

Thanks Adam for the additiona insight. I do think approaching each situation on its own merits sounds like a best approach.

Stanley

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