Buy a house with cash and then take out mortgage?

[Heather Ippolito]

I am thinking of buying a house with cash and then taking out a mortgage. Are there any downsides to doing it this way? Benefits? Thanks 

[David Faulkner]

I am a big fan of paying cash initially then refinancing later. Why?:

1)You can get a better deal paying cash, especially on distressed properties that can't be financed. And they don't necessarily have to be completely trashed ... you'd be surprised some of the dumb, minor reasons the bank considers homes uninhabitable and therefore deny financing.

2)Your leverage matches the risk profile. When you first purchase a distressed property, it is the riskiest, then risk goes down once you fix it, then down again once you stabilize it with good tenants. So, minimize leverage by paying cash, reduce risk by fixing & stabilizing the property, then add leverage to multiply positive returns once your risk profile comes down. If you are not able to stabilize the property, for whatever reason, then you are in a much better position to either fix it or get out if you paid cash. In this way, I view the excess equity as an insurance policy in the beginning.

3)Your property value will go up after you fix it and stabilize ... refinancing then allows you to pull most or all of your initial investment out if you like, and possibly with better financing terms since the property is fixed, stabilized, and "seasoned".

4)By "seasoning" the investment first, you will have a much better idea what the actual financials are, and can therefore better predict how much debt burden it can support and still safely remain cash flow positive.

Downside is you need the cash and it is locked in the property until you cash out refi, and it is not 100% certain you will be able to refi when you want and on the terms you want.