All cash vs using leverage for real estate

11 Replies

Hi Everyone, Making my first post in the BP community and looking for some feedback and opinions. I’ve recently set up my LLC and just waiting on my 80% LTV loan to close for my 1st rental property. Exciting! My wife and I have a pretty nice income which equates to an extra $5k a month disposable which we’ve been using towards our debt pay off (my truck) which will be paid off soon. We are starting with SFR but plan to move multifamily within 5years. I’d like to have 10 SFR’s before making the transition. My wife thinks we should only use our cash flow and buy (or build) a new rental about every 10 months all cash. Construction Management is my career. We’re in Mississippi, so $50k can buy rentals in the right location. Everything I’ve read talks about using leverage and Other people’s money... which way would you attack the situation if you were in our position financially? I appreciate any insight. Thanks, Zach M

My wife and I also have the ability to buy cash on single family homes but we’ve always chosen to borrow as much as possible to keep our cash ready for that “deal you don’t want to miss”. Usually to act fast in those deals it requires cash or a hefty down payment. It’s paid off for us because there would’ve easily been 3/4 big deals we would’ve had to pass on had we not left our cash reserve open for the opportunity.

Our latest example was an 11 unit apartment building. Had we paid cash for the single family home we got a month prior we would’ve lost the deal on the apartment complex since multiple people were interested.

Best of luck!!
Matt

@Zach Morrow The reason most of the books cover using leverage is because that is what their target audience wants to hear.

The real answer is it depends on how many good of deals you are finding.  It is often easier to buy with cash.  If you start finding more great deals than you have cash to buy simply do delayed financing on what you have already bought.

The longer you have been a landlord and the more rental income you have been making the easier the financing will get.

Originally posted by @Zach Morrow :
Hi Everyone,

Making my first post in the BP community and looking for some feedback and opinions.

I've recently set up my LLC and just waiting on my 80% LTV loan to close for my 1st rental property. Exciting! My wife and I have a pretty nice income which equates to an extra $5k a month disposable which we've been using towards our debt pay off (my truck) which will be paid off soon.

We are starting with SFR but plan to move multifamily within 5years. I'd like to have 10 SFR's before making the transition.

My wife thinks we should only use our cash flow and buy (or build) a new rental about every 10 months all cash. Construction Management is my career. We’re in Mississippi, so $50k can buy rentals in the right location.

Everything I’ve read talks about using leverage and Other people’s money... which way would you attack the situation if you were in our position financially?

I appreciate any insight.

Thanks,

Zach M

I don't know what you are paying for the house you have currently found, but the closing costs and interest rates on houses less than 50K are pretty high. This has been my strategy; I pay cash for houses initially but finance it subsequently with a first place HELOC. Wells Fargo is one of the few places that will do HELOCs on rental properties. Usually the only fee is for the appraisal plus $75 a year. They will usually give you a teaser rate the first year, but if you pay it off you can get another teaser rate. I have three of these and I manage them much as I do balance transfers on a credit card, playing musical chairs with the balances in order to keep the interest rates down.

@MatthewCrawford - I agree that having some cash reserves is always a good thing. Finding the balance of what that amount should be has always been a question for me.

@MichaelBiggs - This is sort of my strategy on my first property that I'm in the midst of right now. I purchased the property in cash. Got a "Subject-to" appraisal done based on the renovations I plan to perform on the property. At 80% LTV of what my subject to appraisal came back as, I was able to get financing that covered purchase price and all but $5k of my renovation costs. At only $5k of my own money in the deal now, I will make that back within the first year of rental. Since I have a full acre lot, I'm most likely going to split the property in half and build another SFR Rental next to my existing property.

@SusanManeck - That's valuable information. I have thought about taking out a HELOC on my primary residence but have since learned the interest paid will not be tax deductible unless actually used on the property it is taken out against. — I will definitely give this a try on my rentals through a local bank as I begin to acquire them.

@Zach Morrow Using all cash to purchase an investment property comes in handy when you need to close on a deal fast. This will put you ahead of investors that use financing (closing takes longer, banks not supporting the deal, appraisal isn't high enough, ect). 

Leverage allows you to expand and grow your portfolio. Real estate is so great because you get to choose the dial between cash flow vs leverage. If you put a lot of money down, you cash flow is high. But if you put little money down, your cash flow is low. I recommend making an excel file with a couple of scenarios. One example is paying all cash for deals and calculating cash flow, and using that to buy another SFH. Another scenario where you put little down, look at the cash flow and the left over money you have from not using all cash (80%LTV for example), and determine when you can purchase another single family home. Expand the timeline to 5-10 years and determine which position you would like to be in.

 There is not one unique solution for all. You need to find the balance you are comfortable with. You could put enough money down to cash flow at 2% or even 50%. It all depends on how fast you want to expand your portfolio and use leverage (risk) to get there. Good luck

@Zach Morrow it definitely is a balance thing. I have a couple houses that I paid cash for because I would’ve missed out on them otherwise but I always put 10-20% down on my single family homes.

Once you start getting to wanting to purchase multifamily Properties is when, I’m my opinion you can begin to get more creative with financing and when you’ll need the bigger lump sums of cash ready.

I try to keep the mind set of being ready for the next deal when I’m purchasing the deal at hand, this way I don’t regret not being ready.

Originally posted by @Zach Morrow :

@MatthewCrawford - I agree that having some cash reserves is always a good thing. Finding the balance of what that amount should be has always been a question for me.

@MichaelBiggs - This is sort of my strategy on my first property that I'm in the midst of right now. I purchased the property in cash. Got a "Subject-to" appraisal done based on the renovations I plan to perform on the property. At 80% LTV of what my subject to appraisal came back as, I was able to get financing that covered purchase price and all but $5k of my renovation costs. At only $5k of my own money in the deal now, I will make that back within the first year of rental. Since I have a full acre lot, I'm most likely going to split the property in half and build another SFR Rental next to my existing property.

@SusanManeck - That's valuable information. I have thought about taking out a HELOC on my primary residence but have since learned the interest paid will not be tax deductible unless actually used on the property it is taken out against. — I will definitely give this a try on my rentals through a local bank as I begin to acquire them.

Dear Zach, 

I don't know of any local banks that will do HELOCs on rental properties. If you find one, let me know because Wells Fargo is kind of a pain. As for building a new SFR on your property, that might work in Rankin County. Where I buy property I pay about $25 a square foot. To build a new house costs about $85 a square foot. There is an empty lot next to mine that I could buy from the city for $50-$100 but I would have to submit a plan of what I plan to do with it, and given I paid 30K for the house I live in, how does it make sense to build on that property? Right now, I just keep the grass mowed.

warmest, Susan 

@Zach Morrow This is going to be all about you and what you want to do. Do you want to scale a rental business? If so then using hard money to a conventional will free up more of your personal cash to do more deals. If your trying to take a route with less risk on the side of your everyday job, then using your own money might be the route for you. Hope this helps!

@Zach Morrow buying with all cash every 10 months is a sure fired money making scheme. This will reduce your risk to almost zero and you will be able to weather any housing market crash, interest rate hike, recession, etc. Your properties will produce maximum cash flow which at some point will allow you to buy a property per month instead of 10 months. Focusing on dollars instead of percentages will make you rich. Owning 10 SFRs free and clear will give you the net worth, equity and cash flow needed to move into multi-family very easily. This is when using a lender will be most needed, but there is no need to borrow on a $50K house that you can buy with cash.

@Anthony Dooley , @Zach Morrow

I agree 100% cash is best if you want low risk/immediate cash flow. It's especially good in our Mississippi markets where we can get low-cost SFRs.  I'd say continue to do what you're doing now with cash but be putting some aside for when you are ready to go multi-family so you have a big down payment ready, probably better to finance part of a multi-family 10 year +/- note. if you hate it, just buckle down and get out of it quicker. I am more of a pay as much up front as possible sorta guy. I like to see the cash flow as apposed to slim margins/break-even properties.