BRRRR with All Cash or Financing?

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BRRRR with All Cash or Financing?

Leo Kotschenreuther
Rental Property Investor · Mountain View, CA · Member since 2017 · 34 posts · 24 votes

Dear BP-community,

I just finished David Greene's book "Long-Distance Real Estate Investing: How to Buy, Rehab, and Manage Out-of-State Rental Properties". Before I had read the book, I was convinced that I wouldn't be able to do an out of state rehab considering my lack of experience with rehabs and it being out of state. My view on that has changed quite a bit now that I have read the book and I want to start doing the BRRRR strategy.

Right now I have about 15k in cash available for real estate investments. From what I have been reading on the forums, I could probably get a loan of another 45k to buy and rehab a property in the next months.

On the other hand I also own a rental property in Texas. It cashflows but not great, it's only 5% cash on cash return. I'm thinking about selling that property in about a year and to use every dollar I have available to reduce the mortgage until then. If that goes smoothly I could have 40k in cash available once the property is sold in a year (some equity from the property and some additional savings over a year).

If you were in my position, would you rather wait until you have enough cash available to buy and rehab a property without any financing or would you find financing and start now?

What are the advantages of all cash purchases? Lower closing costs, no interest payments until the property is refinanced and the potential to negotiate a lower purchase price of the property?

Thanks for your input!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
8y

First, you have to understand the difference between cost and expense as it applies to a rental.  There are a number of ways to explain this, but in this case, the best way to look at it is this way:

Cost:  What you pay out of pocket (cash).  An example would be the down payment (or if you paid all cash).

Expense: What your tenant pays from the rent. An example would be property taxes (even though you pay them, it comes out of the rent), insurance, and the big one...the mortgage payment. This it the one way too many REI misunderstand and as a result include the interest on the mortgage when they are discussing the "cost " of the property.

As long as the property is positive cash flow, this is true.  When you are negative cash flow, that negative number becomes a cost.

As far as paying down your mortgage,...why?  That's your money, you're only helping your tenant do their one and only job (pay off the mortgage), and that cash you're putting in has the same value in your equity as it would have in your hands.  The difference is while it is in the property, it is dead.  In your hands, it is alive...and can grow.

Cash is not a noun, it's a verb.  When it becomes a noun, you lose.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y
    Originally posted by @Andrew Syrios:
    Originally posted by @Leo Kotschenreuther:

    @Joe Villeneuve Thanks for reminding me of that. A cash flow positive property is actually a really great thing, even if it's not that much. This is how I learn to pay less for the next property.

    For paying down the mortgage, sure it would lock up the money in the property. I would be saving interest but considering my interest rate being at 4.25% it's not that much

    @Andrew Syrios I would love to hear more about why different people prefer financing or all cash purchases. What are the reasons you prefer financing? Just to be clear, even if I buy all cash I still want to pull out all my money when I refinance after a few months or a year.

     Financing allows you to buy more faster. But of course, it's also more risky. We believe that level of risk is acceptable, but others don't (or perhaps, they don't have anyone lined up to finance the upfront costs, or at least not at terms that make sense).

     Define risk.

    0Reply
  • Cory O'Dell
    Rental Property Investor · Dayton, OH · Member since 2018 · 142 posts · 74 votes
    8y

    Well, my wife and I were considering changing our automatic payments for $500 extra a month toward principal on our house to 0 to reinvest it elsewhere, and this post inspired me to actually crunch the numbers. When put toward equity our ROI on that is 2.8% over the next 18 months. Yuck. Just changed auto payment down to $0 extra and will put that money toward our next investment instead.

    Thanks for the inspiration.

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    8y
    Originally posted by @Joe Villeneuve:
    Originally posted by @Andrew Syrios:
    Originally posted by @Leo Kotschenreuther:

    @Joe Villeneuve Thanks for reminding me of that. A cash flow positive property is actually a really great thing, even if it's not that much. This is how I learn to pay less for the next property.

    For paying down the mortgage, sure it would lock up the money in the property. I would be saving interest but considering my interest rate being at 4.25% it's not that much

    @Andrew Syrios I would love to hear more about why different people prefer financing or all cash purchases. What are the reasons you prefer financing? Just to be clear, even if I buy all cash I still want to pull out all my money when I refinance after a few months or a year.

     Financing allows you to buy more faster. But of course, it's also more risky. We believe that level of risk is acceptable, but others don't (or perhaps, they don't have anyone lined up to finance the upfront costs, or at least not at terms that make sense).

     Define risk.

     Basically the more risk, the higher potential reward, but also the greater potential cost. Leverage adds this kind of risk, because if the property goes up in value, you have acquired it with less money, so you will make a higher return on that money. However, if it goes down, you will lose a great percentage of your investment because the first loss will be your equity and not the loan. Also, since you have loan payments to make, you risk falling behind and having to give the property back to the bank and damaging your credit.

    Podcast Guest on Show #121
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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y
    Originally posted by @Andrew Syrios:
    Originally posted by @Joe Villeneuve:
    Originally posted by @Andrew Syrios:
    Originally posted by @Leo Kotschenreuther:

    @Joe Villeneuve Thanks for reminding me of that. A cash flow positive property is actually a really great thing, even if it's not that much. This is how I learn to pay less for the next property.

    For paying down the mortgage, sure it would lock up the money in the property. I would be saving interest but considering my interest rate being at 4.25% it's not that much

    @Andrew Syrios I would love to hear more about why different people prefer financing or all cash purchases. What are the reasons you prefer financing? Just to be clear, even if I buy all cash I still want to pull out all my money when I refinance after a few months or a year.

     Financing allows you to buy more faster. But of course, it's also more risky. We believe that level of risk is acceptable, but others don't (or perhaps, they don't have anyone lined up to finance the upfront costs, or at least not at terms that make sense).

     Define risk.

     Basically the more risk, the higher potential reward, but also the greater potential cost. Leverage adds this kind of risk, because if the property goes up in value, you have acquired it with less money, so you will make a higher return on that money. However, if it goes down, you will lose a great percentage of your investment because the first loss will be your equity and not the loan. Also, since you have loan payments to make, you risk falling behind and having to give the property back to the bank and damaging your credit.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y

    There are 3 parties involved to define risk, and three questions where the answers define these three parties:

    1 - What is at risk?

    2 - Who is at risk?

    3 - Who is "the" risk?

    Put yourself in the position of those that truly understand risk...the bank, and you'll see why I believe that a REI that is leveraged is in a less risky position than one that has paid all cash for their property.

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