Cash or Loan purchase?

Question

When would it be better to pay cash vs loan for a rental property? I understand many people like to use leverage and buy multiple properties if able to. I am looking at my first investment and a cash buy seems nice to minimize risk and debt.

Seth Ferguson · Answer

Hi @Dr. Travis Martin,

Some people may disagree with me, but I feel that every income producing property should include some form of leverage. Now, whether that's 60% LTV or 80%, that's up to the individual and what their tolerance is.

It sounds like you're new to investing. I'd recommend you read up on the power of leverage and how to use to safely. You can also learn a lot from podcasts that talk about real estate investing.

Travis Martin · Answer

Thanks everyone for the input. Much appreciated!

Chris Mason · Answer

Cash buyers get their pick of the litter of properties, and can expect to pay a little less since time = money and they can close the fastest. I always suggest being a cash buyer if you have the ability.

Slap a mortgage on it after the fact if you want the leverage. :) Only thing to watch out for there is that some properties can't be traditionally financed for a reason... 2-4 unit manufactured homes and non-warrantable condos being the most common examples we see.

Enrique Huerta · Answer

That's a personal decision. There are many investors who purchase property via 100% cash and then put a loan on it after closing. This incentivizes the seller to sell for a lower price, shorter time frame, etc. The investor can then leverage the asset post-closing.

Additionally, some people buy all cash because they don't like using debt.

The main advantage of using a loan is what you mentioned - leverage to buy multiple properties. If you're conservative and want to minimize risk, then you can still get a small loan of 50% LTV. That should allow you to be comfortable and still use some leverage.

It's a personal decision at the end of the day based on risk appetite, return expectations, and equity available to be invested. I know many doctors who buy apartment complexes all cash. They just need to put the capital to work and are often more conservative. When needed, they'll put a loan against an asset if they want to access capital from their investment.

Anthony Dooley · Answer

@Dr. Travis Martin you are absolutely correct about risk. A paid off house cannot be foreclosed on and the monthly cash flow is probably twice as much as a mortgaged property. You are trading cash for equity and increased cash flow, but your net worth stays the same. When you borrow the money, you keep your cash and give up equity and cash flow. Personally, I prefer to get 15% return and more cash flow than a 90% return and only get $200 per month of cash flow.