Should I pay full in cash? Or get a loan?

Question

Hello,just kind of lost in what I should do. I want passive income. And I want to invest in real estate. I have some money in the bank. And my financial advisor says if I stay investing long term with him in 30 years I’ll have a lot of money. But if I invest in real estate should I pay cash or a loan? I have enough money to pay full for a couple of single family homes.

Joe Villeneuve · Answer

Here's my answers:

Answer A:

1 - The cost to you isn't the principle and interest, since the source of the funds for the mortgage payment comes from the rent (tenant).  All you are paying, is whatever comes out of your pocket.

2 - You start making a profit after you recover all of the money you spent, ...So...

If you pay $100k, even though you get twice the cash flow, it takes you 10 years to recover your money...and start making a profit.

If you pay only $20k, even though you are only getting half the CF of the 100% cash purchase, it will only take you 4 years to recover your money...and start making a profit.

Answer B:

1 - If you are paying all $100k on one deal, you are getting $10k in CF per year.

2 - If you bought 2 properties using $20k for the DP on both properties, you would be getting that same $10k/year in CF...but you would still have $60k left.

3 - If you spent all $100k for $20k DP buys, you would have 5 properties, at $5k/year each, and end up with $25k/year in CF.

Which would you rather be?

Jerry Padilla · Answer

@Joseph Nardiello

I would purchase using loans. You can buy even more properties, and leverage your money even further with financing. Putting 25% down on a mortgage, will give you the capability to purchase 4 times the amount of properties, thus giving you more profit in the end when all the properties are paid off.

Steve Vaughan · Answer

If regular bread and butter houses over $50k and getting conventional long-term residential mortgage, I'd borrow.

If odd property or needs too many repairs to be able to obtain a loan, BRRRR.

My last cash buys were an old mobile on land (wanted the lot), and a condo and house needing too many repairs to appraise.  Different situations need different solutions.

Bill Plymouth · Answer

@Joe Villeneuve that was brilliantly explained.

Twana Rasoul · Answer

@Joseph Nardiello the right answer lies in what your goals are and how leveraged are you comfortable being? Some like buying cash and don’t want to be leveraged at all and have nice cash flow and others want to be over leveraged and buy as many ‘doors’ as they can for one reason or another. Think about what you would like to accomplish and more importantly, WHY? and that should lead you to the right answer. Best of luck!

Account Closed · Answer

It all depends on what your goal is. I would try and find a combination that works for you of leverage in cash.   Find a deal and run some different versions of the numbers  with different amounts of down payments and all the way from Cash to 50% 40% 30% 20% and see what works for you.  Just know that if you have $100,000 and you  Buy $100,000 property a cost anywhere from 20,000 to 50,000 or all of your 100,000.  So you’d have to sit down and do some math.

Account Closed · Answer

@Joseph Nardiello everyone above me has explained it way better than I have. I just wanted to add one more thing; lienholder. If you have some mishap in the rental and somebody ends up suing you, the lawyer might not go through with it because there us already a lien on the property and they will not be getting much out of it. Just my 2 cents as I've been sued a year ago and learned with experience. I am a big fan of other people's money. I've bought houses with all cash and I think that I should've bought them with financing as I could've bought multiple times more. Plus, don't forget to get as much insurance coverage as you feasibly can. "It's better to have it and not need it, rather than to need it and not have it.

Doug Emerson · Answer

@Joseph Nardiello I've been doing both but in order.  I find a great deal that I know will appraise higher or that I can improve to appraise higher. I'll buy that property with cash... then a month later I'll go to my community bank and finance it.  This is important because it gets financed based on appraisal not based on the purchase price.

Pay cash of $80k... get appraised at $100k so bank lends me $80k... free property plus positive cash flow. Guess what I do with the $80k the bank gave me back? I buy the next one with cash and repeat...

I dont always get 100% back from financing but sometimes I get 110%.

Stephen Chaney · Answer

I've used leverage for both of my current deals, and a build project that starts next week. For as long as I can will not use my own money to purchase property. These guys above me have said pretty much all that needs to be said.

Joe Villeneuve · Answer

Let's say you pay $100k for one property (100% of the PA) and you cash flow $10,000/year with no loan.

...or...

You pay 20%, or $20k (Down Payment only) and only cash flow $5,000/year.

Which would you rather do?

Should I pay full in cash? Or get a loan?

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