Did you buy your first rental all cash? Do you regret it?

Question

That is buying cash without putting a mortgage/refinancing it later on. Do you regret not leveraging?

Frank Wong · Answer

Hi William,

At the beginning like all investors, I had very little money I bought my first 4unit when I was 21 waiting tables in college.  I needed to leverage and pretty much my first 12yrs of investing I was using loans.  Price point I was buying $170-225k.

As my cash flow increased and my demand for my time increased for all aspects of my life work as a realtor, investor, and personal.  I realized that I needed to net more per deal and I was not interested in making $200 a door anymore.  It dawned on me that to make $10k a month in rentals at $200 a door I needed 50 units.  That means I had to deal with 50 tenants, 50 heaters AC, 50 stoves, etc.  Even with a good PM that will suck my time.  I wasn't interested in losing my time, my time is more valuable and I needed it to focus on my clients and get the results.  If I wanted to deal with 50 houses, I want to make $50k a month.

So it was simple for me.  Based on where I invested and how I buy.  I can purchase value-add houses cash rehab them and net $1000+ a month.  Now my time is free up and I can focus on my number 1 money making business as a realtor and getting results for my clients.

Price point.  I buy $90-140k houses which will require $20-35k worth of work.  All in B or above areas now.  I know exactly what I want and I just basically sit and wait till I see it and then strike like a Cobra.

Thanks, @Blake Edwards .  I certainly made some right moves and some dumb ones along the way. The smartest move that I made wasn't a grand slam deal or anything crazy.  It was basically eating crap for 10yrs and everything I made I reinvested in myself in mentorship, programs, seminars, and investments.  I did buy some stupid items but sold those quickly when I realize I was being stupid. Lol.

It comes down to TIME for me.  As your money increases you want time you want to be more efficient with it.  I am trying to enjoy my life, get rich, and have a lot of fun doing it.

Caleb Heimsoth · Answer

@William S. No I bought my 5th rental in cash.  6th rental is also cash.  First 4 were leveraged.  I prefer cash but that’s just me.  Long term it’ll be a mix of leverage and cash with the eventual goal of just paying everything off.

Frank Wong · Answer

Hi William,

I buy my properties cash now and I do not regret it one bit.  I like owning them and not worrying about a mortgage.  I have the ultimate holding power.   Now I am not against financing either and I financed properties when I first started.

The properties I buy also require it to be cash because they are a value add.  Currently, how the market is I don't see any benefit of cashing out.  When I see the right opportunity I will cash out and leverage again.

Each investor is different with different goals. Pros and Cons for both.  Just depends on your business plan.

Steve Vaughan · Answer

On regular rental houses, I'll usually buy with saved cash, depending on finance costs and pain.  Can't imagine the cost of capital for an $18k buy was low?  Easy?  Maybe with a rockstar private lender.

I analyxze each purchase case by case. On larger purchases like commercial apts or industrial,  I'll finance out of necessity but use private lenders.  My best guy has no points or fees but 10yr straight amortization.   Hard to afford that payment if you owe payments on every rental.

At first I financed pretty much everything out of necessity.  Needed the money to scale or just needed it.  As you obtain/get to having paid-for rentals and avoid financing fees (my last buy had closing costs of $417 vs $4700 with a loan), the snowball grows and sustains itself.  I am not missing naps to deal with mortgage quals and paperwork and delays.  45 days of BS? No thanks.

Thomas S. · Answer

My first property I purchased with 100% financing, I have never regreted maximising my returns.

Some investors have no options if they purchase properties worth less than 50K, financing is nearly impossible. For those paying cash for more expensive properties they choose to reduce their ROI and increase their liability risk in exchange for feeling good about full ownership.

The down side is that the property usually does not generate any cash flow as it is all generated by their own money.

When you consider that a investor usually values their cash at a opportunity value of 10% or greater once that is assigned to their equity return there is usually nothing left from the actual owner ship of the property. Figure 100K in equity costs $833/month and you don't usually have much left to cover expenses let alone produce positive cash flow from the property itself.

Blake Edwards · Answer

I'll throw my .02 in.  We finance EVERYTHING.

We financed an $18k house.  Could we have paid cash?  Maybe, maybe not.  The appeal for us was to put down a fraction of the $18k and use the rest of the money to help secure another property.

Kudos to @Frank Wong for being in the position to pay cash for everything now.  He's definitely made some right moves to be in the position he is.

I agree with him as well.  Different investors, different goals.

Good luck!

Steve Vaughan · Answer

Yes, relationships with community banks are huge.  I would consider utilizing financing more with portfolio products, but not fannie/Freddie gse bread and butter houses.  Once they are involved, all boxes must be checked and the 45 days of pain and loss of control begins.

Curious what the costs were on that $18k purchase?  Thanks!

Dan H. · Answer

I invest in a higher appreciation market.  The returns from appreciation are compounded when financed.  I want my money to provide the best return I can achieve and this is achieved via financing in any higher appreciating market.

If I purchased with 80% LTV and the property appreciates 10% on year 1 my return on year 1 from the appreciation is 50% (not including closing costs or any cash flow).  If I purchased with cash (0% LTV) then my return is 10% from the appreciation.

I finance at purchase if I can get a conventional loan.  I finance after a rehab and extract as much of the equity as the loan will permit.  Most of my RE I have zero of my investment still invested (all investment, including value add costs, have been extracted).

No money invested, cash flow monthly, appreciates in the long term.  RE is great.

Note if I was in a low appreciation, higher cash flow market I do not think it as advantageous to finance everything to the max.

In the high appreciation markets leverage can provide some great ROI.

Blake Edwards · Answer

@Frank Wong - Well said.  Better to sit and strike like a cobra than to hurry up and buy properties for the sake of buying doors.  We are in the business of hitting singles as well.  Slow, steady, and knowing what we want.  I've bought some stupid stuff as well because "I work hard, I deserve it".  Makes me shudder just typing it out....

@Steve Vaughan - It didn't make the bank do back flips to finance it, but we built that relationship and were up front with them.  We are still bringing them business.  We needed the money to scale so it was worth it in our situation.  And yes, I look forward to the day when we no longer have to deal with paperwork, notaries, and all that bs that comes with financing.

@William S. - I agree.  You do what you have to do to get the ball rolling and as you acquire more and more, maybe take a second look and see whats necessary at that point.

Steven McLarty · Answer

We have two rental homes.  One paid off but needs some TLC.  We just purchased another using cash so we could activate another paid off property that will generate over $1300 in straight cash.  The property we just purchased using cash will generate about $1K.  The reason we did this was to start the ball rolling on our strategy.  Once we complete the rehab we will take an equity loan so we can buy more properties.  If successful, we will never use our own money again and grow our rental portfolio.  Our investments were primarily in the stock market.  We did not lose money pulling from our accounts to buy the 3rd.  That money was only moved into RE.  So we didn't lose that money.  We relocated in into an investment that will push a 10% COC return if the numbers pan out.  While doing that, we are leveraging our paid off property and the equity into more properties.

My point is that it depends on the strategy.  We do not regret using cash.  We are using it offensively.

Did you buy your first rental all cash? Do you regret it?

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