WWhat’s the advantage of buying with all cash?

56 Replies

For my first investment out of state...

Originally I wanted to finance multiple homes but I feel I can get a better deal by offering an all cash offer. I can always refi up to 75% after I get the home and reuse the 75% on another home. Is this a good strategy to find a good deal?

Will sellers take less then there asking price if you have cash?

I’d appreciate your thoughts and help.

Thank you

Cesar

1. You can offer less than asking price 

2. You can close in 7 to 10 days

3. Your agent knows you are a cash buyer and will bring you off market deals (pocket listings)

4. The word gets out that you are a cash buyer... no joke people will hunt you down with deals 

5. You have no mortgage = more cashflow

6. If the economy tanks and you have to lower rents you still cashflow 

That's just 6 off the top of my head 

@Clifford Paul

Thank you!! I see how I can use this to my advantage. I might only be able to buy my first deal with cash but it’ll help me get a better deal to start off with.

Will it be a good idea to refi after I buy it and use the money again to buy another property as long as the rent exceeds the new mortgage?

Yes, taking the cash out is a great way to build your portfolio.  Just make sure you leave enough room incase you need to lower rents and still cashflow.  Also start building your cash reserves early. You want to have a sizable cash reserve set aside for emergencies.  As your portfolio grows so should your cash reserves.  

Everything @Clifford Paul said, I just want to add one extra step. Please talk to the refi lender before you actually make the cash purchase so you don't get into a situation where you are expecting to pull your money out via refi and they won't be able to do the loan for whatever reason. Lenders have seasoning requirements and other restrictions so do your upfront due diligence so the long-term financing is proactively locked and loaded.

Cash/free and clear real estate eliminates one of the biggest risks of REI: lender-initiated foreclosure. If you pull all of your money back out, you invite back some or all of that risk.

No one starts in this business planning to get foreclosed on, but it still happens.  Everyone plans to buy low, sell high, and collect enough rent meanwhile so that "the tenants buy the house for me."  Many times that works, but sometimes it doesn't.  It would be irresponsible not to admit that in spite of our best plans, forecasts, and strategies, sometimes people fail in real estate.

Leverage is a double edged sword: it magnifies both gain and loss. Not to be too gloomy, but people have destroyed their marriages and/or killed themselves after getting buried under crushing debt that they had every intention of using to become wealthy. On the flip side, I have never heard of someone destroying a marriage or killing themselves because they paid cash for a house.

Food for thought.

@Erik W.

Finding a deal has been pretty tough. I’m looking for an edge over others when the deal finally comes and it seems like buying a home cash is my only advantage. Thanks for the words of wisdom!

The only advantage, is you can close faster.

It costs you more.  Your cost isn't what the total cost of the property is.  Your cost is what comes out of your pocket, and you have to recover that before you make any profit.

Saying your cash flow is better is an illusion.
Let's take a property where the agreed upon price is $100k, with $10k/yr in CF without financing, and $5k/yr with financing.

Example #1:  All cash buy
1 - It will take 10 years to recover all the cash.
2 - It will take 10 years to accumulate enough new cash to buy the next property.
3 - In 10 years, the profits will start to accumulate at $10k/year, and the 2nd property will start its 10 year wait to recover the $110k cash spent on it.

Example #2a: 20% down, 80% financed...$80k cash left over
1 - It will take 4 years to recover all the cash.
2 - It will take 4 years to accumulate enough new cash to buy the next property.
3 - In 4 years, the profits will start to accumulate at $5k/year, and the 2nd property will start its 4 year wait to recover the $20k cash spent on it.

Example #2b: 20% down, 80% financed...on 5 properties
1 - It will take 4 years to recover all the cash...on all 5 properties
2 - It will take 1 year to accumulate enough new cash to buy the next property...with $5k left
3 - In year 5 you'll have 6 properties, $30k cf, and $35k to work with...and you can buy your 7th property...with an extra $15k
4 - Year 6 = 7 properties, $35k cf, and $50k to work with...and you can buy properties 8 & 9
5 - Year 7 = 9 properties, $45k cf, and $55k to work with...and you can buy properties 10 $ 11.
6 - Year 8 = 11 prop, $55k cf, and $70k TWW...and buy prop 12,13 & 14.
7 - Yr 9 = 14 prop, $70 cf, and $80k TWW...and buy prop 15 - 18.
8 - Yr 10 = 18 prop, $80k cf, and $80k TWW...and buy prop 19 - 22.
...and the $100k buyer just gets their 2nd property.

Also, at the year 10 mark, the 20% buyer has 22 properties appreciating and $110k in cf/yr...the $100k buyer has only 2 and $20k in CF/yr.

Now I'm not suggesting you buy 22 properties (although that works). This is a study in simple math. Whether you're buying SFH, multi's, or whatever, as long as they have the same returns (CF/yr) the projections would be the same.



@Cesar Perini I offered asking price on a 4-plex about 3 weeks ago. I didn’t have quite enough to purchase it outright. My offer was pre approved conventional financing. Someone else got the property for less than my offer because they were a cash buyer. So it definitely helps as far as competing with other investors.

Originally posted by @Cesar Perini :

@Jonathan Hulen

That’s good information. Thank you for sharing! Also trying to understand what’s the advantage for the seller.

A cash offer is safer for them. No chance of financing falling through. Also closes faster. 

 

@Cesar Perini I'm an all cash buyer and most of the advantages have already been listed. One of the things I look for is a house that was previously pending and now back on the market. That means the deal fell through for whatever reason. In my experience those sellers are even more motivated and are willing to take less money for an all cash offer. They just got burnt and don't want it to happen again. 

I like closing fast. I like being able to low ball people which gives you instant equity, and if you find a really good deal you come out way ahead. My bank will do 80% on either the purchase price or the appraisal, whichever is less. I like purchasing the home below market value, doing minor repairs/rehabs to force some more equity and THEN have it appraised. Since I own the home outright the bank will automatically do 80% of whatever the home appraises for. Hope this made sense, and best of luck to you.

@Derrick E.

Yes absolutely!! That’s some good advise. I never thought of looking for the homes that went back on the market, but it makes sense to offer them cash. They’re definitely more motivated then. I’ve been looking everyday for 2 weeks but nothing fits my numbers. I thought it’ll be easier to find a deal but I guess not. Thanks for your input though! Much appreciated!

@Cesar Perini

These are dark secrets of this business. Use them wisely.

The cash offer should be coupled with no inspection contingency and a quick close, just as soon as title clears. If you can't do this, then maybe half the value in making a cash offer is lost.

In our business as C/D-class landlords, the best cash buys are pocket listings, especially repeat pocket listings with the same agent. If you've bought a few places with the same agent and money flowed to her/his pocket on all these buys, and the agent knows you're good for more buys, well, whatever the sellers believes about being represented by an agent who is working for them, that agent is actually working for you.

I would not do a cash buy without an agent like this, known to the seller but firmly nuzzled deep in my pocket. This is the man or woman you want shaking your money at the seller and insisting till he or she's blue in the face that this is a good, good deal.

I would also not do a cash buy NOW, in August. Tis not the season. The best time to do cash buys for us is that small window of time after Thanksgiving and before Christmas. Everyone wants money for Christmas. Ho, ho, ho, that's the time to show up with an insultingly low offer, presented by an agent shaking a signed contract in one hand and a fat earnest-money check in the other, insisting, "I know these people. They do NOT back out of sales!!!"

If I could, I would go through my target area on a parade float shaped like a giant stack of hundred dollar bills every day after Thanksgiving until maybe December 20. I'd stand in the middle of the float in a Santa suit with a police megaphone and have four big old boys in elf costumes pounding the crap out of bass drums on the corners. "WE BUY HOUSES!!!" BOOM, BOOM, BOOM! "MONEY FOR CHRISTMAS!!!" BOOM, BOOM, BOOM!

@Derrick E.

Not sure I totally understand this. First you say your bank will finance up to 80% of either purchase price or appaisal whichever is less.

So if you do minor repairs etc I get the forced appreciation but wouldn't your bank finance up to 80% of the original price which in this case I am assuming would be less than the new appraisal?

Sorry, trying to understand the all cash strategy as well.

There's two different questions being addressed in this thread. The first one pertains to use of leverage and I won't speak to that because there's no "right" answer.

I will however address the "all cash offer" advantages.

There's two sides of this. First, if you have the cash for the purchase up front, it completely eliminates the chance that there will be a glitch with your financing that would prevent or delay the closing.

Second, from the seller's perspective, if they know the buyer has the cash up front, this will greatly increase the chances of closing as most of the time if the property doesn't close, it's because of financing issues. (buyer can't get loan, doesn't appraise, etc)

And as mentioned above, a "no contingencies, no inspection period" offer is really strong when coupled with all cash as it will for sure close barring title issues. These are the offers we've made for all our rental properties. We do the inspection when we view the property and don't come back until we have the keys.

We know for sure that we have had offers accepted that weren't the highest dollar amount but were the "best offer" considering the goals of the seller.

Originally posted by @Wendy Smith :

@Derrick E.

Not sure I totally understand this. First you say your bank will finance up to 80% of either purchase price or appaisal whichever is less.

So if you do minor repairs etc I get the forced appreciation but wouldn't your bank finance up to 80% of the original price which in this case I am assuming would be less than the new appraisal?

Sorry, trying to understand the all cash strategy as well.

 They will do 80% of appraisal or purchase price if you are just now purchasing the property. If you already own the property then it is strictly 80% of the appraised value, so my original purchase price doesn't matter to them. Hope that makes sense.

That's one of the reasons I like to buy cash and low ball. You get instant equity. Then you do work to the house which adds value/more equity. Once you are finished you go to the bank, get it appraised, and they will give me 80% of whatever it appraises for. 

@Jim K. Excellent post and I agree. I also do the no inspections, no contingencies. Close as soon as the title search comes back clear. 

I also agree about late November thru Christmas being the best time. Not only because of people wanting money, but no one is really buying during that time. Home owners don't want to move during the holidays so houses sit on the market longer. 

@John Teachout wrote "And as mentioned above, a "no contingencies, no inspection period" offer is really strong when coupled with all cash as it will for sure close barring title issues. These are the offers we've made for all our rental properties. We do the inspection when we view the property and don't come back until we have the keys." 


Great advise. 

@Cesar Perini

From a financing stand point ......

My recommendation; 

If you purchase all cash - then find a property that needs some fixing up and force appreciation by making some improvements - BRRR strategy. So when you cash out refinance you can get more of your cash back.

Purchase financing has lower rates versus cash out financing and you also have a better LTV with purchase financing. So if you are buying a property at market value, than I would recommend obtaining financing initially for the purchase.