Real Estate Agent · Lima, OH · Member since 2019 · 34 posts · 18 votes
Trying to wrap my mind around the pros and cons of saving up cash to buy my 1st buy + hold VS. financing it just so I can get started? Thoughts? Which one is better?
I'd finance. Where I am properties start in the low $200K for single family homes, so it would take a long time to save for a cash purchase. Plus letting the tenants 'pay' your mortgage means you don't have to.
Leverage is your friend, you always want to use other people's money whenever possible. If you qualify for a conventional loan on a rental property that is your best bet as long as the property cash flows. If it doesn't cash flow you probably should pass. If you are going to pay all cash make sure you calculate your cash on cash return to make sure your money is earning more with the rental than it would earn in other investments.
All that being said, in this part of the business cycle I would be really careful with my purchases. Make sure that anything you buy is a really good deal. If not you are better off saving your money until a great deal comes along. With the current political situation, presidential elections on the horizon, and the crazy increase in property prices we are getting ready for a normal correction in the housing market. I don't mean a 2008 level correction but the standard 5 to 10 percent correction that comes at the end of a business cycle. A correction is good for you because it means that prices will be lower and there will be less competition.
I'd finance. Where I am properties start in the low $200K for single family homes, so it would take a long time to save for a cash purchase. Plus letting the tenants 'pay' your mortgage means you don't have to.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Whatever you pay out of pocket, which should be just the DP, is all you are paying for the property, since the tenant should be paying the rest for you from the rent. You don't start making a profit from the cash flow until you have recovered all of your cash. So, the more cash you put down, the more cash you have to recover...and the longer it takes to do so.
Also, if you have $100k and put it all on one property, you'll have one property. If you get $10k/yr in CF, it will take you 10 years to recover all your cash...if all goes perfect.
If you put 20% on 5 properties, you'll have 5 properties. If you get $5k from each property, you'll have $25k/yr in CF, and it will take you 4 years to recover all $100k...since all 4 properties are recovering only $20k/ea...and simultaneously.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
6y
I pay cash for deeply discounted properties that can't be financed (too many repairs needed) or that need to close quickly and I am compensated for doing so.
I also pay cash for quality BRRR deals to save borrowing costs, knowing I'll get my cash back + within 6 months at most.
In this rate environment it makes no sense to put down more than needed to obtain a good loan for a vanilla residential deal. Go through the costs and pain a mortgage is to lock in the long term low rates, keeping dry powder for another opportunity.