Knoxville, TN · Member since 2013 · 29 posts · 2 votes
I currently own one rental property and planning one more by the end of year for cash. What are the advantages and disadvantages of doing this as opposed to financing.
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
13y
Hi William,
Good question. On the one hand, you have more cash flow coming from your property and less risk to you if you don't have a tenant or run into other financial issues- without that mortgage payment you can go without rent for a while before you are truly in trouble. Also, there are some properties you might not be able to get conventional loans for- around me I can't mortgage a property less than $50k, so if I find a gem for less than that I have to get a bit creative.
On the other hand, when you borrow you are using someone else's money to leverage and you can buy and control more property. Interest rates are CHEAP, so I'd rather put that money towards another downpayment that will earn me more cashflow than pay down or flat out pay for a property. It isn't too difficult now for a property to perform much better than the interest you save.
It is an individual decision, only you will know what is best for you. Your strategy may change over time- when interest rates change or you are done buying properties and want more cashflow during retirement. Personally, we're financing everything we can while rates are low, but plan to pay our own house off sooner than our 15 yr mortgage. The house I live in isn't making me any money :)
Investor · in, MI · Member since 2013 · 226 posts · 102 votes
13y
Advantages of cash buys is that there is no debt service, so better cashflow overall.
Disadvantage is say you buy a property in $50,000 for cash, well you buy 1 property for that. With debt with $50,000 cash you can buy a $250,000 property or 5 properties at $50,000 each. If the bigger, or more properties are cashflow positive, they will still pay themselves without additional cash invested. However, each month will be less profit to you from each individual property. However, collectively (5 properties with less cash, vs 1 with more cash) they may return a similar amount, it varies on property. Additionally, using loans is "more risk" since you must pay that expense, so if you fall on hardship there are consequences.
Rental Property Investor · Oxford, MI · Member since 2013 · 98 posts · 18 votes
13y
William...I am at the same point in my decision process on this. I originally was leaning towards all cash as it reduces risk, but like above if you can buy 5 properties that after your mortgage payment cash flow more than the 1 property you might want to go with loans. Personally I am leaning towards using other peoples money...Rich Dad, Poor Dad is fresh in my memory.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
13y
Rich Dad, Poor Dad, yes. Always use other people's money when you can help it. Your cash-on-cash returns are higher, you can buy more properties with the same amount of money, and worst case scenario (unlikely scenario, or should be unlikely) the house goes completely bunk, you only lose your credit score, not a huge lump of cash. The place you got the money from loses the money. So while most think its riskier to be in debt, I disagree. My credit score is the only thing I could lose.
(all that said, I'd never plan to let things go that sour or have someone who lent me money lose it all, but just saying that to make my point).
Calculate the difference on the returns for your money with an all-cash buy versus leveraging. You'll see.
Flipper/Rehabber · Lorain, OH · Member since 2013 · 15 posts · 6 votes
13y
I think its all about risk tolerance. I personally can sleep better at night knowing everything is paid off cash even if I would be potentially losing out on other deals. Worst case scenario for me if all went completely bunk would be just paying the yearly taxes.
Larsen, WI · Member since 2013 · 45 posts · 7 votes
13y
I would amend Ned by saying: You are trading higher returns on investment for more risk and more work.
Yes if everything goes well your cash flow will be higher with 5 leveraged properties vs 1 paid off property, but you will also have 5 times the work for that additional return. The more hands on your are, the better your return is going to be because you arn't paying someone else for the work.
I personally value my time a lot, and so I would rather take a slightly lower return (and risk) in order to save myself a lot of time.
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
13y
I bought my first two home cash. Quickly realized my folly and refinanced them with cash out. All future purchases were leveraged. The govt and the federal reserve has decided that saving is bad (forced low interest rates) and borrowing is good. Its very hard to fight the Fed. So why not use it to your advantage. Borrow as much as you can at long term fixed low rates and invest it in high yielding rental property. Once the Fed bond buying party stops, interest rates will rise. The opportunity is now to capitalize on the cheapest money in a generation. The other factor is inflation. All the money printing will eventually be inflationary. Debt allows you to pay back principal with cheaper dollars. You win both ways.
Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
13y
I personally know many investors who went broke because they were over leveraged when the market went down. I know that most of the people here either don't have any money, or prefer to use other people's cash. Keep in mind that if the market softens, or you have several vacancies, you will be in much better shape having paid off homes.
Landlord · Dallas, TX · Member since 2012 · 505 posts · 34 votes
13y
Ali Boone
"the house goes completely bunk, you only lose your credit score, not a huge lump of cash. The place you got the money from loses the money"
I don't use hard money, but what about the deficiency statements when you take out a loan on an investment property. Aren't there typically deficiency statements that state the lender can come back after you for any difference in the amount owed?
Feel free anyone else that wants to chime in.
@RobbK I think Dave Ramsey himself went broke from being over leveraged!
Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
13y
I have mixed feelings. I don't like debt but sometimes debt is necessary. I bought my first two with cash. I borrowed money on the next two. My mortgage is at a fairly good rate and for only a five year term. That eats up all of the cash flow but in five years they will all be debt free and I am planning on retirement at that time. I would answer you question by telling you to do what is most comfortable for you. If you lose a lot of sleep over debt you have to factor that in. Sure you are giving up some leverage opportunities, but you are also give up headaches with additional debt. That might be well worth the trade off.
Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
13y
With leveraged properties I have about 24%+ cash on cash return. With all cash I would have about 9% return.
With 4 properties versus one the other advantages are multiplies as well. Depreciation on four properties, appreciation on four properties and cash flow on four properties all equals much higher returns with leverage.
I buy my properties right to begin with, with plenty of reserves. Rents and prices would hve to drop 50% for me to even think about being in trouble.
Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
13y
Why not have it both ways.... Buy multiple properties with cash and then set up a Line of credit with the properties as collateral..
That way you have the funds available whenever needed, but are not paying interest when the money is not required.
I personally am trying to acquire 1 house per year paying cash for them. Just closed on #4!
I sleep much better at night knowing that if the market crashes I will not be tied down/trapped. The US economy is crap, built on more crap and lies... The banks are screwing people by paying less in interest than inflation, so for me a house with rental income is a safer bet at this time. Still plenty of risk though.
Investor · Howell, MI · Member since 2011 · 202 posts · 52 votes
13y
I've been purchasing in SE Michigan for the past 3 years. Our market has not been a favored market for lending due to the discounts banks have had to take to sell off their inventory. Bad for borrowing money, but good for acquisitions.
As such, purchases have been cash to date. Our properties are in solid neighborhoods outside of Detroit where nice 2 & 3 bedrooms pre-'07 were selling between $100k-$150k. The past couple of years we've been able to pick these houses up between $10k-$20k. Including improvements we don't have more than $25k into any one house.
At the same time rents have remained high. The lowest rent rate we have is $700/mo. and we average $750/mo. accross the portfolio. So we have good positive cash-flow.
One thing I would say is that landlording has expensive, unforeseen issues. I've been in real estate for 20 years but new to dealing with tenants and ownership demands. Having plenty of money coming in has allowed me to easily handle problems that I don't think I would have dealt with as well only eeking by with minor positive cash-flow.
Once I got to 10 properties I had additional expenses and began paying more for help with properties, reducing NOI. Now closing in on 20, I couldn't imagine doing this without that substantial monetary incentive each month.
For me It would just be too much of a grind to be highly leveraged and deal with day to day issues!
tel aviv, mercaz · Member since 2012 · 38 posts · 1 vote
13y
Originally posted by Geof Greeneisen:
I've been purchasing in SE Michigan for the past 3 years. Our market has not been a favored market for lending due to the discounts banks have had to take to sell off their inventory. Bad for borrowing money, but good for acquisitions.
As such, purchases have been cash to date. Our properties are in solid neighborhoods outside of Detroit where nice 2 & 3 bedrooms pre-'07 were selling between $100k-$150k. The past couple of years we've been able to pick these houses up between $10k-$20k. Including improvements we don't have more than $25k into any one house.
!
When do you think the market in SE Michigan will be ready for getting finance?
Residential Real Estate Agent · Mound, MN · Member since 2010 · 87 posts · 32 votes
13y
To me another big consideration is whether you can find enough properties as listings are down and prices are up. In many markets investors are having a hard time finding places right now.
My point is that in theory it would be better to buy 4 places with 25% down each but in practice it may be much harder to actually find 4 places vs. the 1 place to buy with cash.
In addition, it's probably easier to get your offer accepted as all cash (although you can certainly buy with cash and get a loan on it later).
Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes
13y
With these rock bottom interest rates as well as prices in alot of areas, not taking advantage of locking into a 30 yr fixed rate @ 3.75 - 4.0 on an investment property with othe peoples money is being foolish (just my opinion) it is ridiculously cheap to borrow money right now! Take advantage, and put YOUR money into something that will also generate a decent return like a high dividend paying security IE. stock or bond.
This way you are diversifying your investments in property as well as securities and getting a return on both instead of putting ALL your eggs into one basket.
Grand Rapids, MI · Member since 2013 · 99 posts · 30 votes
13y
Thank you for posting this!
What refreshing responses to read as we also plan to buy in CASH ONLY in the future. These response confirm my belief in that strategy.
Landlord · Las Vegas, NV · Member since 2011 · 8 posts · 0 votes
13y
My Las Vegas Investors need to buy "all cash" to even be considered to have their offer accepted. We are dealing in 3+2 houses at the low end of the price scale, and the competition is fluid.
Fukuoka, Fukuoka · Member since 2012 · 148 posts · 29 votes
13y
In Japan as well, cash is king, and gets the best selection, fastest closings (which also saves money), and we have the advantage of being able to still get interest on the cash in between deals in Australia, where rates are still reasonable at 3-4.6% even for day to day savings. Ah, the joys of international cloud living. :)
Investor · Cary, NC · Member since 2014 · 9 posts · 1 vote
11y
Steve cook may be a good role model for investing in proper is without borrowing. For example, instead of borrowing from a private lender to flip a property you would offer to find the house , fix the house , sell the house and then split the profits . I am working on 2 houses with 2 private lenders. Even though we make more money that way, and the investor makes less....my goal for the next house is to find a lender who will take the deed and split the profits once we sell the house. Learning to do reel estate with no debt is my ultimate goal this year
Los Angeles, CA · Member since 2015 · 16 posts · 3 votes
11y
I like the interest rate deduction at Tax Time. I never understood when people pay off their mortgage or buy all cash, the say they are debt free. Tell that to Uncle Sam at tax time when you have no write offs. I advise people to stay 50% in mortgage debt if you are risk adverse. I also consider the fact that when you are debt to the bank a disaster hits your house, fire, flood, tornando, earthquake you now have a partner who needs to help you make things right. Just like having another insurance policy