How do yall feel about buying a rental property all cash?

120 Replies

How do yall feel about buying a rental property all cash? This will be my first investment and im wondering if it will be a good idea. I am fortunate enough to work a job I love that makes me a decent income. My plan is to buy a rental house all cash so I dont have to worry about mortgage payments and all the rental cash will go towards my next investment. My plan is to save income from my job and rental income to buy 1 property every year and rent them out. Is this a good strategy?

I'm still a newbie, but if I had enough cash to buy a house outright, I'd probably use it as downpayments to by a few houses with mortgages. Let the renters pay the mortgage and have multiple rentals coming in. Interest rates are low right now. 

I'm probably a minority here, judging from the posts - but I'm a believer in less greed, less leverage and more cash. All-cash can serve you well, as you'll be able to ride out any problems better than if you're leveraged up the wazoo. Your strategy is great - your job income is your biggest wealth-builder in the beginning. Next step is learning to identify good rentals, but that's for another post. Good luck!

As with most questions it depends 

if you are saving $1000 a month from your job and houses cost $500k.  Probably not a good idea 

If you can save $15k a month and houses sell for $75k could work out nicely for you



@Kiet Ho Why? Why? And...why? Would you invest in anything else that requires $200,000 upfront to get a couple hundred bucks a month and a fistful of headaches in return? If you give me $200,000 cash I will gladly and faithfully hand deliver you a couple hundred bucks a month and I'll never call you to fix a toilet seat, refrigerator, or anything ever.

Other People's Money. OPM. Always.

@Kiet Ho I get being worried about something going wrong, but look at it this way. If you're buying a house for $200k and that's all your cash, you're going to be stressed out if the A/C and roof need replaced and you need $15k. If you buy the house with 25% down and put in $50k, you'll have $150k in reserves. When the $15k bill comes, you’ll still have $135k in the bank.

Granted that’ll cost you $400+ a month in interest, but the beauty of it is, you could buy 2 more of these houses and still have $50k in reserves. Assuming the 1% rule, you’d have $6,000 in rent coming in, instead of the $2,000 and you’d still have $50k in the bank.

You're losing money.  You're giving away all your cash flow by paying for it upfront...before you even get it.  Besides, your tenant is making the payments for you...why help them?  You do realize that the only cost to you is what comes out of your pocket, right?  that means the DP and anything else you voluntarily spend out of your pocket...like paying for the entire property with your money.  

Paying all cash just means you paid full price for the property, and gave away all your ash flow before you got it.

NOOOOO.

Originally posted by @Kiet Ho :

How do yall feel about buying a rental property all cash? This will be my first investment and im wondering if it will be a good idea. I am fortunate enough to work a job I love that makes me a decent income. My plan is to buy a rental house all cash so I dont have to worry about mortgage payments and all the rental cash will go towards my next investment. My plan is to save income from my job and rental income to buy 1 property every year and rent them out. Is this a good strategy?

Show me a house worth $200,000 and I'll pay $50,000 cash all day long.

 

@Kiet Ho

Hi Kiet , I am on the same situation like you .. and my strategy is to balance my portfolio having half payed on cash and half using loans on this way I can reduce my risks .

I will challenge you to do a investment exercise for 15 years using different methods of investments and take the decision which is best for you .

@Kiet Ho

If you are worrying about getting over leveraged then there are some strategies that you can use. Since you are saving about 13k a month, I'm assuming that you are not worried about cash flow right now.

1.) Buy two-three houses 50k down each. Have the second/third house pay for the first house. That way you have 50k-100k in reserves and your assets is paying for your asset. Then when the first one is paid down to your liking. Buy a 3rd/4th house to pay for your 2nd house. So on and so on...

2) Be your own bank. By multi-family homes w/ cash so that way you are getting more income to pay yourself back faster.

3) Syndication, find investing groups or go to your local REIA and see if you can invest some of your cash to a larger project. No troubles of keeping up with your homes. But still get the returns.

@Kiet Ho , I've seen it all too often when folk either save a lot of money or come into it some other way - they're too quick to decide what to spend it on!

ie.  Just because you can afford it doesn't mean it's a good buy.

ie.  Just because you can afford it doesn't mean you shouldn't do lots of research.

ie.  If you spread out your spending by borrowing money also, you're more likely to take more care with your purchases in the first place.

ie.  A good investment will cash flow positively even if using 75% leverage, which means that good cash flow using zero leverage is meaningless. [ie.  What @Joe Villeneuve said].

I get that you don't like the idea of multiple mortgages, but, start with one, ok?

The idea is that you shouldn't be relying on your ongoing high income to pay off investment mortgages.  That's what tenants are for.

The best reason to have high income is you're then able to qualify for good mortgages.  

ie.  Your high income is largely wasted if you don't also use Other People's Money.

Welcome to BP.  Good luck...

@Kiet Ho It sounds like you don't want to deal with multiple mortgages. I assume you do want to get a good return on your investment however. As stated, the more you put down without increasing the cashflow, the more your return will go down. IF you make $500 a month of a $200,000 investment thats a 3% return as an example.

So simply find an investment opportunity or someone else to partner with that will deal with the mortgage part, or the toilets part or the tenants part or whatever you don't want to do. Partnerships can be great to achieve what you are looking for while ensuring you are best allowing your capital to work for you. AND it's worth noting, spending your time on things you don't like does not make it a good investment either.

At the end, what matters is doing what allows you to reach YOUR goals. 

You’ve heard some very good advice already. What I didn’t see ask or mention is…

What’s your credit score?

With a reasonable credit score there’s a lot of active asset based lenders at this juncture in the RE cycle. Is there a reason to believe you cannot get a mortgage?

Not to get into the no debt  max debt debate to me its math and a personal bias or comfort level.

however if your buying low value assets like many on BP buy  in the C D class stuff for 20 to 50k a door then I like those in cash for sure.. and at your savings rate you could amass a pretty nice nest egg in 10 years with Zero debt I like that a lot.

If your going for A and B class assets with not so much risk to tenant use and abuse and failure then I think you could maybe split the baby down the middle and take on some debt as its real cheap now and nothing says you have to have max debt.

But one things is certain paid for real estate is very common with the very wealthy much more than what is talked about on BP.. 

@Kiet Ho    

@Steve Vaughan    Steve Vaughan is one of the BP members I respect a lot and over the years when you follow his postings he lays out an incredible plan to gain financial independence on rental income.  And the prudent management of debt and what to have debt on and what to pay off and what kind of debt to have etc etc. . Maybe he can chime in on this thread.. 

For me personally age is a huge thing I we get on SSI and Medicare paid for real estate becomes goal number uno for the sleep well low risk semi retired . 

Originally posted by @Brent Coombs :

@Kiet Ho , I've seen it all too often when folk either save a lot of money or come into it some other way - they're too quick to decide what to spend it on!

ie.  Just because you can afford it doesn't mean it's a good buy.

ie.  Just because you can afford it doesn't mean you shouldn't do lots of research.

ie.  If you spread out your spending by borrowing money also, you're more likely to take more care with your purchases in the first place.

ie.  A good investment will cash flow positively even if using 75% leverage, which means that good cash flow using zero leverage is meaningless. [ie.  What @Joe Villeneuve said].

I get that you don't like the idea of multiple mortgages, but, start with one, ok?

The idea is that you shouldn't be relying on your ongoing high income to pay off investment mortgages.  That's what tenants are for.

The best reason to have high income is you're then able to qualify for good mortgages.  

ie.  Your high income is largely wasted if you don't also use Other People's Money.

Welcome to BP.  Good luck...


This is one of the many posts I wish I could vote more than once on.  i particularly liked the one about "just because you can afford it, doesn't make it a good buy".  A good deal isn't based on what you pay for it, nor is it based on what it's worth.  It's based on the spread between the two.  It amazes me how many times someone says they have a great deal because the purchase price was $XXXXX, and the rent was $XXXXX, then when I ask them what the CF was, they still go back to the high rent...as if they got to keep it all.

REI isn't really brain surgery, unless you make it out to be by rationalizing bad deals into good ones. The property is either profitable, or it cash flow, or both. A deal does both, and regardless of how much equity can be built up over the life of ownership, a negative CF property loses money. Math is math, and you can't make 2 plus 2 equal anything else but 4.

 

@Kiet Ho I ask myself this question regularly as well. I'm by nature against debt because we used to have tons of it and no money. It's a hard mindset to change when you have spent a good chunk of your adult life getting out of debt. We are doing buy and hold so the monthly cash flow doesn't matter to us, what matters is appreciation over many years. We also live in a very competitive market where a cash offer can get us a better deal and more likely to win vs financed deals. We are going to buy our first one cash and then prob do what you are planning... Use income as a potential down payment for future properties. Perhaps will finance in the future but not at the moment.

Buying all cash is fine. There is no reason that you must have a loan. In fact if possible I think it is a safe way to get your feet in the door.   I bought my first MF deal cash. This allowed me to not worry about debt and focus on learning how to be the best LL I can be.  

in the end saving on interest is a fine way to go. Why pay interest if you dont have to is my motto :) 

to respond to those that say you are losing money if you dont lever RE.   This is a perfect advertisement for mortgage companies.....   leverage is a personal preference and there are PLENTY of folks that buy cash. Cash allows you to not worry about making the mortgage if something like oh,  a global pandemic occurs.....  and the cash flow can be used for other investments. 

IMO as soon as I can I will sell my levered MFs and go back to cash buys - the stress and loss of income is not worth it IMO.  

OP - only you can make this choice, but buying all cash is fine.  Most people have to use a mortgage because they dont have the cash to buy outright. 

ETA:  comparing  profitability of various assets is easy if you use the method the MF guys use...  which is cash flow from operations (income minus expenses but not debt)  this will give you a number you can use to compare across various properties...  then you deduct your debt (which will be different for each property)  ....  and you will have your  Levered cash flow  - so to say you cant really compare properties unless you pay interest and Principal is not quite true. 

I will never buy cash for rental property. The name of the game in USA is the gov. is giving you money lower than inflation for 30 years for property  with 1:4 leverage that has huge cash flow and appreciate in 30 years.

It almost like the gov. is trying to make you rich buy since one doesn't understand how to be richer with less effort, then one not able to take advantage of that.

@Carlos Ptriawan sure, except you are not taking into consideration the money you are paying in interest...  I live off my rentals....  if I dont pay a mortgage I make a lot more each month than if I do ...  pretty simple IMO....  maybe in 5-10 years I will be in a better place cash flow wise, but that does not help me NOW.....   So It all depends on why you are buying....  so you cant just flatly proclaim leverage is better.