Pay with all cash, or use as down payments?

Question

I will soon have access to a lump sum of money ($40K) from refinancing a rental home that I own free and clear (I paid all cash, fixed it up, rented it out). Should I use that money to buy another rental home using all cash (and refinance again in the future), or should I use it as down payments on multiple rental properties? My goal is to acquire enough passive income through rental properties to be financially free.

Thank you for considering my question!

Edward Burns · Answer

Ali,

I appreciate your position, but with $40K 2-70K houses could be bought and rented out. We'll assume you make $140/month over expenses on each house or about $3400/yr. So it will be 6-7 years before you can buy the next property (assuming only these funds are used).

But by buying a $30K house, fixing into a $70K house and then getting a $45K loan against it, you can repeat the process every 6 months. So theorectically after 6 years you could have 12 $70K homes and still have your original $40K you started with.

If you look I have turned the $40K into over $800K - mortgages (about $500K) or $300K. In the meantime you have turned the $40K into $140K in houses - remaining mortgage (lets assume $70K) + rent profit ($40K) or a total of $110K.

There is no right answer for every situation, and buying turn-key properties, yes I would agree mortgage to the hilt when you buy. If buying fixer-uppers and you have the cash, by paying cash, fixing the home and then (after 6 months of holding, take a loan out on the property, you can recoup your investment faster to reinvest.

Jeni Lu · Answer

Thank you everyone for your thoughts! There are many good points for me to consider here. BP community is great.

I’ll try to go forth by repeating what worked already. I was feeling a little hesitant about putting all the money into only one house but as Jimmy Hong points out-- I am leveraging the bank’s money this time around and not my own money! Lynda also makes a great point about sweetening a lower price offer by using cash.

Hopefully I can repeat again with success and get through the process quicker this time around. =)

Lynda Poe · Answer

If it worked, repeat.

Buying with cash is quicker, less expensive and all things equal can be the tipping factor in obtaining the deal if there are multiple offers on the same property, even if your offer is less. If there is no contingency for financing some Sellers will accept less on the price to be more sure to close.

Lynda Poe, REALTOR* and Investor

Marcus Johnson · Answer

Remind you that all foreclosures occur with someone who has a mortgage. When you pay in cash you don't have that risk. I have calculated my own risks when borrowing money and have a backup strategy in place if something should happen, but if you have no money and no assets and all you do is borrow money your in for a hurting. In addition if you don't calculate risk when borrowing money from someone else you will certainely lose your shirt and it won't just be your credit score. You'll file for bankruptcy and lose your car, your home and no credit score which means good look trying to rent an apartment and your insurance premiums go up. Never assume that the worse case scenario won't happen, Murphy has a way of rearing it's ugly head.

George P. · Answer

if you refi later, you have to pay for that refi. what's the point in that?

and besides, it's only 40k. that's good for under 2 houses in my area (down payment)

Ian Kuchman · Answer

There are pros and cons to any investing approach. However, if your goal is to generate enough PASSIVE income to be financially free, what is your definition of passive, and what do you want to be doing with your freedom?

Fixing and flipping properties may or may not fit within your goals.

Just a thought...

Jimmy Hong · Answer

Refi with cash out to purchase another property later is leveraging. I agree with @Edward Burns and repeat your 1st property process.

Ali Boone · Answer

There are soooo many debates on BP about buying all cash versus leveraging. Search for them and you'll read way more than you want to.

My vote is to ALWAYS leverage as much as possible. For so many reasons. And for all the arguments not to because of "risk"... I beg someone to tell me how using all of your own money versus someone else's is less risky. All you could lose by using someone else's money is your good credit score.

Edward Burns · Answer

I would do the same thing you did with the first property. Buy with cash, fix up, rent and take out the equity.

First, You have a system that seems to be working (at least on the first property). Why try to fix something that is not broken?

Second, this gives you another out if the property for some reason can't be rented and allow a profit, you can sell it and recoup your money plus hopefully make a profit on the home.

Third, you do not have to worry about mortgage payments while fixing up the new property. Eliminating one headache if things take longer than expected.

Marcus Johnson · Answer

Here's my thought. So would you rather have 10 properties all worth 100k with 20% down cash flowing $600 with the 2% rule or have 3 properties all paid for cash flowing $1066.00. I guess it depends on your level of risk, right?

Pay with all cash, or use as down payments?

Pay with all cash, or use as down payments?

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