Thoughts on buying multi family all cash(duplex,triplex)

Member since 2020 · 9 posts · 5 votes

I just wanted to hear the thoughts of more seasoned investors. I currently house hack a duplex that I bought 2 years ago. I want to add to my portfolio intelligently and patiently, making sure I don’t over leverage. So my question is, if you had the money to buy a property all cash, would you do it? Not do it?

Looking forward to hearing your thoughts. Thanks in advance.

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Greg ScottPro Member

Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes

Never.

Why?
1) Total returns improve with leverage. Obviously you can over-leverage a property, but there is a balance. If I can borrow money at 6% and invest money to make 20% plus I would do that all day long.
2) Without leverage you are setting yourself up for paying more taxes because your depreciation expense cannot fully offset the cashflow. You would be better off having two properties at 50% leverage than one at 0%.
3) You lose out on appreciation benefits by having one property unleveraged when you could have four properties at 75% leveraged
4) Unleveraged properties are a target for ambulance-chasing lawyers and also now fraud. About 10 episodes ago, BP had a podcast on this topic. Take a listen. https://www.biggerpockets.com/blog/real-estate-945

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
2y
Never.

Why?
1) Total returns improve with leverage. Obviously you can over-leverage a property, but there is a balance. If I can borrow money at 6% and invest money to make 20% plus I would do that all day long.
2) Without leverage you are setting yourself up for paying more taxes because your depreciation expense cannot fully offset the cashflow. You would be better off having two properties at 50% leverage than one at 0%.
3) You lose out on appreciation benefits by having one property unleveraged when you could have four properties at 75% leveraged
4) Unleveraged properties are a target for ambulance-chasing lawyers and also now fraud. About 10 episodes ago, BP had a podcast on this topic. Take a listen. https://www.biggerpockets.com/blog/real-estate-945
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Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
2y
@David Pereira
Buying a property with all cash can bring a lot of perks, like more money in your pocket, no need to pay interest, a better chance to win in bids, easy process, and peace of mind. But, it also locks up your money, cuts down on chances to put your money in other places, and might lose some tax breaks. A halfway option is to pay a lot upfront and borrow the rest. This way, you get good cash flow but still keep some money free for more chances to grow your money. Things to think about include how the market is doing, your own money situation, what you aim to achieve, and the kind of property and where it is. A mixed way is often best, with plans for money coming in and extra backup for any surprises. The best decision depends on individual financial situations, risk tolerance, and investment goals, and consulting a financial advisor or real estate professional can help tailor a strategy.

Good luck!
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Leonard Rybak
Rental Property Investor · MD · Member since 2018 · 62 posts · 29 votes
2y
Quote from @Greg Scott:
Never.

Why?
1) Total returns improve with leverage. Obviously you can over-leverage a property, but there is a balance. If I can borrow money at 6% and invest money to make 20% plus I would do that all day long.
2) Without leverage you are setting yourself up for paying more taxes because your depreciation expense cannot fully offset the cashflow. You would be better off having two properties at 50% leverage than one at 0%.
3) You lose out on appreciation benefits by having one property unleveraged when you could have four properties at 75% leveraged
4) Unleveraged properties are a target for ambulance-chasing lawyers and also now fraud. About 10 episodes ago, BP had a podcast on this topic. Take a listen. https://www.biggerpockets.com/blog/real-estate-945
Please share an investment that offers 20% plus returns
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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
2y
Quote from @Leonard Rybak:
Please share an investment that offers 20% plus returns

Almost every real estate investment I have made has had returns in excess of 20%, both single family and multifamily. Attached is a screen shot of my passive investing returns for every apartment complex I've invested in that has gone full cycle and sold.
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Benjamin AakerPro Member
Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
2y
Agreed with @Greg Scott. If you are looking for long-term growth of your investment portfolio, paying all cash will make it very difficult.
I would add that there are some times where all cash is a good thing. In times such as this with high interest rates, or to have a competative offer, you might offer all cash at a lower price with a short closing time frame to a seller in order to get a good deal. You would then finance the property at a later date.
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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
2y
It's 2024 and it seems everyone has forgotten the Great Recession (GR) and Financial Crisis (FC). While returns on recent investments for most real estate investors have been stellar, we have experienced times of financial difficulty not too long ago. I knew several people who had an undeniably great stretch (probably in that 20% range) until the GR and FC hit them in the face.

I'm not saying that some people can't make 20% annual returns, potentially for decades, but those people are extremely rare. I'm also not saying that a price correction is looming, certainly not like post-FC. I am saying that short-term, my return on US Treasuries is better than buying anything with a door with cash in my market. I sleep well.

Below is a snapshot of recorded documents from one (note #1) of the many investors who got slammed by the GR and FC. Almost all of the properties went back to the lender (banks - note#2) or sold at the courthouse steps.

My point: The GR showed us the downside of leverage. As market values plunged, banks called loans (lines of credit) and held firm on builder draw dates. As a courthouse buyer I saw many builders, REI, flippers, speculators lose everything post GR/FC. For them, it was painful.

@David Pereira there is no shame in buying with cash on hand, F&C. Earlier in my career I did it often, however (as others pointed out), with the intent to leverage once stabilized. You can buy with cash and (potentially) leverage later. I think you are prudently thinking things through, which is one attribute of a successful investor. Good luck to you.

Note #1 - name removed
Note #2 - One entry I circled is not a bank or financial institution
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