Buying property-All Cash
Member since 2021 · 38 posts · 20 votes
Buying property-All Cash
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Melanie P.Pro Member
Rental Property Investor · Member since 2023 · 1k+ posts · 922 votesFor most people starting out all-cash is not an option. Another way of looking at this is how much appreciation did you give up while saving to do the transaction all-cash. In economics this is called an "opportunity cost."
116 Replies
- 2yMelanie P.Pro MemberRental Property Investor · Member since 2023 · 1k+ posts · 922 votes
For most people starting out all-cash is not an option. Another way of looking at this is how much appreciation did you give up while saving to do the transaction all-cash. In economics this is called an "opportunity cost."
- Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes2y
A greater % of homes are bought in cash these days (about one-third) which makes sense with mortgage rates remaining high. Plus it's still a seller's market in most areas around the country so it's competitive. Like @Melanie P. mentioned you'll want to consider the tradeoffs between paying cash vs getting a mortgage. This is where the time value of money comes into play.
- Developer · New York City, NY · Member since 2015 · 812 posts · 718 votes2y
Quote from @Melanie P.:
For most people starting out all-cash is not an option. Another way of looking at this is how much appreciation did you give up while saving to do the transaction all-cash. In economics this is called an "opportunity cost."
True, but it's much safer not to worry about a mortgage while you get your feet wet. Additionally, one can always get a HELCO if they need or want to tap into the equity.
- Rental Property Investor · St Augustine, FL · Member since 2019 · 265 posts · 279 votes2y
@Eric Justice I have 6 properties that I paid all cash for. Having no mortgage makes for peace of mind when the property sets empty, my rule of thumb use to be the 1% rule. Monthly rent equals 1% of buying price but with the explosion of housing prices that is impossible now. I haven't bought since 2015 just living in retirement collecting rent.
- 2yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
@Eric Justice in higher end markets that can mean alot of your assets are not liquid. Not sure how viable lines of credits are on investment properties so you have a better reserves. You have some loss of opportunity for future properties if you have all your cash in one and you need the cash to buy plus reserves.
- Rental Property Investor · Member since 2018 · 826 posts · 810 votes2y
@Eric Justice It’s not appropriate to speak in absolutes as everything is relative to goals and strategy. It seems that you’re also fairly new to investing as your statements contradict many investment principles.
Understanding when to use leverage and when not to use it is the core of running a business, regardless what type of business you operate. You’re suggesting to never use leverage.
- Member since 2021 · 38 posts · 20 votes2y
@Allan C. I am not suggesting to never use leverage. I’m simply stating that buying a property in all cash seems to be a great strategy. I also think it can be a goal to buy a property in all cash. I do not think any of my post is “not appropriate.”
I think people struggle to own homes due to a lack of steady income which leads to foreclosures or unable to pay rent. If someone has the opportunity to save for a period of time to buy a property in cash, then I think that is spectacular.
- Member since 2021 · 38 posts · 20 votes2y
@Melanie P. Securing a loan is not an option for some people also.
- Rental Property Investor · St Augustine, FL · Member since 2019 · 265 posts · 279 votes2y
@Fred Cannon reading thru these post I see a lot of people poo poo buying with cash. Buying with cash doesn't mean saving your money under your mattress until you have enough to pay cash for a rental property. It means investing other ways such as stock market, etc. the stock market does well in the long run, I put my money in stable mutual funds primarily then if I find a property to invest in that I think will pay me back then I buy it. You can pay your interest rate, pay you taxes, pay your insurance, pay your upkeep, pay your mortgage and hope there is enough left over that you can get xx per door per month. Thats a lot going on, lot of stress, lot of hope. I like the cash method for RE it's peace of mind. The RE market goes up and down, its timing the buy more that any other factor. A lot of people lost millions in the last RE market crash because they were using leverage, some people made millions in the last RE market crash because they had money waiting to purchase. To each their own.
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes2y
Tying up all your cash is ok if it doesnt liquidate everything you have. Also, it depends on the deal. What if you throw 90k into a property but your return on your money is 1 percent or less? Is tying that much up for a low return while have nothing else make any sense? With that same money you could possibly buy 2 or 3 homes by taking out mortgages and putting down 20%. This way you could be pulling in more cash flow, have double to triple tax benefit and way more room for appreciation. You have the exact same option of leasing or living in the property. Its more about the deal and less about the notion of tying up all your cash. You can increase savings either way you go if you know what you are doing. Being the most secure approach is an inaccurate assessment and way more goes into it.
- Member since 2021 · 38 posts · 20 votes2y
@Mark Cruse using a loan will just prolong your return on investment.
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes2y
Quote from @Eric Justice:
@Mark Cruse using a loan will just prolong your return on investment.
It depends on the deal. I just explained that if you put all cash on a losing investment, what are you doing? You can make more money with a CD if you dont know what you are doing. Prolong return? I have bought many with cash and many with loans and it's mixed. If you dump all your capital into an asset that is giving you 1 percent; how would 4 homes I get through loans, that are returning 10 percent prolong anything? If those 4 homes return 10 percent and my entire portfolio doubles in that same time frame, do you understand I have crushed everything you made by dumping all your resources into one that doesnt perform? Again, you are making claims to people who have actually already done what you are currently studying.
- Member since 2021 · 38 posts · 20 votes2y
I believe buying with all cash is the best investment option.
- Member since 2021 · 38 posts · 20 votes2y
@Mark Cruse you’re comparing a successful investment versus a failed investment. I would recommend trying to sell the property that you paid for with all cash. That’s not investment advice.
- Member since 2021 · 38 posts · 20 votes2y
I would also state that I believe this would improve the cost of living.
- Wholesaler · Nashville, TN · Member since 2024 · 7 posts · 4 votes2y
All cash would be a god send if you can scale quickly in tandem. However, with everything volume is key, RE debt is not necessarily bad. Even your Funds are buying "Cash" but once in portfolio getting loans on that asset.
- 2yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
Paying off my first two rental properties was the dumbest thing I’ve done. Since then, I learned to leverage my way to wealth. I now have 27 leveraged properties making me MUCH more $. Maybe 15k/month more vs just 2 paid off properties. Plus I’d rather have 27 leveraged properties appreciating at 5%/year or whatever vs just 4 or 5. I’ll tap into that equity later on after it builds up. Refi til you die! The ultra wealthy leverage their way to generational wealth. The Dave Ramsey crowd pays their houses off and makes much less in the long run. But some people are fine making much less and wouldn’t rather not have a mortgage.
- Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes2y
Quote from @Eric Justice:
@Melanie P. Securing a loan is not an option for some people also.
Dodd Frank made it rather difficult for the self employed to borrow.
- Investor · Melbourne, FL · Member since 2017 · 159 posts · 116 votes2y
Getting a HELOC on a rental home is harder than on a primary. Rates are higher when you find one too.
My first investment property was purchased during a large market dip in 2009. I wanted to purchase additional houses but most of my cash was tied up in this first property. If I just would have either made a minimal down payment or cash out refinance i could have continously purchased additional houses and could easily be retired now off them. (Opportunity cost).
when i was finally in a position to purchase more houses the prices were substantially higher. I followed a BRRRR method. Originally pay cash, then refinancing after renovating. This way I have the cash again to purchase another property. Unfortunately with today's high rates and prices my opportunity to find very good deals has passed for now. If I only had more available cash when prices were low i could have cleaned up.
No matter what you need to make sure you are not over leveraged. I have always been very conservative on this.
- Investor · Miami Beach, FL · Member since 2017 · 362 posts · 109 votes2y
Indeed be a smart move however, it's important to consider the opportunity cost as well.
- Investor · Newark, DE · Member since 2014 · 245 posts · 198 votes2y
Quote from @Ron H.:
Getting a HELOC on a rental home is harder than on a primary. Rates are higher when you find one too.
My first investment property was purchased during a large market dip in 2009. I wanted to purchase additional houses but most of my cash was tied up in this first property. If I just would have either made a minimal down payment or cash out refinance i could have continously purchased additional houses and could easily be retired now off them. (Opportunity cost).
when i was finally in a position to purchase more houses the prices were substantially higher. I followed a BRRRR method. Originally pay cash, then refinancing after renovating. This way I have the cash again to purchase another property. Unfortunately with today's high rates and prices my opportunity to find very good deals has passed for now. If I only had more available cash when prices were low i could have cleaned up.
No matter what you need to make sure you are not over leveraged. I have always been very conservative on this.
Ron, I did exactly what you wish you did. Bought with a mortgage in 2009 at a low price, and then another one in 2010 at an even lower price. Then another later in 2010 at a lower price yet (bottom), Had I paid cash for the first one, I would not have been able to buy the following two. Those 3 are now worth at least 3x what I paid for them, and are almost paid off - I took 15 year mortgages. - 2yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
It all depends on what you assume. Leverage multiplies returns, but also multiplies risk.
- Buying with high leverage is great if the property appreciates.
- Not buying at all is great if the property depreciates.
- Buying with no leverage (all cash) is the right answer if you experience only modest appreciation during the hold, and if the cap rate is lower than the interest rate.
Right now, I think that many investors would be very reasonable to buy with no leverage, if they have the means. It may actually be the right risk-adjusted way to play this market, if you are in position to actually do this.
- Member since 2021 · 401 posts · 254 votes2y
I paid cash for 5 small condos and a house over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible thus covering the note with just 20% down. But I also wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise, none of this made any sense as you could also invest in dividend funds that payout every month...
but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow your net worth faster via leverage (at that time), index funds or 401k matching.
The average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house in my mid 20s.
The greater cash flow of paying cash was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and maxing out my 401k matching or buying land and building. WIth all these new ADUs laws, it might be the next boom of the decade that nobody is talking about.
- 2yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
- Member since 2021 · 401 posts · 254 votes2y
Quote from @Scott Trench:
Quote from @K S.:
I paid cash for 5 small condos over an 18 year period. In hindsight, paying cash did not make sense at that time because interest rates were dropping and the 1% rule was possible at that time making paying the mortgage with 20% down possible thus could have leveraged myself and been in a better position today but I had bad credit and wanted the comfort of tangible assets and a payout every month giving me the feeling of security but surprise,
None of this made any sense as you could also invest in dividend funds that payout every month, but I also realized, a young person working a career in his prime does not need cashflow. Dividens or rent payment make no sense until after retirement. The comfort and safety of rental cash or dividens when you won't need it for the next 30 years is wasting opportunities to grow faster.
The benefit of no mortgages to keep track of is nice, but near 20 years later, I realized that simply putting it in the S&P 500 would have netted way more in net worth today. I lost hundreds of thousands if not over a million for ideas that did not serve my future net worth building. Ideas like comfort, security and no hassle of a mortgage. This is something you do in retirement, not in your 20s and 30s. Definately pay it off if you're retiring.
For example, the average rate of appreciation on a property is 4%. The S&P 500 averaged around 12% during the same time period when I purchased my first house.
The greater cash flow was good for peace of mind only but served no purpose as I didn't need it. Reinvesting that cashflow into the S&P 500 or dividens would not make up for the gap between real estate appreciation and the S&P 500 as I had already done the math in detail using my own tax returns. You simply will do worse in the long run if you purchase a house or condo in cash as it's tying up to much money for too little return.
All this means nothing today as prices and interest rates are too high. The 1% rule is more like .5% now as I can attest with the sale of my own house and condo. In fact, whoever purchased my condo is now paying $4,600/month but I was just renting it out for $2,300/month in San Diego. You can reinvest those savings at way higher than appreciation.
So buying in cash or obtaining a mortgage are both out of the question for the more passive investor.
Also, don't listen to people who continue old school book advice about putting 20% down on multiple properties for leverage. At these prices and interest rates, you need 50% down. See how long you can leverage negative cashflow.
Last piece of advice, unlike John Morgan, I don't think debt until you die is good. Owning your home outright free and clear in retirement is the way to go as nobody wants to deal with tenants, headaches, lawsuites, constantly rotating older properties for newer ones, renovations, searching, offering, buying etc. It's exahusting. Plus your mind fades as you get older and you may not not be able to handle it. No caretaker or family member will manage your portfolio for you.
In conclusion, the answers are simple, for a more passive real estate investor like myself, it's time to move on to index funds like the S&P 500 and or buying land in cash which is more manageable, and build on the land when the time is right. With all the new ADU laws and land buying, it might be the next boom of the decade that nobody is talking about it.
I actually really appreciate this comment. The paradoxes and seeming contradictions in here reveal your experience and life lessons.
However I want to challenge a few things:
- Cash flow is not valuable until later in life.
I disagree. Cash flow early in life may enable entrepreneurship, comfort with a gap year, etc. when one has a minimum amount of cash flow to retire early in life the optionality is huge.
- RE is overpriced so buy stocks.
Real estate is expensive, yes, but so is everything else. S&P is at 25X earnings. RE at a 5-5.5 cap is priced at 18-20X. You gonna buy bitcoin? Or lend? (Good option but does not solve for long term wealth the same way as equity).While I’m a bit bearish on rents for the next 24 months, I think they explode nationwide when multifamily supply stops coming online in 2H 2025, especially if rates stay high.
Completely agree that in many markets the property does not cash flow without higher down payment (hence the topic of this discussion) and that attempting to sustain and scale a cash flow negative investment is inviting disaster.
Last, I think most of us know that stocks beat unlevered real estate in the long run.
But, sometimes the long run isn't a math game. If I back into owning a portfolio that spits out $10K in monthly NOI, unlevered that's as good a bet as any on an inflation adjusted $10K for the rest of my life. Sure there will be puts and takes, but in terms of getting a great shot at a reliable inflation adjusted income stream, that's one of the best out there.
No more math games from there on out. That’s what freedom feels like to me.
You disagreed with my statement "cashflow is useless until retirement" statement because you can use it for unemployment or other investment opportunities.
So if you become unemployed and your minscual $1000 isn't cutting it, that's because you took 250k and locked it up. Had you not locked up the 250k, you would not need cashflow to get you by in this situation. To say that it's a good move to lock up 250k so you can have $1,000/month in an emergency, is rediculous because had you not locked up 250k in a house which is illiquid and could take months to sell and incur fees on, then you would have 250k for emergencies lol.
I'll help you with a quick example using my own condo. I dropped 250k on a condo with a 7.5% cap rate. That earned me 19k last year. Yes, I have gap funds for a situation that may never happen like when people spend their whole life practicing karate and end up never getting into a real fight or more on point, losing that fight because of your Karate because it gave you a false sense of security when walking away was the better choice.
For example, if something happened and I needed the $1,500/month that my unit earns, well, I have to live off of $1,500/month which may not be enough. However, had I a more liquid investment like a divident fund or S&P 500, I could not only pull out some in dividens, but I could pull out 250k in principal as well very easily and quickly. More quickly than the hassle of selling my property and then incurring enormous fees like recaputre, renovations, agent fees, federal and state taxes.
The money is there in either a cash investment or index fund/stock market. But one is liquid and the other is not. So assuming $1,500 is enough for this gap, emergency or other investment opportunity, then any investment that earns that much would be the same or better due to liquidity.
But wait, what about 5 propertys at 19k each? That's near 100k and you're out of the rat race right?
Not really, because I could not purchase all 5 at the same time. Saving cash for years is an opportunity cost. Not to mention, you forgot that even if you could purchase all 5 units right now and cashflow 100k/year, that's still less than putting that same amount in the S&P500 for instance or even a dividend fund that might pay you that much as well if you prefer monthly checks.
The S&P/401k is consistent for everybody and you won't get sued which can take all the cash in your house because you paid cash.
So even if you had $1M in cash to purchase 5 condos and retire with 100k/year. Well that's still less than the 120k/year index fund. You would still have less overall growth over time and real estate is less liquid for when you need to pull the principal for emergencies or otherh opportunities. Your train of thought is a poor way of thinking. Allowing the "idea" of rental cash to cloud your judgement when the simple math is staring at you, will keep you poor. But I agree with you, if you can diversify and do both, then do both, but I'd put more eggs in the stock market basket if I had to do it over again. I do like the cash, but it's an illusion.My advice to anyone is to have a house you live in and pay it off if your interest rate is higher than inflation or other investments or you're retiring. Then purchase a vacation condo/cabin for trips and quality of life. Invest the rest in the market.
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