buying with cash vs borrowing

72 Replies

I currently own (no mortgage) two homes and I am living in one and renting the other.  I am looking to purchase another investment home for income purposes and I do have the cash to purchase one property outright. I am not sure if I should finance a small part of it and save cash for future real estae investments or just pay cash.  Any insight or experience anyone can share would be most appreciated.  Thanks,   Calvin

By it with all cash, then refinance to get all of your cash back out, and reuse it on the next property, repeat, again and again until you can't refinance anymore.  Then take the cash from the last refinance, find a credit partner that can refinance, and "share the wealth"  You buy with cash, the CP refinances, and you repeat until the CP can't refia anymore.

Then you find another credit partner, and so on.

This way, you never ever spend the money, you're just using it...over and over.

The most important thing to remember is, after each refinance, the property must still cash flow.  If not, then you bought the wrong property...or are in the wrong market.  Go find a market/property where you can do this and still cash flow after refinancing.

Joe Villeneuve
REcapSystem
A2REIC

I would go the cash route especially if you think you could easily turn around and sell the property for much more than you paid for it. You could always mortgage it later when rates get real low if you need the cash.

Thanks Joe for the advice...I will research this tactic and see if it will work for me.  It sounds very lucrative and a smart way to go to increase my wealth.   I can see where cash flow and occupancy rate in the area I'm buying in are important factors as well as interest rates.   Any thing else to watch out for other than the normal things I am learning about in Real Estate investing?

Thanks Jassem  I would be looking to hold on to the property for a while and not turn it around but I am starting to think the cash is the way to go.

Originally posted by @Joe Villeneuve:

By it with all cash, then refinance to get all of your cash back out, and reuse it on the next property, repeat, again and again until you can't refinance anymore.  Then take the cash from the last refinance, find a credit partner that can refinance, and "share the wealth"  You buy with cash, the CP refinances, and you repeat until the CP can't refia anymore.

Then you find another credit partner, and so on.

This way, you never ever spend the money, you're just using it...over and over.

The most important thing to remember is, after each refinance, the property must still cash flow.  If not, then you bought the wrong property...or are in the wrong market.  Go find a market/property where you can do this and still cash flow after refinancing.

Joe Villeneuve
REcapSystem
A2REIC

 Joe, where are you finding banks that will allow you to do a refinance that allows you to take all of your cash out without waiting a year?

Mark Ferguson, http://Investfourmore.com | [email protected] | http://investfourmore.com | Podcast Guest on Show #68

I like @Joe Villeneuve's idea but with one small caveat, I would hold off refinancing 100% of the value of each of your properties and instead would only refinance 49%.  That way you still owe and control 51% of each asset.  Granted, it may be just my own pet peeve but I do not like the idea of a bank having controlling interest of my investments.  Personally, it makes me feel uncomfortable.  


That is a good question Mark...and a very interesting thought Annette.  I was not going to plan on 100% financing any way but maybe I will consider your concern of the bank owning that much interest in the properties.  I was thinking of financing around 70 - 75%.

@Mark Ferguson Locally I have a bank that will do up to 75% LTV, and also a private broker that will do up to 80%. The bank will let you go up to 5 mortgages, and the private source will do up to 10. Both have no seasoning requirements.

@Annette Hibbler  If I can access my equity this way, and I will still cash flow at least $400/month, then I'm getting everything they will let me have back.  Equity can disappear faster than it appeared...and if you look at recent history, you see evidence of this.  Equity is a trophy.  It has no value until you tap into it by selling or refinancing.  Equity is where money goes to die.  How many investors had lots of equity in lots of properties recently, only to find the market tank, and property values drop, and the equity disappearing.

Now before you say that if you're leveraged higher than the property is worth you are underwater (upside down), and that's a problem, I say so what.  I live for that...well, kind of.  If I'm not selling, and if my property is cash flowing, why would I sell, the drop in property value will also drop my taxes.  So, the property drop just increased my cash flow, without raising the rent.

The beauty of this method is two fold:

1 - You never ever spend the principle, since every refi allows you to get it back.

2 - You never need another source of funds, since you can use the same funds until your arm gets tired.

3 - Ok, I said two, think of this a a big bonus.  Since you never spend the money, when you do the last refi, you get it all back...in the form of a loan, which is not considered taxable income.

Again, this only works when you still have high enough cash flow after each refi on EVERY property.  If you don't, start looking for different properties, of a different market.

Joe Villeneuve
REcapSystem
A2REIC

Am I missing something here? What's the benefit of paying with cash and then refinancing? Assuming there are no seasoning requirements on a refi, what are the net benefits? Why would you pay transactions costs on a refi to have your money go out one door and come in another door? I don’t get it...

Joe- I see your rationale in Point 2, but how is this any different than keeping your money at the onset with financing and retaining your proof of funds (less a down payment)?

Also, to anyone advocating for owning a property free and clear I would challenge you to think about this concept in terms of the benefits of leverage on overall returns. Assume for example you own a 100,000 home with a mortgage to 90 percent LTV. Project cash flows on a highly levered property for the next 30 years and discount them back to the present day (Year 0) using a risk-free discount rate. Assume the home appreciates at the rate of inflation or 2-3 percent and calculate your exit price in 30 years—discount this back to year 0. Use your remaining capital to purchase 9 other similar properties to 90 percent LTV (expending a total of 100,000) and perform the same analysis.

By comparison, take your unlevered property with no mortgage and do the same exercise. The cash flows will be decidedly greater but the overall net present value of the cash flows for scenario 1 will always markedly beat scenario 2. Plus, the return on equity in both scenarios will be decidedly in favor of scenario 1.

The concept illustrated here is really not that complicated. What do the capital structures of Fortune 500 companies that earn billions of dollars in profit annually look like? They are a mix of debt and equity, but mostly favor debt with a lower cost of capital.

The other key point is real-estate values will rise and fall over the years regardless of the amount of leverage you hold on these assets. When the home illustrated here is worth 110,000 dollars in a few years would you rather have earned a 10 percent return ((110-100)/100) on your unlevered property or a 100 percent return ((110-100)/10)?

That is some great info to look over.  Thanks Mark D. and all of you for giving me some awesome learning tools and exercises to figure out the proper direction for me.  I will look into the lower equity/initial financing in close detail.  As I continue to buy properties, what will keep me in favor with lending institutions as my debt grows?  Will I need additional proof of funds each time, and if so will my "proof of funds" run out as money gets tied up into various properties?  I do not have an unlimited source of cash but I have good credit and am debt free.

Account Closed You answered your question to me with the paragraph after your question.

The ability to re-use the exact same funds. The transactional fees are a small price to pay, to be able to quickly move money.  Wealth, the value of money, is enhanced with the speed of its use.  The faster you move the money, the more value it has.  That's why I said equity is where investment funds go to die.

If you bought every house with cash, new cash, your next house acquisition depends on how long it takes you to get enough new cash to buy the next house.  If it takes you 3 years to build up the next $50k (assuming it takes $50k to buy/rehab/etc... each new house) to do your next property, it would take you 30 years to get 10 properties using all cash.  If you just refinanced those funds out of each all cash buy to use on the next all cash buy, the time to that next buy depends on how long it takes you to rehab the house.  So, if it takes you 3 months to rehab, then you are into the next house in 3 months.

Using that last method (refinancing to funds deals), it would then take you only  30 months (2.5 years to acquire those same 10 houses.  30 years versus 30 months?...but it gets better.

Buying each house with new funds means you are spending $50k on each house for a total of $500k.  Using the same $50k on each house means you are only "using" $50k, getting it all back after the last (in this case the 10th) property, and thus spending none of the money.  If you leave it in the last property and don't refi (not sure why), then you spent $50k on 10 houses, versu $500k?

Summary:  for 10 - $50k houses

Total Cost                 Time to acquire

$0                                30 months
$500k                          30 years

Which is better?

Joe Villeneuve
REcapSystem
A2REIC

I still dont get it. But, I am curious nonetheless.

What if you just financed 10 properties to 90 percent LTV all in Year 1. So, 5k down on 10 properties for a total of 50k in expenditures. Total cost is 50k, and time to aquire is zero. In your example above, you indicate that the total cost is $0 for a 30 month plan, but this assumed you are able refinance to 100 percent LTV in each transaction? Not sure I am aware of any lenders doing this at the moment.

my scenario: total cost to aquire 10 homes; 50k; time to aquire- zero months

your scenario (assuming you can only refinance to 90 percent LTV each time): total cost to aquire 10 homes; 50k (5k equity trapped in each of 10 homes) + transaction costs X 10; time to aquire- 30 months

????

Your point clearly rings true when you are comparing a 500k outlay to buy 10 homes compared with 50k outlays, refinance, and rinse repeat 10 times. I guess my point was along a different line entirely. Why pay cash and then refinance to repeat the process over and over again when you could have financed from the start--if you notice in my scenario and yours we both end up with the same assets and same cash outlays.

I am still inexperienced but I get what you are saying Mark.   Makes sence

Account Closed We're actually saying the same thing, but approaching it from a different direction. My assumption, which is more fact in most areas, is you can refi easier than buy/rehab. In my scenario, I'm buy/rehab for 50, but after rehab it's worth at least 65-70. I can get 75-80% LTV, so I can actually cash out doing it my way too...and I have no seasoning requirements.

Joe Villeneuve
REcapSystem
A2REIC

One last question if you please...what is seasoning?

borrow. paying with cash and refinancing is a fun theory, but no lender will allow you to do so without waiting at least 6 months. sure, there are some lenders that can do less than that, one I know of can do 31 days, but it's very hard to do - and you need a rockstar loan officer to make it happen. plus, even if you are able to pull cash out, they'll only let you take up to 70% LTV. whereas the down payment on a loan would be 25% - thus "saving" you 5%.

as well, how many properties can you buy vs. finance?  well, by financing you clearly can get more houses in less time.  the only thing to be aware of is that Fannie Mae (conventional financing) will only allow for up to 10 financed properties.  so once you get there, you'll have to do some "re-arranging."

hope that makes sense.  as a loan officer myself I run into this concern all the time.

nice.  best I can do is 31 days and that requires delayed financing exception which can be difficult for many people.  we have to follow Fannie to the tee though...for better or wrose 

Thanks for the answer Patrick..and thanks to all for giving me much to think about!!

If the deal does not cash with a mortgage than maybe you should not purchase the properties.  I agree with @Mark D.  there is no real benefit of refinancing at a later date to pull cash out.  You are assuming the values will go up and that could bite you in the end. You get a higher loan to value when you purchase than when you pull cash out.  If your investment does well, than you can put additional payments towards paying off the mortgage quicker.  I personally believe in leveraging money so you can buy more properties.

Thanks Karen, I agree with you at this point and with Mark D.  although I am still investigating and reading more.  

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