Loan vs all cash purchase

7 Replies

I know people purchase properties with all cash.  Can someone explain to me why anyone purchase a property with all cash rather than finance it.  I just bought 6 duplexes  and here are the numbers for the two options.

Total price 1 mil.

If I purchased it for 1 mil, the free cash flow would be $85k (these are hard numbers from 2014). ROI would be 8.5%

I financed it with 30% down. so for 300k, the free cash flow for 2014 would be $85k-42K (P&I) = $43k. So my ROI would be 14.3%. If you account only the interest portion (30K), my free cash flow would be $85k-30k = $55k or a ROI of 18.3%. I consider the principal payment portion income which makes complete sense to me.

So paying cash, my ROI is 8.5%. I would also deplete my cash that could be used for other investments, security, rainy day fund, etc.

By financing, my ROI is 14.3% but effectively $18.3%. I would have more cash on the sideline to finance other non real estate ventures (which I am looking at), buy more properties, etc.

What am i missing?  What are the advantages of buying a property outright other than the peace of mind?

Lots of reasons. (1) Faster purchase (2) Easier to negotiate with sellers, or beat a similar financed offer (3) Avoid lender headaches during a time-sensitive period (4) Low debt-to-equity may provide a lower yield but it also lowers risk (5) Some people have a lot of cash the cap rate is better than it sitting liquid (6) There's still always the option to cash-out refinance at your convenience- that is you can still accomplish the same ROI, but you can accomplish a quick, painless, possibly cheaper purchase first.

I'm with you, Michael. I don't know why anyone would buy all cash for a property with interest-rates so low. Certainly not investment property that one intends to 'hold' for the long-term.

I mean, as long as the numbers bear out and you are comfortable with them, why not? I had to press this issue with my partner (and future wife) until I took pen to paper and showed her why leveraging our cash to buy several properties with 30% down beats buying just 1 property and owning it outright.

Depreciation? Market crash? Recession? Who cares?! The last crash taught us that rental rates and rents increased during the downturn. As long as your note obligations are being met, you're safe.

But Ryan G above does bring up some good points. An all-cash offer is a great negotiating tool when purchasing property. But once you have the property under control, refi and pull that cash out to do it again. But you have to run your numbers and be comfortable with your strategy.

Some investors will buy cash for the reasons listed by @Ryan Gillette . Then they can turn around and do a blanket loan, HELOC, or refinance to take out cash and buy more units. Just some food for thought. I would like to see a comparison to analyze.

Originally posted by @Michael Win :

Total price 1 mil.

If I purchased it for 1 mil, the free cash flow would be $85k (these are hard numbers from 2014). ROI would be 8.5%

I financed it with 30% down. so for 300k, the free cash flow for 2014 would be $85k-42K (P&I) = $43k. So my ROI would be 14.3%. If you account only the interest portion (30K), my free cash flow would be $85k-30k = $55k or a ROI of 18.3%. I consider the principal payment portion income which makes complete sense to me.

Hey Michael, I'm curious why you have subtracted out principal in your last calc, artificially increasing ROI? I get it that it's the principle payment increasing your equity in the property but where would you account for this in the straight up cash purchase in your first example? How is it income if it's just "changing pockets" from your savings account to equity in the deal?

Michael Win We need to wait for some stories about investors who lost their leveraged rental portfolios during the market crash. In 2009 I met some people in Fl who lost their portfolios, but they looked so bad that I did not ask about details. But recently I took a chance to ask one guy from Las Vegas who lost his rental portfolio as well in the last crash. He told that when market in Vegas dropped 2-3 times - cash investors started to buy and they dropped the rent. So rent dropped significantly enough for that this guy was not able to make even mirtgage payments
I know some investors who do all cash rental purchases because they are able to and they could negotiate much better deals or because they are not able to get financing. I think they have less stress overall :))) My strategy: the first step to take as much deals as possible with leverage 2) to balance portfolio based on my experience holding properties 3) to pay off during 10-15 years to enjoy higher cash flow 10-15 more years 4) exchange re into re funds and enjoy really passive income :)))
I buy with both. But my deals have been bought with cash. They were in such bad shape they were not financeable.

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