Question: Is it better to use cash or credit to buy real estate? Guidlines: • Cash: You have enough cash to buy a piece of property outright. • Credit: You are taking a loan with 20% down and 10% interest rate fixed. • You can only choose one. I know there are alot of other factors that would lead to the best answer but I just want to see what people think in general (risks/rewards) about these two ways to buy.

You buy with cash so you can get it all out again for repeated use...not because it gets you a better deal. In fact, I've overpaid for deals when overpayment still had the allowable numbers. I can do this since refinancing gets me all of my cash back...no matter what I paid for it...so long as the total cost (rehab included) was under 75% of the ARV. You are maximizing your leverage potential. If you only use your cash for down payments, when you run out of cash, you run out of down payments, and you stop. My method allows you to go on forever...or at least until you run out of deals that make dollars. Paying cash for a property and leaving it in the property means I've spent the funds and must replace them with new funds to move forward. Refinancing all the cash back out means I've never spent it, and I can use the same cash over and over...never needing more to move forward. ...and so what if the bank gets a hold on my asset. What I've described above is far more important than having an exclusive hold on any of my assets. 100%, or any percent equity is just a trophy to me. It has no real value until I cash it in by selling the property (then it's gone), or refinancing (which is what I'm doing). Besides, I still have 25% equity minimum in all my deals since I can only refi up to 75% of their ARV's.

I too like the three legged approach...rentals, flips, partnerships and sandwich lease options. OK 4 legs...but it's more stable. W-2 isn't going to happen. It takes away the only thing that I can never get back, and is more valuable than anything else since it allows me to do everything else....time. My job is to manage everything, and find. analyze and execute the next deal(s)...and not do rehab, or w-2 it. My cash does the w-2 dance, and my cash works as many jobs as I can find for it since it has an unlimited amount of time available to it.

John, hit it on the heard. The first question to ask is if you want to use leverage or not? Depending on your appetite for risk and need for return, will drive your decision. The cost of the money is secondary. If you do not have the cash, then you would only have one option. If you are trying to aggressively grow, leverage is the only option. If you are more conservative, then cash may be the way. Tax should always be considered in terms of effective rate. You can take it as a deduction if you are an individual and as an expense if you are a corporation. The net cost of money is historically low.

Hey Steve, we bought this property in June for (round numbers) $57k and budgeted $18k for closing costs, termite inspection, rehab, and cleaning fee. Once we had tenant moved in, then we started the refi process. With the way refis are going, we did a 45 day lock. The appraisal came in at $109k vs. expected ARV of $115k... close enough for what we need to do since our program allows lesser of 70% of LTV or whatever is on HUD-1. Refi loan amount was $74k plus $1k in cash at closing since taxes are due. Rate is 4.875% with credit of $2k to offset origination charges and fees. Cash back to us is $73k. Origination charges, fees, and impounds were a total of $3k. Basically, the $1k in cash and net $1k in charges (total of $2k) were the property taxes due, a couple months of impounds, and a few $100s of fees. And we'll collect 2 1/2 months of rent before the first payment is due on October 1st. So, we now own a property that has $35k in equity and is cash flowing almost $300 a month (before vacancy and repairs) for essentially $0 out of pocket. @Alexander Felice thanks for inviting me to share our story.

@Joe Villeneuve and @Lee Huffman have convinced me this is absolutely the best way to buy rentals. I just follow them around on BP reaffirming their advice. Pay cash, get it rented, refi your cash out, repeat.

When I say "don't do rehab" I mean don't you pick up a hammer for any reason other than it is in your way. You lose money when you do your own rehab. It is impossible not to. Rent pays for everything. All hold properties MUST have positive cash flow. If it doesn't, don't buy it.

Check out @Brandon Turners BRRRR strategy. This is the method I'd use. Granted in recent podcasts the examples were a $100K line of credit but the same applies here. Buy - use the $100K to purchase a property Rehab - renovate the property to get it rent ready Rent - place a good tenant at market rent Refinance - to get you initial investment back and in some cases possibly more Repeat - do this all over again! There is obviously more to it than this and if you search the forums for "BRRRR" you can dig deeper and reach out to those who have done it.

Exactly, spoken from the king! This is my strategy as well, I just don't have as many properties. Cash gets you deals that others cannot get, then you refi on your own time & terms. Too much leverage is when you do not have instant liquid asset access of at least 1 year of living expenses (that includes the house notes) and access to capital for expected/unexpected repairs and maintenance. Personally, I like the 3-legged stool approach: income from rentals, income from W2 job, income/liquidity from bank accounts (money market, CDs, saving accounts).

Both. Cash first, then credit to get the cash back, then re-use it on the next deal, then refinance that deal to get THE SAME cash back, then....

Cash or Credit??

Buying & Selling Real Estate

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Cash or Credit??

Kevin Martin

Jacksonville, FL · Member since 2013 · 226 posts · 115 votes

Question: Is it better to use cash or credit to buy real estate?

Guidlines:

Cash: You have enough cash to buy a piece of property outright.
Credit: You are taking a loan with 20% down and 10% interest rate fixed.
You can only choose one.

I know there are alot of other factors that would lead to the best answer but I just want to see what people think in general (risks/rewards) about these two ways to buy.

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Joshua D.

Investor · Columbus, MT · Member since 2013 · 1k+ posts · 1k+ votes

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@Kevin Martin Why can I only do one? Why 10%? that is ridiculous.... How much other cash do I have? What market am I investing in?

Lets assume Detroit and I have 100k extra besides my purchase... I'm all cash! I would buy 7 SFRs and a bullet proof vest and make some money!

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Lee Huffman
Rental Property Investor · Mt Juliet, TN · Member since 2014 · 90 posts · 33 votes
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Originally posted by @Steve Vaughan:
@Lee Huffman. "Just received docs today to sign to finish another refinance of a deal we bought all-cash in June." That's great!
Would you please speak to the time and costs involved in that refi? 30 days? $5000? $500? How much is the loan? Do lenders not mind just giving you the money because you own it free and clear? Even on an investment property? Was the process pleasant?
Thank you. I'm asking as a cheap-o with some high equity properties. Thinking of paying a couple off and doing the velocity game, but am concerned about having go to banks with hat in hand and pay $4k - $5k each in fees. Cheers!
Hey Steve, we bought this property in June for (round numbers) $57k and budgeted $18k for closing costs, termite inspection, rehab, and cleaning fee. Once we had tenant moved in, then we started the refi process. With the way refis are going, we did a 45 day lock.
The appraisal came in at $109k vs. expected ARV of $115k... close enough for what we need to do since our program allows lesser of 70% of LTV or whatever is on HUD-1.
Refi loan amount was $74k plus $1k in cash at closing since taxes are due. Rate is 4.875% with credit of $2k to offset origination charges and fees. Cash back to us is $73k. Origination charges, fees, and impounds were a total of $3k. Basically, the $1k in cash and net $1k in charges (total of $2k) were the property taxes due, a couple months of impounds, and a few $100s of fees.
And we'll collect 2 1/2 months of rent before the first payment is due on October 1st.
So, we now own a property that has $35k in equity and is cash flowing almost $300 a month (before vacancy and repairs) for essentially $0 out of pocket.
@Alexander Felice thanks for inviting me to share our story.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
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Wow @Lee Huffman. Thanks so much for sharing more detailed information about your experience. Seems like something worth doing! I appreciate your taking the time to educate me!
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John Teachout
Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
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I pay all cash, do all my own refurb, and buy and hold (no flips). Works for me. Sometimes it doesn't take long for a house of cards to come crashing down. I think it's very easy to get over leveraged (and history proves this) and real care and restraint needs to be in place to keep from falling victim to it. I completely understand the strategies laid out here in the forums but am just not interested in following that path (at least not at this time in my life)
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Lesley Resnick
Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
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John, hit it on the heard. The first question to ask is if you want to use leverage or not? Depending on your appetite for risk and need for return, will drive your decision. The cost of the money is secondary. If you do not have the cash, then you would only have one option. If you are trying to aggressively grow, leverage is the only option. If you are more conservative, then cash may be the way. Tax should always be considered in terms of effective rate. You can take it as a deduction if you are an individual and as an expense if you are a corporation. The net cost of money is historically low.
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Brandon Ingegneri
Rental Property Investor · Providence, RI · Member since 2015 · 1k+ posts · 594 votes
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Buy and hold, use other peoples money with a small percentage of yours. In and out deals, your cash. Less moving parts, less holding costs, way easier and better returns. You can always refi after 6 months if you pay cash, or you can create a holding company that cuts you a loan using your money so that you can refi. Obviously check with your attorney and accountant to structure this properly and see if your circumstances make this applicable to you.
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