All cash or financing?!?
Lockport, NY · Member since 2015 · 41 posts · 8 votes
Hello, I am a new member to BP and currently saving up to invest in real estate with my cousin as a partner (also currently working on getting my real estate license). We decided on renting out small multi-families to start and working our way up to getting apartment buildings with the occasional fix and flip. We plan on financing our properties with mortgages and finding a local portfolio lender.
My question is this - once we are in a position to do so, should we switch to purchasing our properties with all cash, or is financing a better way to go? I understand there are leverage benefits to financing but I would like more feedback on which is the better way to go.
Thanks for any and all replies!!
All my rentals are free and clear now, this is what calculates to net worth. I'm not in the business of continuing to acquire every rental available, we are extremely picky about what we purchase and why. Net worth is all that matters, that's a result of equity through appreciation, sweat equity, smart purchasing, pay down of debt. Cash flow helps through pay down of dept or purchase of more properties. Leverage means nothing if you're not creating equity and net worth, leverage that only creates more dept is meaningless. Again, show me anybody who believes too much in leverage and I'll show you twenty more who went BK in the last recession and as those lessens are forgotten show me those who again believe too much in leverage and we will see them and and more BK'd in the recession that will eventually come. Keep in mind in the next recession all that equity we have I'm talking about can be tapped and 'leveraged' by buying all those really leveraged investors properties at a big discount, just like was done in 2009-2011. This is a long game not a short one. If the cyclical nature of real estate isn't in your game plan you're not realistic in how this works and have way to short of an investment window. Which is why so many went belly up in the last recession, those were all the people who think this is a sprint to leverage yourself as fast as possible into as many properties as you can chasing cash flow and 'control' of properties, cash flow can be a very precarious thing in a down turn, like trying to cup mist in your hands.
@Daniel Lehman Some may not agree with me, but I believe there are two ways to look at a property. If you are buying in cash you better be negotiating down the purchase price because that is the only thing that matters. In cases of motivated sellers this is often times a situation that lets you get the best deals.
In other cases financing may be the best way. For instance, If you can get a property that has an NOI of $70,000 at a 10 cap you would have a purchase of $700,000. If you can get it for $600,000 cash its a great deal. But then again, if you (hypothetical situation) could get the owners to finance it at 0% interest for 20 years at a purchase price of $1,000,000 and no money down you would make $20,000 cash flow every year. Very different purchase prices, but still great end results.
Look at the situation, asses your goals, and determine the sellers goals as well as the lending environment then make a decision. Every deal and every location is unique.
I'm an Oregon Realtor and there are many homes that you just can't buy unless you have cash. Banks won't lend on them for usually health and safety reasons. So if you have the cash, that might be the only way you can purchase some properties. There are options, like rehab loans, that can get you some rough properties and still not have to pay cash.
@Daniel Lehman For any newbie I do not kjow how you save enough to buy cash. In MN you have to have some decent pockets to do that so I would finance as I did. I like small local banks. They may charge more in rate but Fannie/Freddie are hard to deal with.
Be really, REALLY cautious on a partnership. My ffirst one ended because we were not on same page. We are still friends but the move was necessary.
@Daniel,
Keeping using financing as my mentor @Darnell Cooley always taught me "the person that has access to the most private funds will close more deals and make the most money as a real estate investor."
@Mike F., you said: "All my rentals are free and clear now".
What wasted potential!
This is something that I do not get. For years I have heard you must always be growing your business.
If you have sustained income and it can keep up with or surpass inflation, why must you have more?
It is important to pay attention to your own risk tolerance and cash flow needs.
That's fine Hugh; no problem. But be aware: potential IS being wasted!
I definitely plan on financing in the beginning stages of my investing career. In no way, shape or form do I have that kind of cash haha. When I started this post I was hoping to have a clearer vision on my future strategy for acquiring rentals but so far I've seen great opinions from both sides of the fence.
I think it's a tough call and will really come down to how the market is and how far and fast I want to grow my portfolio.
But keep it going guys!! So many great points of view.
I'm an Oregon Realtor and there are many homes that you just can't buy unless you have cash. Banks won't lend on them for usually health and safety reasons. So if you have the cash, that might be the only way you can purchase some properties. There are options, like rehab loans, that can get you some rough properties and still not have to pay cash.
Yes, but it can still be OPM - other peoples' money (Credit Cards; private Lender; Hard Money Lender; Seller Finance...)!
@Mike F., you said: "All my rentals are free and clear now".
What wasted potential!
Wasted potential? You people are weird.
... The market where you are doubling your money is largely gone now...
Right now we're looking down the barrel of a recession, and people on BP are touting leveraging. Property has long since recovered it's losses...
So why exactly would I leverage large amounts of equity when we are possibly looking at a downturn? Even my dog learns from mistakes; it all seems a bit 2006 round here.
OK, but you don't need to be doubling your money quickly in order for leveraging to still be worthwhile ie. making you richer.
Yes, there is NEVER a right time to be OVER-leveraged; and now is a very good time to prepare for the coming (arrived?) downturn.
But in order to capitalize on other peoples coming losses, I don't believe the ONLY way to prepare is to rely on the cash-flow of mortgage-free properties (which seems to be @Mike F.'s only property-related strategy).
Wow, a lot of different opinions here and I don't disagree with any of them. I have the leverage discussion with myself everyday. The math is simple, when all other things are equal, more leverage equals a higher ROI....but....to get the same cash flow, you have to manage more properties and assume more risk. There is no "right" answer to this question that will cover all circumstances. Age, financial situation, risk tolerance, market conditions and goals all play a part in making the decision that is right for you. As a general rule, I think you should use more leverage starting out when you have fewer assets and then use less leverage as you get older and your assets grow. Good luck!
If you can eventually buy with cash why wouldn't you? If you're in the position to put down large amounts of cash that means you have it, so unless you're keeping it under the mattress you'll need to do something with it, either invest it in the things you're most interested in - real estate or diversify it into something else - stocks... etc...
Cash is king for a reason, when we use cash we get deals that we would miss, cash give you power over your competitors in a competitive market or a very desirable property, it allows you to often get better prices (lower) on properties because sellers look at you as being guaranteed to close versus those with financing contingencies.
For everybody who talks about leveraging, there were 20 who went bankrupt in the last recession who were leveraged and believed everything would just continue to go up. Nobody got a property paid with cash foreclosed on.
It always comes down to the numbers. In my experience if your buying the right properties you will make a ton more money taking your cash and spreading it out around 3 or 4 other properties with leverage. Do the math. Even with the interest expense you should be making a profit on every deal. The name of this game to to full-time is volume. Don't let anybody convince you otherwise.
That's fine Hugh; no problem. But be aware: potential IS being wasted!
It depends on how you define wasted potential.
For you, it is wasted potential because you want to grow assets. For Mike, he is taking a defensive mode so he is using his potential to protect assets.
My previous post was about potential being defined differently for different people.
This whole thread is very helpful.
It always comes down to the numbers. In my experience if your buying the right properties you will make a ton more money taking your cash and spreading it out around 3 or 4 other properties with leverage. Do the math. Even with the interest expense you should be making a profit on every deal. The name of this game to to full-time is volume. Don't let anybody convince you otherwise.
You will make a ton more money if you can keep all the balls juggling in the air with what potentially for some, maybe not you, but for some as the past has shown is a house of cards. Those who only leverage to get doors under control and have little equity are at risk, great risk as 2009 showed.
There has to be a balance because if you're too focused on leverage and getting doors under your control and you're using all your cash to control more properties, and using your cash on your personal life and never paying down mortgages to create free and clear assets, your controlled properties may be too leveraged as the only thing you're relying on is principle pay down and appreciation to put you in a safe equity position. This is EXACTLY what happened to many in 2009, they always thought they had plenty of time on the horizon.
Getting 100 houses under control with an average equity of 10% in them is fine as long as the market is rising, it's a disaster when things turn sour on you. If you can keep it going forever the theory is a millionaire maker, but unfortunately reality is that the United States economy is cyclical. So with each passing day into a looming recession the higher leveraged you are the more at risk you become. You've got to have a balance, I started out more as a balanced investor and as a result of fortuitous circumstances created by being so balance I was able to use momentum instead of leverage to more farther from balance to safe haven.
It always comes down to the numbers. In my experience if your buying the right properties you will make a ton more money taking your cash and spreading it out around 3 or 4 other properties with leverage. Do the math. Even with the interest expense you should be making a profit on every deal. The name of this game to to full-time is volume. Don't let anybody convince you otherwise.
You will make a ton more money if you can keep all the balls juggling in the air with what potentially for some, maybe not you, but for some as the past has shown is a house of cards. Those who only leverage to get doors under control and have little equity are at risk, great risk as 2009 showed.
There has to be a balance because if you're too focused on leverage and getting doors under your control and you're using all your cash to control more properties, and using your cash on your personal life and never paying down mortgages to create free and clear assets, your controlled properties may be too leveraged as the only thing you're relying on is principle pay down and appreciation to put you in a safe equity position. This is EXACTLY what happened to many in 2009, they always thought they had plenty of time on the horizon.
Getting 100 houses under control with an average equity of 10% in them is fine as long as the market is rising, it's a disaster when things turn sour on you. If you can keep it going forever the theory is a millionaire maker, but unfortunately reality is that the United States economy is cyclical.
Mike
I respectfully couldn't disagree with you more @Mike F. If you are not overpaying for houses leverage is the only way to expand into more deals. Most people do not have access to $2M in cash. Many use friends and family money which is typically a few hundred thousand. That money does not go far. If you only have 10% equity in a property after its been repaired I wouldn't use leverage either. Thats more like a rental. Good rehab deals have 20% plus.
@Mike F., you said: "All my rentals are free and clear now".
What wasted potential!
Wasted potential? You people are weird.
... The market where you are doubling your money is largely gone now...
Right now we're looking down the barrel of a recession, and people on BP are touting leveraging. Property has long since recovered it's losses...
So why exactly would I leverage large amounts of equity when we are possibly looking at a downturn? Even my dog learns from mistakes; it all seems a bit 2006 round here.
OK, but you don't need to be doubling your money quickly in order for leveraging to still be worthwhile ie. making you richer.
Yes, there is NEVER a right time to be OVER-leveraged; and now is a very good time to prepare for the coming (arrived?) downturn.
But in order to capitalize on other peoples coming losses, I don't believe the ONLY way to prepare is to rely on the cash-flow of mortgage-free properties (which seems to be @Mike F.'s only property-related strategy).
That makes no sense. If you believe, and I think there are clouds, that the economy is souring then why on earth would you take on debt to buy property potentially at the height of the market? And buy into a market with borrowed money, where renting is a risky business in the first place?
If as you say "prepare for the coming downturn" how exactly do you do that with a leveraged portfolio? Property prices will plunge, your equity will disappear in a heart beat, and banks reduce lending.
Really not following you.
I'm an Oregon Realtor and there are many homes that you just can't buy unless you have cash. Banks won't lend on them for usually health and safety reasons. So if you have the cash, that might be the only way you can purchase some properties. There are options, like rehab loans, that can get you some rough properties and still not have to pay cash.
Yes, but it can still be OPM - other peoples' money (Credit Cards; private Lender; Hard Money Lender; Seller Finance...)!
Yes, this is true. There are other options! Thinking outside the box helps tremendously.
That's fine Hugh; no problem. But be aware: potential IS being wasted!
It depends on how you define wasted potential.
For you, it is wasted potential because you want to grow assets. For Mike, he is taking a defensive mode so he is using his potential to protect assets.
My previous post was about potential being defined differently for different people.
You're right. I define it the same as this website: potential for BIGGER pockets!
@Mike F., you said: "All my rentals are free and clear now".
What wasted potential!
...If as you say "prepare for the coming downturn" how exactly do you do that with a leveraged portfolio? Property prices will plunge, your equity will disappear in a heart beat, and banks reduce lending.
Really not following you.
I go by the adage: there are always bargains in ANY market (especially in the mid-west, which will likely fall less, seeing as it hasn't really risen)! But yes, be ready for when you want to increase your leverage (to still safe levels) AFTER the the coming crash! If the Banks won't then lend to ANYBODY, oh well, you shouldn't need to worry, because wise buying now will still generate income enough to keep them off your back later.
That makes no sense. If you believe, and I think there are clouds, that the economy is souring then why on earth would you take on debt to buy property potentially at the height of the market? And buy into a market with borrowed money, where renting is a risky business in the first place?
Mike F. I love your strategy also. Slow and steady wins the race, and you can be safe the whole journey as well.
I suspect that by the time you are in a position to pay all cash, you will have the answer to your own question ... that is step 50 ... I'd focus on step 2 and worry about paying all cash later.
Having said that, there are advantages to buying all cash on houses you can get a good deal on and others can't get traditional financing on for one reason or another (and there are some pretty dumb reasons banks give, doesn't mean they are bad properties). On the other hand, there are advantages to using leverage to accumulate more properties, so long as they are cash flow positive with margin and you don't stretch too far. Why not do both? Buy with cash to get a good deal, remodel and rent so the property is "financable", cash out refi and move your cash onto the next deal ... BRRRR ...
That makes no sense. If you believe, and I think there are clouds, that the economy is souring then why on earth would you take on debt to buy property potentially at the height of the market? And buy into a market with borrowed money, where renting is a risky business in the first place?
Too many people play this game with very little reserves, or a job/business that also gets affected by a recession, so the healthy income disappears down the toilet as fast as the non paying rents.
It's only a matter of time before you fall into the toilet yourself.
And it's exactly what happened in 2008. Which is why i like paid off properties and buying in cash.