Cash Purchase vs Conventional Financing

27 Replies

Good evening from the Midwest! I've come to ask for feedback while acknowledging that I'm early enough in my journey that I can't yet offer much in return other than gratitude and it's hard to pay the bills with gratitude, I know. I'm building skills so I'll have more to offer soon!

I'm a new pro member and I will be making my first deal this year. One of the issues I've been pouring over forum posts to try to learn about are the advantages and disadvantages of cash purchases vs conventional financing for a buy and hold investor. I have the resources to proceed with way, but I'm having trouble being decisive about what will be best for my business.

A cash purchase feels like a better negotiating position for my offer and like a more compartmentalized risk if there are problems (as in, you can lose the cash without damaging your credit if the worst happens.) Conventional financing seems like a good way to get more leverage/cash flow benefit out of less liquid capital, but a poor result could have a more lasting impact. And around and around I go.

Would any more experienced hands out there be willing to offer a bit of guidance to help with my financing paralysis?

@Ryan Pozzi I think it depends on the kind of deal you get. If it's a house you find off-market which the seller wants a quick close, cash is the way to go. It'll give you a better offer for the same price and they don't have to wait the ~45 days for the mortgage to go through.

On the other hand, if you find a good place on the MLS, a lot of sellers I've found don't really care about the extra days to close. Of course, a cash offer will always be stronger, but I've found a number of sellers who sort of expect the buyer to need a mortgage and just figure it's part of the process.

Of course it also depends on your financial situation!

If you have enough savings to pay cash and you buy something that cash flows reasonably well, I don't think you're going to be at risk of damaging your credit (missing payments) as long as you have a good emergency fund for vacancy and repairs. 

Financing will earn you more in the long run if that's what you're after.

Originally posted by @Ryan Pozzi :

Good evening from the Midwest!  I've come to ask for feedback while acknowledging that I'm early enough in my journey that I can't yet offer much in return other than gratitude and it's hard to pay the bills with gratitude, I know.  I'm building skills so I'll have more to offer soon!

I'm a new pro member and I will be making my first deal this year.  One of the issues I've been pouring over forum posts to try to learn about are the advantages and disadvantages of cash purchases vs conventional financing for a buy and hold investor.  I have the resources to proceed with way, but I'm having trouble being decisive about what will be best for my business.

A cash purchase feels like a better negotiating position for my offer and like a more compartmentalized risk if there are problems (as in, you can lose the cash without damaging your credit if the worst happens.)  Conventional financing seems like a good way to get more leverage/cash flow benefit out of less liquid capital, but a poor result could have a more lasting impact.  And around and around I go.

Would any more experienced hands out there be willing to offer a bit of guidance to help with my financing paralysis?

Ryan, Cash vs financing debate will go on and on. depends on your risk tolerance and goals.

Most investors like to finance because  you can get 3 deals at 25% down and still have some cash leftover, vs using allyour money and just getting one deal. Have you studied concept of roi and cash on cash return? If not look into it, that is a huge reason investors finance. 

If buying cash vs buying conventional is truly any option for you probably have lots of cash. You could buy a two houses with a conventional loan and still have lots of reserves in case something does happen.

You could buy with financing but use larger down payment so you have more equity in property, perhaps that is less riskier and a middle road for you.

If having power of cash offer is super important to you, but you don't want to use all your money for one deal,  then look into hard money buy and hold loans, they are often considered same as cash. It is more expensive but in righ situation is valuable tool and can still get you those "Cash only" deals in many cases.

@James Marshall: Strong cash flow is my  primary investing objective, so I'll have to take a more serious look at financing my deals.  A strong emergency fund is a must either way.  Good call.

@Caleb Jordan It sounds like financing is the better option for "economies of scale." One of our main goals is for our passive income to support a trial period for a riskier non-real estate business that my wife wants to run. Sounds like making a more efficient use of cash through financing will grow our passive income faster.

Thank you both for your input!

For a buy and hold investor, I always encourage people that conventional financing is the way to go. Simply due to the fact that when factoring in the opportunity cost, you'll soon realise that it's not worth it. Instead of a cash purchase on one single property, you could have down payments on 4-5 properties.

@Michael Tal : Is it common to run into lenders with concerns about your debt to income ratio? Forgive my newbie ignorance, but even at 25% down it seems like quite a bit of mortgage debt to carry by your four or fifth deal. Is that mitigated, from the lender's perspective by the cash flow of the properties or is there some basic fact I'm missing?

Some buy all cash and then do a refinance afterwords to negotiate a better price with the seller on a purchase going in. Some buyers play dirty and say all cash to get a lower price and then try to switch while under PSA agreement.

We are on an upturn right now. When natural down cycle follows lenders tighten up standards and make loans tougher to get at lower LTV's so many investors take advantage of higher LTV with cheaper debt while they can get it. This can allow them to stockpile more cash on the the downturn.

Originally posted by @Ryan Pozzi :

@Michael Tal: Is it common to run into lenders with concerns about your debt to income ratio?  Forgive my newbie ignorance, but even at 25% down it seems like quite a bit of mortgage debt to carry by your four or fifth deal.  Is that mitigated, from the lender's perspective by the cash flow of the properties or is there some basic fact I'm missing?

 As long as the income from the properties are essentially paying for the mortgage and additional profit, lenders usually don't have a problem with that especially if you have a 25% downpayment. 

@Ryan Pozzi

I’m looking at some purchases with wholesalers who won’t wait for financing. They got a deal, you have to close within a week or two. Cash only. But you get them below retail price this way. Off market. They get the assignment fee.

I then want to refinance after the fact. Then repeat. Hoping to get all my cash back out or most of it anyway. Will see how this turns out after doing a few. If you're financing they'll give you MLS properties which are priced higher but they don't care to wait for financing. You're paying retail in that case.

If you can be a cash buyer, always be a cash buyer. Period. Then slap a mortgage on the property after the fact to recoup your capital.

This way you get the best of both worlds.

@Chris Mason I have considered this route, because it seems like wholesalers give you first dibs on the good deals if your a cash buyer. What has your experience been with then getting financing to get the money out? Do the banks require any sort of seasoning?

@Ryan Pozzi

Cash.

You can close as soon as it is inspected. Maybe tomorrow. That is HUGE for a motivated seller. You want 85k? If I could get you 78 cash in your account by Wednesday would you be interested?

Then if you need cash or for some reason feel you want to have the property financed, simply refinance it (granted can probably only get 70% but with the negotiating cause you paid cash, you probably made up for a large part of that).

So a few months of your cash tied up is the worst case scenario if you find you NEED the cash after the purchase.

I think it really depends of what your strategy is and what kind of property you are buying. 

I always like to think for any investments within my ability to keep it for long term and flexibility to keep going.  

So this is what I do: down payment of 25% for the best rates, paying points up-front for even better mortgage rates. Overall, I buy Class A/B, so looking on to save 10% of initial price, 30 yrs term with the best interest rates I can get. Then, while I'm using other people money (and having positive cash flow), I look for refi with a better rate (name it HELOC, Refi, ect.).

I also like spread the money into different accounts (401K or SDIRA).  But these are the less attention I give (they are managed by the custodian and I pay a fee, I do 6% to get the max of matching from my employer). 

The only problem with buying cash is that in my case, it would be difficult to get another property on the short term. I rather use other people money to keep advancing into buying other properties. If I'm not loosing money, that means someone is paying for my loan, plus a little bit in appreciation (or big depends on your area), in 30 years it will make a huge difference!

Just run the numbers and DON'T DO it like other people estimating maintenance at 3% or CapEx at 4%...

Originally posted by @Nick Talvy :

@Chris Mason I have considered this route, because it seems like wholesalers give you first dibs on the good deals if your a cash buyer. What has your experience been with then getting financing to get the money out? Do the banks require any sort of seasoning?

 If you are true cash buyer (as evidenced on two months of bank statements prior to your purchase that don't have a $100k deposit from Uncle Vinny or Loan Shark Sally) and find an investor friendly local lender that offers Delayed Financing, there is no seasoning period.

@Caleb Jordan hi caleb, sorry for what may be a rookie question but what do you mean by hard money buy and hold loans? I was under the impression hard money loans weren’t suitable (or even available) for buy and hold?

Sorry, in Australia these sorts of financing options are paths not taken

@Nicholas Andrews

These loans are not as common as short term fix n flip, and not every hard money lender has them. But some HML have loans for buy and hold. Basically you get the fast closing, no income check etc. but the term may be for several years. I've seen them with rates in the 7s. Usually it is interest only payment then at end of term full note is due.

@Ryan Pozzi - sometimes, depending on the deal, and especially the size of the deal (single family vs multi family) you can make a cash offer and in the amount of time it takes to get to settlement, close with lender financing. I've done that on several occasions. If you do plan t but cash and then refi, keep in mind that many lenders have a seasoning period - meaning you might have to wait 6 months before being able to refi and getting max LTV. Although, max LTV doesn't seem to be a concern of yours. I work with lenders that have little to no seasoning for this exact reason - buying cash to get a better deal and then refinancing.

@Ryan Pozzi

I’m in the process of turning a paid for single family rental in to higher cash flowing townhomes. So if your desire is to

1. Have more than 1 property

2. Maximize your roi from the pile of cash you have

3. Set yourself up to have possibly 100% tax free income from those properties and potentially shelter some of the income from your wife’s business. Using leverage is the way to go.

One thing that pushed me into doing this myself is for tax purposes. Just run your own numbers on this, but for me with 1 property I had net profit of around 11k per year, I was depreciating that property by around 5k per year. So I paid income tax on 6k.

However with multiple properties I’m going to push my net income to 14-15k per year and depreciate almost 30k per year. That means no income tax paid on my rental income, and the leftover is taken as a passive loss against my W-2 income.

So my advice is to go slow, and learn your market really well. And look to implement the BRRRR strategy as much as possible. Having capital puts you ahead of the game. Use it wisely. Good luck!

Depends on the type of asset and condition.  If a pretty house that can be financed with seller on the market expecting financing to take 6 weeks and it's above $50k and you haven't reached Fannie loan limit of 4 or 10?  May as well finance it. Save your cash for a better or more creative opportunity. 

House price under $50k. Cost of capital/lender fees (if you can get it) at 10%? Cash.

Odd property like a mobile on land, 2 houses, house and income producing something that would be difficult to finance?  Cash.

Too many repairs to qualify for a conventional loan?  Cash. Then finance later.

Commercial property with expensive appraisals and riskier loan terms? Cash.    

Use cash to purchase creative or cheap property or to get discounts. Or both!

@Ryan Pozzi I've been looking for a deal out of state and will be paying cash. Most of the good deals are cash only deals, and not on the MLS. You'll need to network with Investor friendly agents and wholesalers to find them. Like others have said buy cash then get the mortgage.