Does all cash always trump a mortgage?

Question

I’m on the fence.

For rental properties, some books and podcasts say get as many properties as you can with as many mortgages as you can with $X. Others suggest to take the same amount of $X and purchase with all cash.

I’m sure people have succeeded with both strategies, but say I do have that $X, what’s generally the most successful path?

I’m on the fence between all cash for a single family, or a mortgage for a 4-plex.

The end-game for investors is to be all cash on multi-families, no?

Jake S. · Answer

@Erik Pilon It depends on what you want and your goals honestly.

I personally like using debt to acquire properties (as long as Im not over leveraged) due to the higher returns. You should never buy based on appreciation, but let's say you put $20k down on a $100k house. If that $100k house appreciates 4%, the value of the house is now $104k. You just made $4k on a $20k investment in one year. If you buy it all cash, you only made $4k on a $100k investment.

Another thing to consider is your tenant will pay the loan down, and with a long term fixed loan, you are inflation hedging. Let's say your monthly payment is $1k, well, $1k today is worth more than $1k 20 years down the road, so payments become easier to make as well.

Using leveraged to acquire properties also can help you diversify the locations. Instead of buying 1 property in 1 area, you can buy several properties in multiple areas, protecting against downturns in any specific area.

Some may also argue that keeping a property leveraged can also act as a form of protection against law suits and a few other things, but I won't touch on that subject

Frank Chin · Answer

My wife and I had good paying W2 jobs, with me in IT/Programming for a while. But as much as the income is, you soon run into DTI issues.

An investor bought 2 attached triplexes next to my duplex some years back, he started and has a contracting business, with income unpredictable. I was surprised he put $750K down on the two, selling price $1.1 million combined, about 10 years ago. He prefers paying all cash, but made an exception and got a mortgage for $350K. Then he went on to say the mortgage will be paid down in 3 years. I was shocked, but says owns 10 other multi's and 6 of them are mortgage free. So the free cash flow are all used to accelerate payment of his mortgages.

He tells me his contracting business is in construction, mainly retail stores interiors and store fronts, and when business is slow, he sends his crew to work on his rentals, even extensive rehabs. Sounds like the perfect business model for a real estate investor.

Yes, paying all cash gives you more leverage with the buyers and you can make a better deal.

Alvin Uy · Answer

It depends...  I use it as an acquisition strategy.    In my area (Los Angeles), its is a very very competitive landscape.  Good deals are hard to come by so having the “best offer” comes to play.  Often times, buyers with “All Cash” offers are favored over buyers with loans.  The ability to “remove all contingencies” ....especially “loan contingencies” and the ability to close with 15 days (because financing is not an issue ) offers lesser risk for the seller to fall out of escrow.   If you have “all cash”, you can eliminate 90% of your competitors (assuming of course you’re not a low-baller).  You can always refinance it later to cash out after you acquire the property.

I usually try to see if there are already multiple offers on the table first... before I offer an “all cash” buy.  If there are no offers on a property, Then I always try to go for a loan first.

That said... Of course, not everyone has millions of $$$ just sitting in there bank accounts (myself included).   Im not at that level yet.... But fortunately for me, I have slowly bought property with traditional loans and have now built up enough equity in those properties.  I found a lender that gave HELOCs on those investment properties which I access when buying “all cash”... I then refi to a conventional loan later after rehab projects are done.   Hope this helps.

Theresa Harris · Answer

Imagine you have $200K to invest.  You can buy one place with all that money or you can buy 5 units using that $200K for five down payments and getting mortgages.  Run the numbers for both scenarios keeping in mind your tenants will be paying down the mortgages.

Does all cash always trump a mortgage?

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