Paying all Cash versus leveraging Your cash with a Loan

2 Replies

I've been flipping, investing in real estate both residential and commercial for about the past four decades. Well actually 3 1/2 decades but who's counting?

One question that constantly pops up is; "I have about $180,000 do I have enough money to invest in real estate?"

Or like in a recent forum Fellow BP member posed the question of is it better to pay cash for Real Estate investment?

As an investor you're always looking for a cash on cash return. I have $100,000 out there, what is my cash on cash return?

I have one personal philosophy "rent money especially when the rent is cheap"

I found this meme on some social media platform and hijacked it several months ago but it's very true.

Cash_RERent Money

This may be an oversimplification but it's very true so let me apply this concept to a real live flip. In the screenshot below I take a property In Las Vegas and I'm still working on to get under contract. Well my friend and I had it under contract at one number and then after reviewing the condition of the property decided to go back in for a second grind. There is a listing real estate agent involved so when you take her out of the picture. But that's another story.

So we have this property under contract for $235,000, the renovation is $45,000 and the ARV is easily $348,000 we have supporting comps more than one.

Now in an all cash scenario your cash out of pocket at closing plus closing costs assuming the front end the renovation money is $280,000 which does not include holding costs. I typically program out a five month hold for all of my deals, although reality is 3 1/2 months.

As you can see from my application worksheet on a cash basis my cash out-of-pocket is an excess of $280,000 plus holding costs $3067 my cash net profit on the steel would be in excess of $47,000 with a 17% cash on cash return.

This is where leveraging your cash comes into play if I finance to steal my cash at closing is slightly over $32,000 my holding cost over five months are slightly over $15,000 (Paying rent for the money and loan costs). My financing net profit is $26,404 represents  a 76% cash on cash return. My loan costs are cheap 2 1/2% LO and a 12% annual rate. But it really doesn't matter because I'm not gonna have the money for that long.

So what would you rather do shell out over $280,000 and make $47,000 and a 17% return, or shell out slightly over $32,000 plus only costs make a net profit of $26,404 with a 76.48% return. I personally think the answer is obvious but it's always good to know what your choices are.

Hey @Jack C. , this is some great content!  I'd recommend converting this into a blog post on your member blog and letting it live there for folks to learn from in the seasons to come.  

Stuff in the forums usually get engagement for a minute and then fall to the wayside (thanks to the millions of forum posts each year).

Nice work, Jack!

So paying cash, your extra $250k is making $21k or a little over 8% (8.4%), in 5 months. About 20.5% annual. So if you have another deal that absolutely needs that cash now you get the loan. Otherwise you take the guaranteed 20% annual return and pay cash. 

I understand people doing 10 or 20 or 100 flips should always get a loan. But doing 2-4 flips. I’d rather do 2 flips and make $47k x 2 ($94k) than do 4 with loans to make $26k x 4 ($104k). Why do two extra flips to make $5k on each? What if you can’t find 2x more deals? Than you’re actually making less money. Again, I understand big guys doing more deals, I’m talking about the part timer. After all, I woulda fixed em up, refinanced them, and rented them out instead of selling. You might end up with zero dollars in the deal making infinite percent if that’s what’s important to you. 

Everyone’s at a different stage in their life and many have different goals. But I do appreciate the work that went in to the post and how clearly you explained the concept. Your post is part of what makes BP great.