Buy with cash or get a loan?

Question

My question is:

If I have enough capital in the bank to purchase my first few properties in cash would there be an advantage to obtaining loans for them anyway? If I did just put 20 percent down on each and obtained a loan for each it would obviously leave me additional monies to purchase more by putting 20 percent down.

However, would it not be smarter to just buy the first 2 or 3 cash as I find the deals and when I want to purchase more or as I find additional deals to just finance against the previously purchased properties as needed? my thinking is that if it takes me months or a year or more to find additional deals I would needlessly be paying the bank interest?

I wanted to throw this out there for opinions incase I'm blindly overlooking something.

Thanks,

James Ma · Answer

It sounds like you are  underestimating the value of having cash working for you and there's a lot of potential for making money on leverage right now with super low interest rates.

Stock markets are returning historically on average 8%/year in indexes, there's dividend stocks that can be 5% yield etc. so it is a bad idea to spend all your cash buying properties outright when you could borrow money at a lower % rate and give yourself the freedom to invest your cash into building more wealth.

There's an expression that rich people get rich by using other people's money - in this case the bank's at low rates. Of course leverage does increase your risk but if you're buying cashflowing properties in properly researched areas, I think you'll do very very well!

Jason Holtzinger · Answer

Thanks for the input Tom. That is a good point.

Jason Holtzinger · Answer

Thanks for the insight Matt! I will weigh that out. I didn't think of it that way.

Tom Wagner · Answer

Interest rates are at all-time lows, so IMO you absolutely should be purchasing properties with leverage. If you want to be a bit more conservative you could do a 15-year fixed note at sub-2% interest, but no matter what you should be levering up at least part way in order to amplify your returns.

Matt Moreland · Answer

Hey, Jason!

Great question. Buying properties in cash while you can is always a great option if you are of the belief that any debt is bad debt, but I believe with interest rates being at historic lows it may make more sense to leverage that money as much as possible while rates are low before the market adjusts and we begin to see those rates shoot back up.

This is just speculation of course, but I would not be surprised if interest rates rise significantly over the course of the next year, but that is just my personal opinion. At the end of the day it just comes down to your individual risk tolerance and if you are willing to put your neck out a little bit right now while money is cheap to potentially tackle a few more deals in the meantime.

Let us know what you end up doing, and best wishes however you decide to proceed!