All cash or conventional loan?

Austin, Texas
General Real Estate Investing
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All cash or conventional loan?

Kent Depwe
Member since 2022 · 16 posts · 5 votes

Hey BP,

First post in here, short intro: I’m 25, Technical recruiter living in Austin Texas, just bought my first house in Austin July 2021.

I'm keen to get into REI, not necessarily in Austin or even in Texas for that matter.
I have about $70-100k cash to play around with for my first property.

Since interest rates are horrendous currently, I got quoted 6.3% on 30 year conventional with a 750 credit score and great debt to income. It would be very difficult to cash flow doing a regular 20-25% down mortgage, so I’m considering buying a $70-100k house in all cash in a secondary market to avoid the high interest. But then I wouldn’t be able to leverage my money as well.

So should I pull the trigger now and buy a $100k house in cash, or get a $250-300k house using mortgage loan risk low or no cash flow, and refinance when rates go down, or just wait until rates go down before buying?


I appreciate any input, thanks!

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
4y
Quote from @Kent Depwe:
Quote from @Joe Villeneuve:

Option D...none of the above.

Never buy a house with all cash. The cost of a REI property is only the cash that comes out of your pocket. That means if you are paying only the DP on a property, say at 20%, your cash is worth 5 times its face value. When you pay all cash, the PV is equal to the cash paid.

Never buy a property with negative CF.  As that negative CF adds (or subtracts,...depending on how you look at it) up, it adds to the cost of the property.  When the property has positive CF, that positive CF pays back your cost, and when the CF has completely paid you back for your cost, you have nothing in the property anymore...and the rest of the CF is pure profit.

Option D is find a different property in a different market.

Thanks for the response, my preference would be to leverage my cash, however with interest rates being upwards of 6% it’s difficult, many of the properties I’m finding would have maybe $100-300/month cash flow and that’s without including maintenance issues so could be little to none.


Interest rates being at 4-5% make cash flowing properties a lot more common it seems. So was curious given the high interest rate environment we are in would justify going all cash.

No.  Your goal isn't to collect properties...it's to collect money.  None of the options you have given satisfy any positive goals...so don't do it.  It's far better to walk away and make no deal, then it is to make a bad one, just for the sake of making a deal.
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  • Kent Depwe
    OP
    Member since 2022 · 16 posts · 5 votes
    4y
    Quote from @Tyler DeVerse:

    I would always say leverage, it will become much harder to find a deal but well worth it one you see all the other benefits of having 5 houses get paid down by tenants, 5 houses to depreciate on taxes, 5 houses appreciating.  

    Of course are the end of the day it depends on your goals and risk tolerance and as they say, deals are made not found.

    This decision would have been so much easier back when rates were even 4-5%!

    only looking to buy 1 property this year as it’s my first and want to figure out how to be a landlord before stacking on a ton of houses.
    plan is to buy 1-2 per year the next few years.

    Is there any situation that you would recommend buying cash instead of mortgage?
    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    no

    0Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    4y

    Do not let the interest rates discourage you from purchasing a property. The majority of my clients are investors, and use a conventional loan to finance their property.

    There are still properties with great cashflow.

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    4y
    Quote from @Kent Depwe:

    Hey BP,

    First post in here, short intro: I’m 25, Technical recruiter living in Austin Texas, just bought my first house in Austin July 2021.

    I'm keen to get into REI, not necessarily in Austin or even in Texas for that matter.
    I have about $70-100k cash to play around with for my first property.

    Since interest rates are horrendous currently, I got quoted 6.3% on 30 year conventional with a 750 credit score and great debt to income. It would be very difficult to cash flow doing a regular 20-25% down mortgage, so I’m considering buying a $70-100k house in all cash in a secondary market to avoid the high interest. But then I wouldn’t be able to leverage my money as well.

    So should I pull the trigger now and buy a $100k house in cash, or get a $250-300k house using mortgage loan risk low or no cash flow, and refinance when rates go down, or just wait until rates go down before buying?


    I appreciate any input, thanks!


    There are 40 yr fixed rates available that offer a lower total monthly payment. Also if you are planning to sell this property fairly soon (5 years or less) there are ARM loans available. There is also a 40 yr Interest only option.

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  • Kent Depwe
    OP
    Member since 2022 · 16 posts · 5 votes
    4y

    Haven’t been able to find anywhere offering 40 Year fixed, do you know a place?

    Honestly I plan to basically never sell these investment properties, just cash out refi over time 

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  • Polo VazquezPro Member
    Real Estate Agent · McAllen, TX · Member since 2017 · 382 posts · 281 votes
    4y

    I would never buy a property that cash flows negative, but that's me. I feel like if you that and we hit a recession you might end up jobless or with a long vancancy and you would be prone to lose the house. If you have positive cash flow, you can just lower the rent and I'm sure you wouldn't have a problem finding a tenant with a lower rent.

    Texas small cities tend to cash flow very good. In my area, most properties cash flow but we don't get the appreciation Austin and San Antonio get. Consider buying in smaller cities or suburbs. You are youg, so I would try to leverage as much as possible haha. Leverage and time are a great convination.

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  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Quote from @Kent Depwe:

    Honestly I plan to basically never sell these investment properties, just cash out refi over time 


     Never say never......

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Quote from @Bruce Woodruff:
    Quote from @Kent Depwe:

    Honestly I plan to basically never sell these investment properties, just cash out refi over time 


     Never say never......


    Both options...refi and "never selling " are great ways to lose money. It's basic math applied to REI

    0Reply
  • Aaron Gordy
    Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
    4y

    Its hard to time the markets. I have found that its best to pull the trigger when you see a good opportunity. There are opportunities that happen all the time, even in the Austin metro. If you think that the metro real estate prices will go down, think again as history is on the side of steady appreciation. If you think that interest rates will go down then you might want to look at the historical interest rates. Inflation is at historical highs presently and interest rate hikes will be inevitable. Can one still cash flow in the Austin metro? Yeah. One just has to be creative. Also, keep in mind that with sfh's long term rents will increase to the point that you are making money. Why don't you house hack your house that you live in to see if you like the landlording business? You will also cut your household expenses down too. 

    1Reply
  • Dave Skow
    Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
    4y

    @Kent Depwe - thanks for the post 1) fyi- you can buy a rental SFH for as little as 15% down ....if you put 20 or 25% down the pricing is better and your cash flow will be better 2) the present rates are still realtively low and likely can still allow a proeprty to cash flow nicely .....if your goal is to acquire a rental and have it cash flow - figure out what you need to put down and then borrower the remainder ..this will allow you to acquire a property and keep you cash intact ( as compared to buying a proeprty with cash )

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