Is Buying with Cash Really the “Conservative” Move?

[Adam Tafel]

It really depends on your goals. Personally, I try to use as much leverage as possible assuming the property will sustain itself, because I’m looking at the long-term and I can stomach potentially being underwater during a market correction. I also try to add value to everything I buy, and I’m very careful about purchase price relative to comps.

That said, I have clients who are much more conservative when it comes to debt. I’m working on a $690k duplex transaction right now with an investor paying all cash. Deals like that are relatively rare, because leverage is one of the main reasons real estate has created so many millionaires.

If you put 80k down on a 400k duplex and the market appreciates 3%, you just got roughly a 15% return on your original cash investment from appreciation alone. If you bought that same duplex with cash, your appreciation return would still just be 3%.

On the other hand, if you’re relatively new to investing, you might not want to put your entire 235k into one property. You may be better off spreading that across 2-3 smaller deals while keeping some liquidity and reserves.

A lot of people see 235k and immediately think commercial real estate, and that can absolutely make sense, but many investors find that 1-4 unit properties are a much better introduction into the world of landlording unless you find a commercial deal in exceptional shape in a great area.

Most deals are not killed by a few hundred dollars a month in negative cash flow. They get killed by major capital expenses, long vacancies, expensive evictions, unexpected repairs, or investors simply running out of cash. All of those problems become exponentially worse when you don’t have reserves sitting in the bank.

At the end of the day, it all comes down to your tolerance for risk and your long-term goals. Finding a balance is key. Becoming as leveraged as possible and constantly borrowing against everything you own will eventually catch up to most people, but putting 300k down on a single property probably isn’t going to create life-changing wealth or buy back much of your time either.

[Chris Seveney]

Net worth, available cash flow, risk tolerance - many factors play into this. So the answer is very investor dependent. If you have less experience I typically recommend less debt but again “it depends”.