Cash first or finance first?

14 Replies

Hi BP! Say I have a property that's 100k (including all closing costs etc). Say I could comfortably purchase this property with cash only.

I obviously don't want all my money to be tied down in this property, so I want to get this financed. But the question is, which would have a better outcome? Purchasing this property financed (20% down) or  purchasing this property with cash and then refinancing it completely with a bank very soon afterwards. 

The property in question is a duplex and already has tenants in it. I'm wondering if I finance later, would I get a higher appraisal value and hence actually recover my closing costs. 

I would use the concept of leveraging.  Put 20% down and loan the rest.  Use the same method for the next property. Rinse and repeat.  You technically could get 5 properties instead of 1!

Depends on what you buy it for, how much value you can add, and if the market appreciates any (if at all). 

@Joe Villeneuve  has good insight on these kinds of questions.

@James De Silva  The answer is all cash buy...then refi.  There are a couple of reasons:

1 - The cost to refi vs using financing to buy in the 1st place is usually cheaper...at least that's always been my experience.

2 - I you buy with financing and put 20% down, you can as @Tuan Le  says, maybe buy 5 properties, but you have 20% of your money tied up in 5 properties.  Let's say 20% represented $20k on a $100k buy.  That means you have $100k tied up...as in it "cost you" $100k to buy 5 properties.  I know, it sounds great...especially when you consider each property could be cash flowing $300/month (x 5 = $1500/month).  Great right?  Wrong.  In reality, you spent $100,000, and you're only getting $1500/month back ($18,000/year).  It will take you over 5 years before you break even.

3 - OK.  Let's say these properties were worth $135k in 6 months (they were worth more than the $100k when you bought them...and they appreciated).  If you bought them all with cash, and refinanced after 6 month seasoning, you could get your $100k back...on each property.  Now you're ahead of the game since you have no more cash left in the properties.

4 - If you buy with financing, you are going to get 80% of the purchase price. When you refinance, you get 80% back of the ARV.

Using #3 above, you don't buy 5 properties at once, since you only have $100k.  You buy them in sequence...one at a time, using the same money over an over again by refinancing every property...then re-using the funds on the next one.  If you put 20% down on 5 properties, you've spent $100k.  If you cash out, one at a time, you've only "used" $100k...never actually spending it, and you don't have to stop at only 5.

I love this option but it will take a longer period of time to acquire five properties. Joe, if option 2 is chosen, when could he refinance to get the $20,000 back?

Originally posted by @Glenn Willeford :

I love this option but it will take a longer period of time to acquire five properties. Joe, if option 2 is chosen, when could he refinance to get the $20,000 back?

 Not true.  You can refi in 6 months.  That means you can move very quickly.

How much of a percentage-of-equity can someone typically pull our on a refi?

Reason I'm asking is one of my properties (a 4 plex) has apprecaited $130K in 4 years and I am thinking of doing the same thing. I used to think that appoach was sort of like robbing Peter to pay Paul, but since joining BP I see how people like Joe do this and it seems to work. 

@Tom C.  

That depends on the lender. I have a number of lenders. The range of refi % for me is somewhere between 70-80% of the ARV. Usually, it takes 6 months of seasoning before you can refi. I just picked up one thought that will do it much faster.

@Joe Villeneuve  Thanks for expanding on my option.  Your option 3/4 is very interesting.  I will have to read up more on this method and refinancing.

Originally posted by @Joe Villeneuve :
Originally posted by @Glenn W.:

I love this option but it will take a longer period of time to acquire five properties. Joe, if option 2 is chosen, when could he refinance to get the $20,000 back?

 Not true.  You can refi in 6 months.  That means you can move very quickly.

 But if he chose option 2, when could he refinance to get his money back?

@Glenn Willeford  IF by Option 2 you mean: 

"2 - I you buy with financing and put 20% down, you can as @Tuan Le says, maybe buy 5 properties, but you have 20% of your money tied up in 5 properties. Let's say 20% represented $20k on a $100k buy. That means you have $100k tied up...as in it "cost you" $100k to buy 5 properties. I know, it sounds great...especially when you consider each property could be cash flowing $300/month (x 5 = $1500/month). Great right? Wrong. In reality, you spent $100,000, and you're only getting $1500/month back ($18,000/year). It will take you over 5 years before you break even."

He would probably never be able to since he would be at 80% LTV from the start. There's not enough equity in each house to cash out. If he puts it all in one, and it is an all cash start, then every house has all cash...so he can get all of it out.

Originally posted by @Tuan Le :

@Joe Villeneuve Thanks for expanding on my option.  Your option 3/4 is very interesting.  I will have to read up more on this method and refinancing.

 Sorry.  My bad.  4 isn't an option...it's a comparison of #'s 2 and 3

@Joe Villeneuve:

 Thanks for the information Joe.

@Joe Villeneuve Does this work with only distressed properties or properties that you know will have ARV? If you buy a house around market price with cash and then refinanced, wouldn't it be the same as leveraging it?

Did you ever have issues with refinancing if your other properties were also refinanced?  

Originally posted by @Tuan Le :

@Joe Villeneuve Does this work with only distressed properties or properties that you know will have ARV? If you buy a house around market price with cash and then refinanced, wouldn't it be the same as leveraging it?

Did you ever have issues with refinancing if your other properties were also refinanced?  

 It works with any deal that you can buy that either has built in equity or appreciable equity or built up equity with rehab.

If you buy a house at market price, then it might be the same thing...but there are too many ways/conditions that it is better than just an outright loan to buy to even attempt to mention here.

My question to you would be, "Why are you buying a house at market value"?

I never have an issue getting financing because I can always take on a partner with credit to get the financing if needed.  I have access to lenders that will allow up to 10 mortgages per person.

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