Investor · Las Vegas, NV · Member since 2016 · 39 posts · 11 votes
In your opinions is it better to buy one property cash and collect additional cash flow each month (Until you have cash to fund your next purchase) or buy multiple properties with 20 percent down payments? I feel as if only having 20 percent equity in a property puts me in a losing position if the market takes a downturn, but at the same time my lack of using leverage on the property I paid for in cash hinders my networth growth from an appreciation standpoint. Any recommendations on how I should go about this?
Having 20% equity does not put you in a losing position. What puts you in a losing position is having 100% equity sitting dead in the property not earning a higher return elsewhere. You could take your money and buy one house and make conservative 10% cash on cash returns or you could buy multiple properties and make 15-20%.
If the market takes a downturn it doesn't matter as long as you don't need to sell. Would you rather have 10k into a property and it lose 30k of value or have 100k in and lose 30k of value? The less cash in a property, the better however that's not to say you should over leverage.
Also you have a better chance at appreciation if you have more than one property, not to mention if you have a vacancy, it will have less of an impact.
@Account Closed - It really depends on your goals. Do you want multiple properties? Are you aiming for slow growth and strong cash flow at the beginning? Or are you aiming for faster growth with little cash flow? Do you need to support losses on other properties such as flips? Etc
Purchasing and then refinancing will lose you some money, since you pay fees.
How do you figure a down turn in the market places you in a losing position.
If you own a 100K property and the market drops 20K you lose exactly the same amount of money whether you have 20K equity or 100K equity. The reality is however that unless you sell you have lost nothing. If it drops in value even further it is then impacting your cash even farther or the banks money. Would you be happier losing your money or the banks money.
Due to the high opportunity value of cash it reduces cash flow rather than increasing it with a cash purchase. Your investment turns from asset to a liability.
If it's a rental with positive cash flow, it should ride out a market downturn. Your only real concern would be if rental rates take a huge plummet and you can't cash flow with a payment any more.
IMO it depends how old you are and how close you are to retirement. If you are young then buying multiple properties using leverage and having mortgages (with resultant lower monthly cash flow) is fine. If you are approaching retirement and need higher monthly cash flow then paying cash and avoiding starting 30 year mortgages makes sense.
So you mean buying cash then refinancing after the seasoning period?
Fannie Mae has an exception to the seasoning period for cash buyers, called the "Delayed Financing Exception." You can refinance right away. Get tight with your lender ahead of time, however.
@Account Closed's delayed financing strategy and achieve the same results. Having 50% equity means more cash-flow and less debt. Of course, if the market goes up you've lost leverage. And it's easy to make the argument that "money is cheap" right now so taking on a bunch of debt will serve you well in future if interest rates rise. You do have dead equity but you also have to sleep at night. Net result, my point is view is that you don't have to choose all-cash *or* 20% down, there is a middle ground.
Aggressive option for growth: leverage up
Conservative option for safe and slow: buy all cash
I want $0 of my money in my deals. My original money into my first property has long since been paid back. I have 1000 units cash flowing with $0 of my money in them.
So you can guess which option I'd pick.
Run the numbers. Would your cash on cash return be better on 1 deal cash or multiple deals with down payments? We can't answer this question for you, but we can give you ideas to think about. As mentioned before, it depends on your goals. What do you want? But I think the question answers itself when you actually start plugging in real property scenarios. We could speculate all day long about purchase price and rents but without facts, it's all for nothing. I think your market will dictate which is the best route to go. Can you cash flow with only 20% down? Some markets can't. Also, are we talking about 1 $50k property or 2 $200k properties, or 1 $500k property and 2 $1million properties. To many "it depends" to give solid advice. Hopefully some of these questions can help you come to your own best decision. Best of luck. Good "problem" to have.
I've talked to people who only buy investment properties with cash (usually two income households that live on one income and buy cash in midwest). I've also talked to people who leverage to the max. In the good times leverage works for you, in the bad times it works against you. You have to use your own judgement on whether we will have bad times and when, and how much of a downturn can you survive when you are leveraged.
I always remind myself what I read in one of Kiyosaki's books, poor people work for money, rich people have money work for them. Is paying 100% cash for investment property the best way your money is working for you?
In the good times leverage works for you, in the bad times it works against you.
I don't understand why, if you don't need to sell and you remain cashflow positive there's no problems paying your mortgage.
My normal spiel is that rental RE is the only place for average people to invest with massive leverage. That's what makes it different than equities etc. If I buy a neutral cashflow place (it pays all it's expenses but nothing more) for 25% down on a 15 year note, at the end of 15 years it's returned 9.4% on that down payment even if there's no appreciation. Now it's rare that there's no appreciation or rent increases over a 15 year period, and that's all gravy on top of your great 9.4% return. The appreciation return on your down payment will be 4x whatever rate the property appreciates at. If it's only 2%, you're making 8% on top of that 9.4%. Not too shabby in a slow market.
So you need to compare that to the return you get on an all cash cashflowing deal for the same property.
Buying all cash would limit your growth in other opportunities in other investments as your tenants could pay down your mortgages on multiple properties if you decided to use leverage. I would consider leveraging but not to over leverage to the point the mortgage/PMI is too high, there is not a right or wrong way to do it, it all depends on what you personally would want to do. If your young in age using leverage is understandable, if your approaching retirement it could make sense to pay in all cash to get a stronger monthly cash flow as a rental and avoid a 15-30 year mortgage.
@Johann Jells What happens in a recession if you lose your job and your renters lose their jobs and stop paying you rent. You have no money to make payments. You get behind 90 days and the banks start foreclosing on you. Saw it happen a lot in Florida (and other places) during the last crash.
I would just like a nice balance where I'm not over leveraged and can hold on to the property in the event of a market crash.
It all comes down to how well you sleep. We can all argue the logic of different decision, historical trends, etc. But we all sleep differently with the decisions we make based on that knowledge.
It seems like you are not sleeping well knowing you could do better, but also wouldn't sleep well being highly leveraged. How about having one free and clear and using the proceeds to buy the next one or two with leverage?
Cash is king in terms of getting a deal. I've learned if you can bring cash for a quick close, you can get the seller down lower in price in some situations (if they're a motivated seller). But your money is way better served with financing on multiple properties as opposed to one owned outright, so I recommend a hybrid approach:
Buy with cash IF you can use it to your advantage to knock another 5-10% off the purchase price
After buying and rehabbing, cash out refi it and repeat (BRRRR). If you can't get a better deal with cash on the purchase, then either move on to look for one you can or finance multiple purchases. But remember the lure of cash and quick closing will often get a seller to come down.
i am considering the same question. @Chris Mason, how does delayed financing work?
Basically it takes a week to 10 days to figure out if a loan is going to happen or not. The rest of the time is checking boxes for the GSEs.
So while you're in contract for your all cash purchase that closes in two weeks, we're (if you were in California) in the background doing mortgage paperwork. You get the thumbs up from underwriting. You close on the cash purchase. You spend another few weeks wrapping up mortgage paperwork. A very large deposit it made to your checking account, and now you're several hundred thousand dollars in debt and have most of that capital back for the next one.
@Johann Jells What happens in a recession if you lose your job and your renters lose their jobs and stop paying you rent. You have no money to make payments. You get behind 90 days and the banks start foreclosing on you. Saw it happen a lot in Florida (and other places) during the last crash.
What happens if a meteor hits your house? If you focus on low percentage worst case scenarios this is the wrong business for you. 2008 was a historically bad event, and FL was arguably ground zero. Haven't you seen "The Big Short"? Look at the graphs below showing difference in the drop between here and there. I had 9 units and it had no effect on me, and I picked up a 4U at short sale in 2012 from a guy who HAD overextended into an untenable position where his cashflow couldn't cover expenses.
Also, if you don't have operating cash or credit to weather 3 months of no cashflow you have a problem to begin with. That's enough time to evict nonpaying tenants and rent at whatever the new market price is. Rents tend not to fall much in these crises, sadly there's more renters out there.