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?
Bloomington, MN · Member since 2009 · 107 posts · 30 votes
9y
I started in 2002 at the age of 25 and went right for Leverage and appreciation. I don't believe in appreciation now only in cycles. Also I think cash on cash return and cash flow is where it's at. The book missed fortune discusses all cash out and the real estate investors book by KELLER I believe talks about 20% equity plus 20% down.
I don't think 100% down is necessarily the way and if you get good instant equity than it may not be too much leverage. I think having $5000mo in cash flow as phase 1 allows people to think more clearly especially if your income derives from real estate. We may see a correction. I don't think it will ever be as bad maybe 30% of that. I saw it coming in 2007. Too many stories from 2008.
We may see a correction. I don't think it will ever be as bad maybe 30% of that. I saw it coming in 2007.
The only people who didn't see it coming were those who couldn't weather it and were in denial. I see a storm coming in right now, equities and RE are too damn high. Just look at GRMs.
The question boils down to the simplest common denominator....risk tolerance. Investors take risks in exchange for rewards. Leverage increases the potential reward.
Cash buyers are the most conservative of conservative inventors. Their risk level, aside from a down turn in market, is practically zero. Their return is also almost non existent in real world dollars compared to a leveraged investor. One can not expect to hoard money and make a profit.
In real world terms, at least in theory, a leveraged investor should easily out perform a cash investor by a infinite % over a life time.
Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
9y
Originally posted by @Account Closed:
...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?...
Account Closed Simple response = multiple.
Long answer, depends. How much cash? Where are you buying? Does property cash flow? What is market appreciation rate? What is mortgage rate?
If say we are talking $100,000 cash. You can buy one property in a middle tier market somewhere or put $20,000 down towards 5 properties in same market at a mortgage rate of say 4.5% each. Assume property values grow by at least 5% per year and you sell property in 5 years.
Los Angeles, CA · Member since 2017 · 1 post · 0 votes
9y
Hi, guys. I'm just catching up here, but my brother believes in the idea of using leverage to keep his own money off the table. His position is that, IF the market takes a fall, the cash on hand will be worth more than the now-worthless equity. We're currently looking around various markets in California and he's found a property for me to invest in. He's walking me through the "cash-with-delayed financing" I see you guys discussing here. It costs $220K, so I'd be into it for $57K give or take with closing costs, figuring 25% down after refi. He's done his research and we're both confident that it'll rent for $1800/month, given current market conditions, and we know similar properties in the area were renting for roughly $1200-1500 back in the crash of 08. Mortgage/Interest and Taxes would be impounded at $900/month, with HOA dues of $230. By HIS math, that's $670*12 months = $8040/year. Minus $300 for landlord insurance, right? So, $7740/year on $57K = 13.6%, unless I'm missing some other cost (tenant issues aside, that's a given, I've been told). If I buy it for cash, it's $1800-$230*12-300 = 18540/220K = 8.4%. Am I missing something here? Why wouldn't I want the higher return with less of my money at risk? If the markets fall/rents collapse, they'd have to fall below $1140/month (30% decline) before I start having to put my own money into the mortgage. This seems too good to be true, though and, like Maciej,I'm wondering if/worried that I'm missing something about using leverage (or anything else, for that matter) that might hurt me here. Thanks for any responses.
Investor · San Jose, CA · Member since 2017 · 453 posts · 254 votes
9y
@Chris Mason to confirm you're talking about getting say a pre approval through a lender to refi then buy cash and within a week or two refi the property?
Investor, engineer · Longmont, CO · Member since 2013 · 55 posts · 36 votes
9y
One of the big advantages of real estate investing is the ability to obtain low interest financing. Buying with cash takes away that advantage. Its also not necessarily safer to buy with cash versus using leverage. Imagine you have $500K in cash. In one scenario you use all of your cash to buy a house without a mortgage. Now you have no "emergency fund". Is that safe? I don't think so. Imagine if you then lose your job and have some unexpected expense. In a second scenario, you put 20%/$100K down, and you still have $400K in cash. I would sleep much better with the second scenario personally. My preferred third scenario would be to buy 4 properties with $100K down payments each, and still have $100K in cash as a cushion. That would be a pretty secure position, with decent cash flow if you bought correctly and the chance to make a killing on appreciation. If the properties appreciate you will make 5X what you would make had you bought all cash. In general, if you can borrow money at a lower rate and invest the money at a significantly higher rate of return, then do it... carefully and within reason.
I know I'm late to the question. Consider paying all cash so you get full cashflow up front. Then pull an 80% interest only heloc on the property. Then, when you find new deals, use the heloc for downpayments until you've exhausted all of the heloc. Once you do that, simply refinance the original property and payoff the heloc so you don't have any heloc payments. Basically, this will allow you to receive the benefits of full cashflow on the property until you've accumulated more properties over time. A benefit of doing this is that the heloc can act as a buffer incase of vacancies or maintenance issues during the accumulation of properties. Technically, I suggest owning two properties outright with a full 80% heloc on both. Use one heloc solely as a rainy day and emergency maintenance fund and the other to accumulate additional properties. That's just my opinion on the matter.
@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.
Hi Andrew,
I am in the same dilemma. Funny enough, 6 years ago when you commented, you were the only one who stated "current interest rates" acknowledging a potential rise in the future, which sure did come around.
I was curious if your opinion on cash vs. leverage is the same at the current interest rate environment (in my case it will be a 6.85% interest rate on my mortgage.