Paying cash for a property versus taking out a loan...

5 Replies

To all the experts, novices and beginners!

Looking for some thoughts and advice….

I am reading over and over again not to use 100% cash to purchase a property..but to only use your cash for the down payment and let the tenants pay the mortgage. But why not? I have done the math on the cost of the overall loan and the ROI versus cost to pay cash in full at time of purchase. Is there something I am missing? If I can save enough money to pay cash, why not? PLEASE educate me, I do not want to make a rookie move, but I am having a hard time wrapping my head why borrowing money (and paying all that interest) is better investment than cash sale.

Originally posted by @Lulu Goodie :

To all the experts, novices and beginners!

Looking for some thoughts and advice….

I am reading over and over again not to use 100% cash to purchase a property..but to only use your cash for the down payment and let the tenants pay the mortgage. But why not? I have done the math on the cost of the overall loan and the ROI versus cost to pay cash in full at time of purchase. Is there something I am missing? If I can save enough money to pay cash, why not? PLEASE educate me, I do not want to make a rookie move, but I am having a hard time wrapping my head why borrowing money (and paying all that interest) is better investment than cash sale.

You already did the math on return on investment. For a 100,000 property paying 1000 in profit a year paying cash gets you a 1% return while paying 20% down and financing 80,000 gets you a 5% return with the same profit . With the cash You have tied up paying all cash for a property you earn only whatever appreciation the  property gets while with a mortgage you earn more on less cash. Thats the whole point of leverage. Certainly you could go all cash and certainly some investors recommend this but you will not grow your wealth nearly as fast as if you used leverage though it will be much safer. Basically you could buy one deal all cash or 5 with the same amount of cash using financing and the tenant will pay the mortgages down for you (hopefully). Its all about your appetite for risk and your goals. 

Originally posted by @Lulu Goodie :

@Adrie Moses-bailey OK!!!!! That makes sense.....LEVERAGE...Thank you! 

 NP leverage is a tough thing to wrap ones mind around but its how most businesses function. Just be careful as it amplifies your gains AND your losses

@Adrie Moses-bailey ... I do understand what you are saying. But how are you going to get financing on 5 different properties? 

Originally posted by @Lulu Goodie :

@Adrie Moses-bailey... I do understand what you are saying. But how are you going to get financing on 5 different properties? 

Ask I would guess. Once you get one property and the income starts rolling in I imagine it would have positive impact on your DTI by raising your income more than the new debt.

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