Mortgage v home equity loan or refinance

5 Replies

I've got a newbie question.  I can see that most sellers prefer cash buyers.  I've got a finite amount of cash that I can spend on investing, but I don't want to sink it all into one property.  So, could I buy in cash, and then pull a large percentage of the money out by refinancing or taking a home equity loan? And then repeat the process with a less expensive property?  What would the ramifications of such an approach be? How do the rates for the different kinds of loans compare?

Or am I way off the mark, and this isn't even possible?

@Rivy S.

Welcome to BiggerPockets!

Of course sellers prefer an all-cash buyer, but that's usually not in your best interest.

Financing your purchase at the time of the acquisition will be the best way to go because you'll have the lowest interest-rate and the highest LTV.

Doing a cash purchase and then refinancing will not give you the most favorable terms.

The only exception to this is if it's an incredible deal that requires a quick close and you have no choice but to purchase it using all cash.  A specific property at an auction that you've done your due diligence on would be a good example of this.

I prefer leveraging my investment capital.  It's the 10th rule of my 10 Rules of Successful Real Estate Investing and one of the GREAT advantages of investment real estate.

Continued success!

Thanks for answering. So you saying that competition with cash buyers isn't strong enough that it precludes non-cash buyers from getting good deals?

Rivy,

You will find that there is a lively and thought provoking line of discussion and thought on financing vs. paying cash, with smart people making well reasoned arguments for both methods. Personally I love the power leverage provides, but as with all powerful tools it can be dangerous. And you will also hear/find Brandon Turner talking about the buy, rehab, rent, refi (BRRR) protocol.

You should sit down with your banker, explain your goals,  and then you will probably have more concrete numbers and  the course will become clear.  (except the part about just being an all cash investor...I don't imagine most banks would encourage this route, as they make money by making loans, not by counselling you to pay with cash. So dig into BP on that topic yourself.)  You may need to shop around for a lender.   Your lender is a key member of your team and should be screened and treated as such. This topic has been frequently discussed on the podcast and there are probably a number of forum posts on finding a lender.  Perhaps you pay an extra point for the loan on refinance of a cash deal, but this may be better than never being able to land a deal!

You can still compete with all cash buyers if you finance, but it will of course depend on the motivation of the seller and what your offer looks like in comparison to the cash offer.  Price, time, hassle, certainty of closure are all points of motivation to consider, among others.  

You will probably look at a number of deals before you find one where the motivations align.  And, I think you should set your parameters and be willing to lose deals if they don't fit your parameters.  If you can never find anything that fits your parameters, then perhaps you need to either look at a different market/submarket, consider if your parameters need to be modified, or consider if there is anything about your business plan that you can modify to help you reach your parameter goals.  Or maybe you just need to be patient and keep looking.

If your market is really so hot that everything is selling quickly to cash buyers, you really need to do your homework and get a good idea of values so you know how aggressive it makes sense for you to be with your offers.  Or perhaps you might start smaller or engage a partner so you can make a cash offer of your own and then later refinance.  

I started with the lender before I identified my first target property.  This allowed me to more confidently run my numbers in assessing the deal. Sort of like starting a trip with a full tank of gas...it gives you a better idea of how far you can go before you even start!  

Hope this helps.  Good luck!

John

Thanks!  And I don't mean to understate the importance of knowing your market well, even if it is not smoking hot! Either way knowledge and a good team of advisors/mentors seems pretty important as you get started.  

I've been hearing so much about Dallas.  Good luck to you!