Cash vs Mortgage question

4 Replies

Hi All, I have just started out on my RE journey and have 2 properties. One turnkey and one other SFR. Both of these properties are financed with a conventional loan at 25% down. I have a question about financing. Say I’m looking at a 150K property. If I have the cash upfront to do an all cash deal, do you think that is better than doing the deal with a conventional mortgage upfront? My thought behind this is that once I make the purchase I can then pull out the money through a mortgage after the sale. Also, this would give me an advantage during the purchase by offering the seller all-cash and therefore a faster closing as well as the potential to make an offer without the mortgage contingency and potentially get a better deal that way. I have very good credit so I’m not worried that I wouldn’t get a mortgage. What are the downsides to this approach? Do any of you use this strategy? Thank you for all your help. ASH

@Ashish Khera I think the biggest potential downside (which really isn't that big but worth considering) is any potential deals you may miss out on while your cash is otherwise held up in the property.

For example, let's instead say you're going to put 20% down on this deal (so $20k instead of $100k to make it simple), which can arguably get approved for a loan pretty quickly these days (around a 40 day turn time for the lender assuming your good credit, DTI, etc.). In the time you're getting approved or even after closing, you could be leveraging the other 80% (or $80k) you would have used to purchase the property all cash on another deal!

I am a proponent of leveraging as much as possible but this is due to my own investment strategy. Of course some personal aspects come into play as well (i.e. how leveraged you currently are, how much time you have available, are you seeking more deals, etc.). Just some thoughts here but I think with your experience you can't go wrong in either scenario.

Best of luck!

There's nothing wrong with your strategy other than tying up your money for other deals.  In fact, if you intend on placing a tenant, that rental income can be used to help you qualify for the loan.  This may not mean anything to you at this point, but eventually, as you build a portfolio and have more on your plate to carry with financing, this will be an important thing to remember.

Best of luck to you!

I agree that there is nothing wrong with that strategy but if you're looking to buy more properties and scale your business its good to use leverage. It all depends on your goals and what you're hoping to do in the future.

@Ashish Khera , you could give each Seller two options: All cash "tomorrow" for at least 10% off your alternate offer; or, two month closing at that higher (leveraged) offer.

If you're chasing highly motivated Sellers (if not, why not?), that "tomorrow" offer may be extremely attractive to them - even if you ask for more than 10% off your other price!...

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