Pros and Cons: Refinance vs Mortgage

6 Replies

@Spencer Hatfield Think in terms of the return on your investment as well as how fast are you able to scale up. 

For instance, you have $100k to invest, you buy a single property with $100k and let's say it makes you $10k/year. $10/$100K = 10% a year and you have no other money to buy more properties.  Let's change the case a bit. Let's say you put in 20% down = $20k, got $80K note and received the same $10k/year on this property. You just bumped your return 5 times: $10k/$20k = 50% a year and you still $80K to invest! 

Hope this helps!

@Alina Trigub Thank you! I fully intend to lever up, my question is more around timing. Should I get a mortgage up front, or buy with cash and get a mortgage after closing? I did a bit of reading yesterday and I came to the conclusion that if I have enough excess cash then I should buy with out a mortgage to start. I can close faster, I only really need an inspection, no appraisal, no loan contingencies etc. But if cash is tight then levering up first makes the most sense.

Originally posted by @Spencer Hatfield :

I want to buy a multi-family property and I can buy 100% cash and then refinance once any repairs are done. Should I refi or is there an advantage to just get a mortgage up front? 

 This depends on how much work you plan on doing, and the purpose of the refinance. If you plan on doing enough major work that you can increase the value of the property, you should buy cash and refinance. Example: This allows you to purchase the building for $100k. Put $20k of work in, and then refinance at new appraised value of $160k. If the bank cashes you out at 75% you get your $120k back and then can put it to work in a new property.

If you plan on doing minimal work then you can mortgage up front. Example: purchase for $100k, do $5k work. New value is $105k. There is no large benefit of refinancing after the work is done.

My only caveat, is that buying in cash may make your deal more desirable to the seller. Example: $100k house but the buyer is willing to take a cash offer of $90k. You my friend just saved $10k and can now refinance into the same mortgage you would have had in scenario above.

This is a slight simplification, but you will need to run your numbers to decide which is more beneficial.

@Andrew B. your last example is what I was thinking about. I'm analyzing the properties in multiple scenarios, 100% cash, 100% debt, and 20%-30% debt. I want the properties to cash flow in the 100% debt scenario and if I can achieve that I think I can get comfortable paying cash and then getting a 70% - 80% loan after closing.

@Spencer Hatfield , if you already know a Lender who'll let you borrow 100% up front, why even think about paying out of your cash? (But if not, I suggest: don't count on the 100% hypothetical/fantasy.)

But I agree that when you want to re-finance (or use the "Delayed Financing Exception"), then sure, you hope your deal was such a bargain that the Lender's subsequent appraisal will see their 70% LTV actually cover all your initial outlay!...

@Andrew B. Think of it this way: what are you gaining by closing out quicker (aka with cash)?! Look at the pro's and con's of it versus closing with a mortgage?! Keep in mind the rates are going up slowly but surely. Make a list and see which one outweighs the other.