Does it make sense to do all cash?

Question

I know leverage is the key to making money, but my other goals in buying investment property are:

1) minimize transaction costs
2) being able to close quickly to get preference when buying REO's.

Currently own my house free and clear.  Plan to buy several rentals properties over the next year.  I have enough cash to buy 2 or 3 properties.

Would it make sense to buy the homes for cash, and finance them later when I need the cash for other transactions?  Alternatively, I could pull the cash from my house, and use it to buy several properties. (avoiding all the costs and time associated with having to write 3 separate loans)

The plan is to hold and rent the homes for several years (or longer). Curious what you pros think...stupidest idea ever...or is there some merit?
Thanks

John Perry · Answer

Thanks for the great advice.  Based on the replies, and the referenced threads it looks like the HELOC is the way to go for flips.  However, if I am going to be holding it for several years, probably need to get long term financing.

Spoke with a couple of realtors about this and not sure that they get it.

Thanks again

Aly W. · Answer

Thank you again for an excellent thread. I'm considering doing just this to purchase a rehab property to live in. The bank that owns the property is looking for a cash deal or 203K rehab loan. The cash deal can make this happen and I now have a much better understanding of it.

Aly

Frank Adams · Answer

I bought my first "cash" deal in 1989 and the only mortgage since then was for a personal residence deal that fell into my lap when I wasn't looking and was a bit cash poor, with a sh** pot of income. Paid that off in about 2 years.

The reason I bought that one for cash was that (in TX back then) no one wanted to talk about any RE that wasn't owner occupied. The bank wanted about 10-10 1/2%, market at the time was about 8 IIRC, 4 points, another one for origination and between $1500-$2K in JUNK fees. Oh and 20% downstroke. The purchase price was about $32K.

Looking at throwing about $3-$4k into fees that got me NOTHING, plus the hasssle of throwing another THIRTY CENTS a month into postage I decided to go "halfsies" with my brother. When the closing took all of 10 seconds I decided this was a pretty sweet way to proceed.

Since then I do all my flips buying for cash and then selling on "low down, owner will finance" deals that allow me to (occassionally) purchase off the MLS and sell the same day for a profit. Some of my deals may be outlined in the threads listed by the above poster.

Hence my screen name.

all cash

Richard Warren · Answer

Your idea has a lot of merit.  I usually buy for cash.  It allows me to compete against higher offers that involve financing because I can close quickly.  If I need cash I will refi a property to pull cash back out.  I used to buy using a HELOC and then refinance later.  However my HELOC has been cut by $100k, so that isn’t as easy as it used to be.  Leverage is great but it is a double-edged sword.  If you are highly leveraged and property values fall you can find yourself upside down in a hurry.

8)

Christian Malesic · Answer

Let us make sure we are completely clear and on the same page.

Having a “cash” contract and buying with “cash” are two separate things.  Said another way, “not having a mortgage contingency on the contract” is a very different thing than writing a check at the closing table for the deal out of internally generated funds.

I highly recommend removing as many barriers to a deal with which you feel comfortable.  Thus, if you can do good inspections - no inspection contingency.  If you can inspect for termites or do not care - no termite inspection.  If you can do a deal without a mortgage - no mortgage contingency.  Etc., etc. etc.

Thus, my deals very rarely have a mortgage contingency, which are referred to in slang as “all cash deals.”  But, I never have paid cash (funds which were generated internally) in the history of my business.  I use a credit line that was previously approved.  The bank comes to the closing table and issues a check against my line.  Once or twice they transferred the money to my account on or about closing day and I paid by certified funds check written against my account.

This does not negate your proposed strategy.  It is one to which many subscribe… successfully.  However, to be clear: you are wanting to do both of the above.  For me, the former meets my plan objectives whereas the later does not.

Christian Malesic · Answer

There is also discussion of this topic currently going on in the Starting Out forum.  You may want to check out these two threads:

What does "Other peoples money" really mean?

Help understanding using equity to obtain more props