20% down payment or Buying Cash

[Zamontae Stinson]

I see that a lot of investors like to buy properties for cash, and refinance them at a later date to pull out their equity.  In my opinion, it would be smarter to use the leverage on the front end, to maximize your purchasing power.  

Can someone explain the benefits to purchasing with cash in the beginning of a real estate transaction vs using leverage?

[Brian Garrett]

Originally posted by @John Galang:

@Joe Villeneuve And over 3 years later... Just to get this straight at a HIGH-LEVEL understanding, in your option 2, you're losing, let's say at 25% (at 75% LTV). Assuming $100k SFRs...

Purchase Property #1 at $100k, cashout refi for $75k.

To purchase Property #2  you'll need additional $25k. Now you're in $125k for the 2 properties.

To purchase Property #3, you'll need another $25k. Now you're in $150k for the 3 properties.

Cash out Property #3 for $75,000

Initial investment of $150,000. And let's assume closing costs were about 2.5% for each refi, so $1875 x 3 = $5,625 + $75,000 from property #3 cashout = total investment of $80,625 for three $100k SFRs each w/about ~25% equity.

This would take about 18 months b/c banks refi after 6 months of ownership.

I realize that cash deals close faster, but after the first property, since you have to wait 6 months (x3) anyway, how are you benefiting from buying cash then cashing out on properties #2 and #3? How is that any different than buying with (#2 and #3) using financing w/25% down? Save a couple grand on closing costs? What's the real benefit?

You have your numbers wrong that's where the confusion is. In Joe's example he is buying the $100k properties for $75k therefore recouping that money on the cash-out assuming 75% LTV. He's not buying the $100k property for $100k and then refinancing out $75k like your example demonstrates.