I bought my 3 buy and hold properties cash, the benefit is speed of closing, which often means a better price and beating out competition. The cons are that you have used your cash, and that sometimes when you want to refinance to pull your cash out, sometimes for a year or more the property will only appraise for what you paid for it. It’s a matter of good cash flow from properties that you own free and clear, vs less cash flow because of a mortgage, but being able to have more properties because your cash goes farther
Buying cash will make the purchase process much easier.
You must however assess cash flow with a hypothetical 100% financing to evaluate what the true cash flow from a property really is. When you buy with cash most of what you are seeing is artificial cash flow from your own equity and does not represent the cash flow from the property itself. Every income property has two separate income streams, one generated by the property the other by your cash/ equity.
Buying cash flow today costs twice as much as the prevailing mortgage interest rates based on the opportunity value of money to investors. It is essential that you refinance as fast as possible after purchase to increase your bottom line and reap the benefits of having tied up your cash..
Using a hypothetical 100K cash purchase if you value cash at a 10% return and mortgage interest rates are at 5% you would be losing a potential $416.50/month by having 100K in dead equity. Subtract that from your rental income and see what your actual cash flow from a property is when you pay 100K in cash.
In most cases dead equity will turn a asset into a liability.
• You can often get the property cheaper because you can close quicker than someone attempting to buy with traditional fundings • You can do a cash out re-fi if you fix the property up and get it rented so that you can leverage that money on a new deal
Cons:
• Your repair costs may be more than anticipated • Your money is now locked up in a deal and you may lose money if the deal goes south
• Doing a cash out re-fi may take a while to get done
Cash buying is a great way to employ the BRRR (Buy, repair, rent, refinance) strategy that is often talked about here on BP. IMO it's the way to go because you have leverage in the negotiation when buying a property from a buyer who needs the money quickly.
Thanks for all the great responses guys.
Reason why I ask, is because I’m a very conservative person. And the 2008 crash really grab my attention. But just wanted to weigh the pros and cons.
Well the pro is that you don't have to pay a mortgage payment every month. The cons, in my opinion, are that you don't make as much of a return on your money and you are the one holding all the liability.
What do you mean by I’m the one holding all the liabilities? can you go in depth with that sentence please? Originally posted by @Ali Boone:
Well the pro is that you don't have to pay a mortgage payment every month. The cons, in my opinion, are that you don't make as much of a return on your money and you are the one holding all the liability.
PROS - negotiation when buying a property. Cash offers can often get 10%+ under competitive bids. Once closed you could refinance a portion so that you still create a decent cash flow but can then leverage capital elsewhere
CONS - leverage - you could be leveraging your cash into another investment.
PROS - negotiation when buying a property. Cash offers can often get 10%+ under competitive bids. Once closed you could refinance a portion so that you still create a decent cash flow but can then leverage capital elsewhere
CONS - leverage - you could be leveraging your cash into another investment.
PROS - negotiation when buying a property. Cash offers can often get 10%+ under competitive bids. Once closed you could refinance a portion so that you still create a decent cash flow but can then leverage capital elsewhere
CONS - leverage - you could be leveraging your cash into another investment.
PROS - negotiation when buying a property. Cash offers can often get 10%+ under competitive bids. Once closed you could refinance a portion so that you still create a decent cash flow but can then leverage capital elsewhere
CONS - leverage - you could be leveraging your cash into another investment.
@Derrick E. - Right. You should only leverage to the point where the investment can still create cashflow even in a down market....for those with limited capital to invest...not leveraging available cash diminishes opportunity to build additional wealth.
Right I agree over leverage is not something I’d like to do. That’s why I am being conservative. and ask questions in regard of that subject.
I wouldn’t mind leverage. but as long as I know I have the fund to pay all cash if things went sideways. Only way I see myself leveraging. But I’m getting a lot of great answers from you guys. And hear both sides. .Originally posted by @Derrick E.:
I buy all my homes with cash and invest for cash flow.
These people leveraged to the max are setting themselves up to go under during the next market crash.
Equity is just FAKE wealth until the property is sold.
@Jerry Cinor We are up to 6 houses now. We are just now getting ready to use some leverage with a HELOC on one of the homes. I feel comfortable to do it now because like you said, even if things were to go sideways, I know I can pay for it out of the rents from my other properties.
I do not want to be stressed out which is what leverage causes....a bunch of stress (at least for me.)
I totally agree with you man. Everyone has their own risk/reward tolerance. and knowing me being a very conservative person, I really like your idea on how you go on buying your rental properties.
@Jerry Cinor We are up to 6 houses now. We are just now getting ready to use some leverage with a HELOC on one of the homes. I feel comfortable to do it now because like you said, even if things were to go sideways, I know I can pay for it out of the rents from my other properties.
I do not want to be stressed out which is what leverage causes....a bunch of stress (at least for me.)
Hey all, I always as do my clients pay cash. We get a better deal and we then can refi cash out , and buy more, rinse and repeat. I hope everyone is doing well in their real estate business .
Right. You should only leverage to the point where the investment can still create cashflow
In reality a property that can not produce positive cash flow with a hypothetical 100% financing can never produce positive cash flow without a abnormally high rent increase. If it does not have cash flow with 100% financing then any cash flow you see is only purchased with your own money. The property itself is incapable of producing positive cash flow.
With mortgage interest rates at 5% and the opportunity value of cash at 10% a so called investor is paying $2 to achieve every $1 of artificial positive cash flow. Buying money at twice it's value is not investing.
What are the pros and cons of buying a rental property cash?
Just want to hear you guys opinion. And any other suggestion/awareness you guys might have for me.
Thank you!
The biggest pro one has when they are a cash buyer is their offers appear much cleaner & more likely to close to the seller. This can be a differentiating factor in winning the bid on a very hot property. Buying with cash also allows investors to buy heavily distressed assets that would not otherwise qualify to residential or commercial financing.
The con involved in paying cash is you greatly limit your buying power. With the ability to finance you can easily quadruple your buying power. $1 Million dollars quickly becomes $4 Million dollars of buying power with financing. The ability to finance a property is what sets real estate investing apart from other investment vehicles such as the stock marker or bitcoin. Try walking into your bank and asking for a 30 year loan to buy some bitcoin lol.
What are the pros and cons of buying a rental property cash?
Just want to hear you guys opinion. And any other suggestion/awareness you guys might have for me.
Thank you!
The biggest pro one has when they are a cash buyer is their offers appear much cleaner & more likely to close to the seller. This can be a differentiating factor in winning the bid on a very hot property. Buying with cash also allows investors to buy heavily distressed assets that would not otherwise qualify to residential or commercial financing.
The con involved in paying cash is you greatly limit your buying power. With the ability to finance you can easily quadruple your buying power. $1 Million dollars quickly becomes $4 Million dollars of buying power with financing. The ability to finance a property is what sets real estate investing apart from other investment vehicles such as the stock marker or bitcoin. Try walking into your bank and asking for a 30 year loan to buy some bitcoin lol.
The cash vs leverage debate will always rage on BP. I'm in the leverage camp but we all have different goals and are in different stages of our lives.
Let's debunk a couple of misconceptions though.
Buying for cash increases cash flow. This is simply not true. Buying for cash increases cash flow on ONE property but it decreases the overall amount of cash flow that can be generated on that capital invested.
Leverage is risky and will take down BP investors in the next crash. People who get on the bandwagon, buy into hot markets, and over-leverage in cyclical areas are not on BP learning and discussing prudent ways to invest. We don't need to discuss obvious strategies that are not real investing. Prudent leverage is way down on the list of concerns for many investors.
On the flip side of the coin, I've heard a good quote about owning properties free and clear. "Once you have won the game, it's okay to stop playing it."