Loans vs all cash deals
Investor · San Francisco · Member since 2018 · 2 posts · 8 votes
Loans vs all cash deals
Most Popular Reply
Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes
5yWhen you purchase with cash, there is no mortgage - so there' nothing to refinance. Cash-out Refi loans come with a higher interest rate, a lower LTV, and usually require a 6-month waiting period after acquisition to obtain. A Deferred Mortgage - is a first-time mortgage - that has the same rate and cost as an origination mortgage. Again, you're not refinancing...you simply "deferred" financing by paying with cash originally. There's no waiting period either. So if you need to buy with cash for competitive reasons, go ahead by all means. But then get a Mortgage afterwards - a Deferred Mortgage - which will give you the same LTV terms and rates as a new purchase mortgage.
And, for those who claim that if you buy with cash, there's no cost - it's simply not true. Look at the inflation cost of a US Dollar:
| Year | jan | jun |
|---|---|---|
| 2021 | 1.400% | 5.391% |
That's a decrease in spending power.
I'm a former senior wealth banker and admittedly a money geek. There is a big difference between generating cash and building wealth. It's how the rich keep getting richer and a lot of other folks work really hard and never achieve financial independence.
Hope this helps.
29 Replies
- 5yDaniel ToshevPro MemberRental Property Investor · Denver, CO · Member since 2020 · 29 posts · 16 votes
Hi, Conor.
There's pros and cons each way you go. You named a few of the cash purchase advantages.
I did the same thing you're looking to do, because I wanted to get started and get experience without too much risk. And if you only want 3k a month I think that's the way to go.
I want more though and that's why I'm starting to cash out refi now, so I can scale. That's the main disadvantage of cash purchases - you run out of money eventually. Another is you lose the advantage of leveraging.
just my 2 cents.
Good luck
- Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes5y
If you go the loan route and decide to switch to pay them off you have already paid the fees for the mortgages
On the other hand if you buy a couple cash you could change your mind and get mortgages for them or just use mortgages for the next few
- Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes5y
In terms of wealth building, it's about matching sources and uses of cash. So, if your real estate acquisitions are long time holdings, using cash (short time asset) isn't ideal. Having said that, I do believe in cash for competitive reasons but recommend getting a "Deferred Mortgage" (not a cash out refi - it wasn't ever financed so there's nothing to "refi") after acquisition to redeploy those funds for more purchases.
Using leverage appropriately allows you to acquire more and build wealth. When your sources and uses are unmatched, you may be cash flowing but it's not wealth building.
Hope this helps...
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Your cost is what comes out of your pocket in cash. Nothing more. That extra CF from buying all cash is an illusion. That CF is recovering your cost. Take that same money and use it as 20% down, and you could buy 5 times the number of deals. If the full CF property CF was twice the one that had financing, that same total cash buys you 2.5 times the cash flow...and, you're getting 5 times the PV. This means you're also getting 5 times the appreciation.
- 5yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
If you are young and building your empire you have to leverage your cash and keep reusing it to fund more deals. Cash works if you are old and have no interest in scaling; but just want enough income to fund your retirement.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Bjorn Ahlblad:
If you are young and building your empire you have to leverage your cash and keep reusing it to fund more deals. Cash works if you are old and have no interest in scaling; but just want enough income to fund your retirement.
also depends a lot on the asset class along with tenant base.. Keep in mind he wants no work or very little.. those that own rentals know that while this is talked about there is a certain amount of work.. and generally speaking higher end assets tend to be easier to manage most of the time.. but for sure if you start stacking up a bunch of C D type units your going to have to keep your hands in there to keep from taking loss's regardless of how you buy them.. For low end C D I personally like the cash route.. much safer given the inconsistant cash flow of those assets over time.
- Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes5y
No doubt buying with cash is a great way to go and the best route in a competitive market where cash is quick and far less hassle for both buyer and seller.
That said, doing a refi to pull your cash out while interest rates are historically low is a better longer term strategy for most in my opinion. Generating 3K a month is great, not really wealth building but great. Turn those 3 into 6 into 9 and so on, now that is wealth building and pulling your cash our to repeat the process is the road to true wealth building.
- Real Estate Broker · Hyde Park Tampa, FL · Member since 2019 · 2k+ posts · 3k+ votes5y
When you purchase with cash, there is no mortgage - so there' nothing to refinance. Cash-out Refi loans come with a higher interest rate, a lower LTV, and usually require a 6-month waiting period after acquisition to obtain. A Deferred Mortgage - is a first-time mortgage - that has the same rate and cost as an origination mortgage. Again, you're not refinancing...you simply "deferred" financing by paying with cash originally. There's no waiting period either. So if you need to buy with cash for competitive reasons, go ahead by all means. But then get a Mortgage afterwards - a Deferred Mortgage - which will give you the same LTV terms and rates as a new purchase mortgage.
And, for those who claim that if you buy with cash, there's no cost - it's simply not true. Look at the inflation cost of a US Dollar:
Year jan jun 2021 1.400% 5.391% That's a decrease in spending power.
I'm a former senior wealth banker and admittedly a money geek. There is a big difference between generating cash and building wealth. It's how the rich keep getting richer and a lot of other folks work really hard and never achieve financial independence.
Hope this helps.
- Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes5y
@Conor Livingston
As a cash buyer you may be able to negotiate better prices.
After purchasing you could pursue a cash out refinance, establish a line of credit, or do nothing.
The first two options allow you to recoup your capital to then pursue new deals or buy a fancy car.
- Rental Property Investor · Columbus, OH · Member since 2015 · 184 posts · 162 votes5y
@Bjorn Ahlblad
This is exactly the difference between my parents and I LOL. They are in their sixties and ‘winding down' so they want to pay cash and have fewer properties. I'm in my mid thirties with goals to replace our income and scale. Different goals and stages of life. That said, I also paid cash for our first two properties as the deals were ‘cash only'. Now I'm in the financing process to get our cash back to do more BRRRR and flip projects.
- Rental Property Investor · Columbus, OH · Member since 2015 · 184 posts · 162 votes5y
@Patricia Steiner I just learned about the Deferred Mortgage option while talking with a private money lender last week. It fits my investing strategy of using cash to get the best deals and be more competitive with the advantage of getting my cash back pretty soon. Flips will help me replenish and grow my down payment fund too. I’m looking for more ways to make the process quicker too.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes5y
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
- Rental Property Investor · Monroe, WA · Member since 2018 · 177 posts · 98 votes5y
@Conor Livingston I like the idea of leveraging.
I leveraged my funds to grow a small portfolio of 30
doors. Most of my clients use the same method!
#leverage
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
Buying all cash is the "maximum" risk. Risk is based on three things:
1 - What is at risk - your cash (equity and CF). The more equity you have, the more is at risk.
2 - Who is at risk - The person supplying the cash/risk. All cash deals = "you", in leveraged deals, this is the lender.
3 - Who is the risk - The person that is in position to do something to lose what's at risk. This is you also.- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes5y
Originally posted by @Joe Villeneuve:
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
Buying all cash is the "maximum" risk. Risk is based on three things:
1 - What is at risk - your cash (equity and CF). The more equity you have, the more is at risk.
2 - Who is at risk - The person supplying the cash/risk. All cash deals = "you", in leveraged deals, this is the lender.
3 - Who is the risk - The person that is in position to do something to lose what's at risk. This is you also.I wouldn't agree with the definition of risk. If you get an 80% loan on a property, that doesn't mean that you aren't at risk for that portion of the property. Most non-commercial loans are recourse and require a personal guarantee. If you go belly up on that property, you will still be required to pay back the lender and not just the lost equity, but all the fees and what not too. That is unless you declare bankruptcy which will ruin your credit.
Yes your cash investment is at risk, but with no loan on the property, there's no risk of another market crash wiping out all of your equity and forcing you to either bring additional money to the table or hold the property and wait. With an all cash investment, you are only really risking the cash you've invested (and additional rehab costs which would be there either way). You are not generally risking your credit, the possibility of default or the possibility of needing to bring additional money to sell/refinance the property outside of potential rehab costs.
All cash is certainly not the best way to grow IMO because of all the advantages of leverage. But I would still say it's the lowest risk if you actually have the cash to invest.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes5y
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
I only know about buying low-cost C-class urban assets, so I'm only going to talk about them here.
1. Andrew is EXACTLY RIGHT here. The mentality that you're going to get rich off the rent your tenants pay is one of the first traps of the game that you have to negotiate your head around. You're a real estate investor, not a rental investor. You should be buying to be a landlord, not buying to be a parasite. So many people here on BP talk about buying exclusively for cash flow down in the C/D classes -- what does that really mean other than making a calculated attempt to maximize your take out of your tenants? Even with C-class assets, you can always find places where there appears to be a good chance of sustained appreciation, areas where you see a significant chance of gentrification. That's where you should be putting your money if you're buying C-class assets.
2. There is a difference between buying a property using money that's been saved up and making an all-cash offer. While we repeatedly make all-cash offers we have almost never bought a property out of our savings. Making an all-cash offer simply means making an offer using cash in a transaction that carries no element of risk in it from a bank that might choose not to lend. Where the cash comes from, what kind of leverage goes into producing the cash that gets wired in the transaction before the closing, that's a WHOLE DIFFERENT STORY than buying a property straight out of a savings account. That distinction is not made clear all too often here on BP. Yes, obviously people who buy with all-cash offers are usually a lot less leveraged than people that buy using as much leverage as possible, but that doesn't mean they are ignorant of the principle of and take no advantage of leverage in their business.3. In a seller's market in aging, cheap C-class assets like the ones we specialize in, it's practically impossible to make an offer that will get accepted that isn't all-cash. Right now, if you're trying to buy any property in good repair in the Pittsburgh area for $100K and under, you're going up against investors using cash.
In a buyer's market, sellers still love all-cash offers because it means they get their money faster and with fewer possible complications. This is one of the reasons why early December is often the absolute best time of the year to submit an all cash-offer.
From the above, it should be obvious that the cash buyer usually has enormous advantages over others in C-class SFR and small multifamily. It's when that power is recklessly coupled to overenthusiasm, a willingness to extend oneself too far, and a lack of asset knowledge that people get into trouble. If you cant' tell a solidly built old house with fundamentals that will hold strong for a few more decades from a money pit, the risks that come along with all-cash offers are not for you.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes5y
Originally posted by @Jim K.:
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
I only know about buying low-cost C-class urban assets, so I'm only going to talk about them here.
1. Andrew is EXACTLY RIGHT here. The mentality that you're going to get rich off the rent your tenants pay is one of the first traps of the game that you have to negotiate your head around. You're a real estate investor, not a rental investor. You should be buying to be a landlord, not buying to be a parasite. So many people here on BP talk about buying exclusively for cash flow down in the C/D classes -- what does that really mean other than making a calculated attempt to maximize your take out of your tenants? Even with C-class assets, you can always find places where there appears to be a good chance of sustained appreciation, areas where you see a significant chance of gentrification. That's where you should be putting your money if you're buying C-class assets.
2. There is a difference between buying a property using money that's been saved up and making an all-cash offer. While we repeatedly make all-cash offers we have almost never bought a property out of our savings. Making an all-cash offer simply means making an offer using cash in a transaction that carries no element of risk in it from a bank that might choose not to lend. Where the cash comes from, what kind of leverage goes into producing the cash that gets wired in the transaction before the closing, that's a WHOLE DIFFERENT STORY than buying a property straight out of a savings account. That distinction is not made clear all too often here on BP. Yes, obviously people who buy with all-cash offers are usually a lot less leveraged than people that buy using as much leverage as possible, but that doesn't mean they are ignorant of the principle of and take no advantage of leverage in their business.3. In a seller's market in aging, cheap C-class assets like the ones we specialize in, it's practically impossible to make an offer that will get accepted that isn't all-cash. Right now, if you're trying to buy any property in good repair in the Pittsburgh area for $100K and under, you're going up against investors using cash.
In a buyer's market, sellers still love all-cash offers because it means they get their money faster and with fewer possible complications. This is one of the reasons why early December is often the absolute best time of the year to submit an all cash-offer.
From the above, it should be obvious that the cash buyer usually has enormous advantages over others in C-class SFR and small multifamily. It's when that power is recklessly coupled to overenthusiasm, a willingness to extend oneself too far, and a lack of asset knowledge that people get into trouble. If you cant' tell a solidly built old house with fundamentals that will hold strong for a few more decades from a money pit, the risks that come along with all-cash offers are not for you.
I agree that the idea that you're going to get rich off of rental income is wrong but that doesn't mean a low debt/buy all cash strategy is wrong. It's a very conservative strategy but if you want low risk and are willing to grow slowly, it can be a good way for someone with those concerns to go.
- 5yKristopher KyzarBusiness MemberRental Property Investor · Norfolk, VA · Member since 2017 · 260 posts · 174 votes
@Conor Livingston ultimately it comes down to what sort of Cash-on-Cash (COC) return are you looking for.
Simplified math: If you buy a $100,000 property for $100,000, and it brings in $1,000 after expenses, you're COC ROI is 12%.
If you buy 5 with 20% down, and now your net is $500 each, that's $2500 per month net. Now your COC ROI is 30%.
Leverage allows you to pull a greater return on you invested cash. 12% is a great return, and if that’s good enough, then awesome.
Another route you could take is to buy all cash, and refinance later. The more money you eventually pull out, the more your COC ROI goes up.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Villeneuve:
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
Buying all cash is the "maximum" risk. Risk is based on three things:
1 - What is at risk - your cash (equity and CF). The more equity you have, the more is at risk.
2 - Who is at risk - The person supplying the cash/risk. All cash deals = "you", in leveraged deals, this is the lender.
3 - Who is the risk - The person that is in position to do something to lose what's at risk. This is you also.Keep in mind when you transfer the risk to your lenders.. If these are lenders that are reporting for FICO you have a huge risk there.
granted not a cash risk most of the time. your not going to get sued for a deficiency although it does happen.. But in the case of a water landing .. and you have too much high LTV debt that you start to miss payments.. your fico goes into the toilet and will haunt you for years
so really depends on your long term business.. and if your really going to need a strong fico and balance sheet to keep you going down the road. this simply is never talked about on BP.. its always what is mathematically best.. And well we all know real estate cant go down because we are super investors :) I am in no way predicting or thinking that we will have a big retreat in values.. But history shows us it can happen.. I mean I just look at my Experience lending Money in Detroit.. when I started in 2003 there.. we routinely got ARV third party apprasials of rehabbed homes in the 120 to 150k range.. by 2010 these were trading at 10k to 50k some have come back up but some never did and probably never will.. the long term buyers and lenders have lost their equity protection and thousands of investors got their FIco's wiped out.. I would do the HML to buy and rehab for the LA investor.. they now had no money into the deal and paid me off 80 to 100k loan i made.. and boom 5 years later their loan is 100% higher than the value of the asset.. So granted if you paid cash you lost the equity .. but if you financed you lost the equity and as stated soooo many got their fico wiped out only to have all manner of personal problems after those events.. So just sayin.. its not simply math there is more to this .. there is Risk as well in more forms than what is talked about on BP.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Villeneuve:
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
Buying all cash is the "maximum" risk. Risk is based on three things:
1 - What is at risk - your cash (equity and CF). The more equity you have, the more is at risk.
2 - Who is at risk - The person supplying the cash/risk. All cash deals = "you", in leveraged deals, this is the lender.
3 - Who is the risk - The person that is in position to do something to lose what's at risk. This is you also.Keep in mind when you transfer the risk to your lenders.. If these are lenders that are reporting for FICO you have a huge risk there.
granted not a cash risk most of the time. your not going to get sued for a deficiency although it does happen.. But in the case of a water landing .. and you have too much high LTV debt that you start to miss payments.. your fico goes into the toilet and will haunt you for years
so really depends on your long term business.. and if your really going to need a strong fico and balance sheet to keep you going down the road. this simply is never talked about on BP.. its always what is mathematically best.. And well we all know real estate cant go down because we are super investors :) I am in no way predicting or thinking that we will have a big retreat in values.. But history shows us it can happen.. I mean I just look at my Experience lending Money in Detroit.. when I started in 2003 there.. we routinely got ARV third party apprasials of rehabbed homes in the 120 to 150k range.. by 2010 these were trading at 10k to 50k some have come back up but some never did and probably never will.. the long term buyers and lenders have lost their equity protection and thousands of investors got their FIco's wiped out.. I would do the HML to buy and rehab for the LA investor.. they now had no money into the deal and paid me off 80 to 100k loan i made.. and boom 5 years later their loan is 100% higher than the value of the asset.. So granted if you paid cash you lost the equity .. but if you financed you lost the equity and as stated soooo many got their fico wiped out only to have all manner of personal problems after those events.. So just sayin.. its not simply math there is more to this .. there is Risk as well in more forms than what is talked about on BP.
All very true, but I was speaking about the financial risk.
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Villeneuve:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Villeneuve:
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
Buying all cash is the "maximum" risk. Risk is based on three things:
1 - What is at risk - your cash (equity and CF). The more equity you have, the more is at risk.
2 - Who is at risk - The person supplying the cash/risk. All cash deals = "you", in leveraged deals, this is the lender.
3 - Who is the risk - The person that is in position to do something to lose what's at risk. This is you also.Keep in mind when you transfer the risk to your lenders.. If these are lenders that are reporting for FICO you have a huge risk there.
granted not a cash risk most of the time. your not going to get sued for a deficiency although it does happen.. But in the case of a water landing .. and you have too much high LTV debt that you start to miss payments.. your fico goes into the toilet and will haunt you for years
so really depends on your long term business.. and if your really going to need a strong fico and balance sheet to keep you going down the road. this simply is never talked about on BP.. its always what is mathematically best.. And well we all know real estate cant go down because we are super investors :) I am in no way predicting or thinking that we will have a big retreat in values.. But history shows us it can happen.. I mean I just look at my Experience lending Money in Detroit.. when I started in 2003 there.. we routinely got ARV third party apprasials of rehabbed homes in the 120 to 150k range.. by 2010 these were trading at 10k to 50k some have come back up but some never did and probably never will.. the long term buyers and lenders have lost their equity protection and thousands of investors got their FIco's wiped out.. I would do the HML to buy and rehab for the LA investor.. they now had no money into the deal and paid me off 80 to 100k loan i made.. and boom 5 years later their loan is 100% higher than the value of the asset.. So granted if you paid cash you lost the equity .. but if you financed you lost the equity and as stated soooo many got their fico wiped out only to have all manner of personal problems after those events.. So just sayin.. its not simply math there is more to this .. there is Risk as well in more forms than what is talked about on BP.
All very true, but I was speaking about the financial risk.
Ya I think on BP many times these discussions are to Linear and dont take in the full picture for the beginner investors.
Like Mr. Syrios he knows all aspects.. but so many on BP simply dont and its all blue sky until it is not :)
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes5y
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Villeneuve:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Villeneuve:
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
Buying all cash is the "maximum" risk. Risk is based on three things:
1 - What is at risk - your cash (equity and CF). The more equity you have, the more is at risk.
2 - Who is at risk - The person supplying the cash/risk. All cash deals = "you", in leveraged deals, this is the lender.
3 - Who is the risk - The person that is in position to do something to lose what's at risk. This is you also.Keep in mind when you transfer the risk to your lenders.. If these are lenders that are reporting for FICO you have a huge risk there.
granted not a cash risk most of the time. your not going to get sued for a deficiency although it does happen.. But in the case of a water landing .. and you have too much high LTV debt that you start to miss payments.. your fico goes into the toilet and will haunt you for years
so really depends on your long term business.. and if your really going to need a strong fico and balance sheet to keep you going down the road. this simply is never talked about on BP.. its always what is mathematically best.. And well we all know real estate cant go down because we are super investors :) I am in no way predicting or thinking that we will have a big retreat in values.. But history shows us it can happen.. I mean I just look at my Experience lending Money in Detroit.. when I started in 2003 there.. we routinely got ARV third party apprasials of rehabbed homes in the 120 to 150k range.. by 2010 these were trading at 10k to 50k some have come back up but some never did and probably never will.. the long term buyers and lenders have lost their equity protection and thousands of investors got their FIco's wiped out.. I would do the HML to buy and rehab for the LA investor.. they now had no money into the deal and paid me off 80 to 100k loan i made.. and boom 5 years later their loan is 100% higher than the value of the asset.. So granted if you paid cash you lost the equity .. but if you financed you lost the equity and as stated soooo many got their fico wiped out only to have all manner of personal problems after those events.. So just sayin.. its not simply math there is more to this .. there is Risk as well in more forms than what is talked about on BP.
All very true, but I was speaking about the financial risk.
Ya I think on BP many times these discussions are to Linear and dont take in the full picture for the beginner investors.
Like Mr. Syrios he knows all aspects.. but so many on BP simply dont and its all blue sky until it is not :)
- Rental Property Investor · San Diego, CA · Member since 2015 · 16 posts · 46 votes5y
Connor; you look quite young so congrats on having the ambition and drive to play in the real world Monopoly game. Interest rates are so low right now and assuming you can qualify for more loans ( FM/FM allows up to 10 at this time), I'd do a hybrid of cash versus finance which means you put a little more than 25% down which is typical minimum for investment properties...say put 35-40% or whatever down that generates a comfortable risk level for you. Lock these into 30 year notes and leave them and don't look back. The mgmt side isn't complicated whether you do it yourself or hire it out, but don't make the mistake of 100% cash purchase at this stage of your life. Use the power of leverage in a reasonable manner. This is why maybe a little larger down may strike a better balance for you between a little extra cash flow, but locking in long term equity in more properties.
- 5yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Villeneuve:
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Villeneuve:
Originally posted by @Andrew Syrios:
Cash flow is, oddly enough, one of the least profitable parts of real estate. Don't get me wrong, its essential; but it's essential to make sure you can stay solvent, not dip into rainy day funds and get loans approved. The ways you really make money in real estate is buying right, appreciation and principal paydown. And all of those are increased by using leverage. I.e. if you have two houses that each go up 10%, you make twice as much as having just one.
The main thing regarding buying with only cash is risk tolerance. All cash means very low risk, which is good. If you want to go with a low risk strategy (that also reduces necessary management) that's perfectly alright. But it's not the most profitable way to go generally.
Buying all cash is the "maximum" risk. Risk is based on three things:
1 - What is at risk - your cash (equity and CF). The more equity you have, the more is at risk.
2 - Who is at risk - The person supplying the cash/risk. All cash deals = "you", in leveraged deals, this is the lender.
3 - Who is the risk - The person that is in position to do something to lose what's at risk. This is you also.Keep in mind when you transfer the risk to your lenders.. If these are lenders that are reporting for FICO you have a huge risk there.
granted not a cash risk most of the time. your not going to get sued for a deficiency although it does happen.. But in the case of a water landing .. and you have too much high LTV debt that you start to miss payments.. your fico goes into the toilet and will haunt you for years
so really depends on your long term business.. and if your really going to need a strong fico and balance sheet to keep you going down the road. this simply is never talked about on BP.. its always what is mathematically best.. And well we all know real estate cant go down because we are super investors :) I am in no way predicting or thinking that we will have a big retreat in values.. But history shows us it can happen.. I mean I just look at my Experience lending Money in Detroit.. when I started in 2003 there.. we routinely got ARV third party apprasials of rehabbed homes in the 120 to 150k range.. by 2010 these were trading at 10k to 50k some have come back up but some never did and probably never will.. the long term buyers and lenders have lost their equity protection and thousands of investors got their FIco's wiped out.. I would do the HML to buy and rehab for the LA investor.. they now had no money into the deal and paid me off 80 to 100k loan i made.. and boom 5 years later their loan is 100% higher than the value of the asset.. So granted if you paid cash you lost the equity .. but if you financed you lost the equity and as stated soooo many got their fico wiped out only to have all manner of personal problems after those events.. So just sayin.. its not simply math there is more to this .. there is Risk as well in more forms than what is talked about on BP.
All very true, but I was speaking about the financial risk.
Ya I think on BP many times these discussions are to Linear and dont take in the full picture for the beginner investors.
Like Mr. Syrios he knows all aspects.. but so many on BP simply dont and its all blue sky until it is not :)
They're not prepared to control the risks, and they rationalize their deals...then can't figure out why they ran into problems. In the end, they don't really understand what a plan is, what goals are, and how they are related. They're just not prepared.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes5y
I use both.
Plain vanilla medium value bankable asset? Leverage.
Odd, low, non-bankable, quick close for a discount? Cash.
Leverage is NOT 5:1. It's 4:1 unless you have that majic lender that doesn't charge.
My cash closing costs avg $417. Leverage $5417.
- Real Estate Broker · Pueblo, CO · Member since 2013 · 366 posts · 303 votes5y
It's funny how this question comes up all the time on here. It's almost as if borrowing money and being in debt owing someone makes you feel icky... consider the banks you're borrowing from have the biggest buildings across every city.
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