Is paying cash for single family rentals a bad idea?

Question

Thomas S. · Answer

To me my cash is worth a minimum 10% return. Buying with cash all you are earning/saving is the present mortgage interest rate.  I would not invest for a return that low.

This is why buying with cash is not a good investment plan. I'll leverage at 5% and earn 10% any day.

Steve Vaughan · Answer

I like buying with cash if an odd or unbankable property for sure.  Another reason might be the price point is so low, it's not cost effective or feasibly possible to get a small loan below like $50k.  Sometimes it's both like an older mobile on land.

I'm keeping my free and clears free and clear for now. With rates rising I'll probably stay that way for a while at least.  I know what it's like to grind through until a til death, I mean mortgage, is finally paid off. The allure of going back into paymemt-ville doesn't really appeal to me. May conflict with my nap schedule.

To not appear a liability target, I've self-encumbered mine with my own generic sounding s-corp.  At first glance they will at least appear leveraged.  Congrats on your succes so far!

Marty Summers · Answer

Thanks Everyone! Yes already have assets in the stock market in 401k' & IRA's.  Problem with that is we are 10 years into a credit bubble and people are sleeping at the wheel again.  This will come down hard again!

I am 47 and need to exit corporate America as fast as possible.  With these purchases we I'll be at 4100 cashflow with buying them up front.  With a total investment of 347k our Total cash on cash return is around 14%....but it's passive and we'll have distinctive tax advantages with Real Estate.

Ned J. · Answer

Yes...its a bad idea if you want to scale up. Unless you have gobs and gobs of cash sitting around, you will quickly run out of cash to buy and reserves to cover expenses etc.

The big advantage of the cash buy is the quick BUY part....... then you have to get some of that cash back out and buy the next one and repeat over and over.

Some smart leveraging is the only way to scale up and get good "passive" cash flow. Paying all cash and then feeling like you have awesome cash flow is an illusion....you just pre-paid your cash flow and are paying yourself back

Jay Strickler · Answer

I have been counseled more than once to always have at least some debt against a property for liability reasons.  If you (or your LLC) get sued, a plaintiff's attorney will see a nice big juicy unencumbered target to go after.

That said, if you do decide to pay cash, you can cross pledge properties and borrow against that unit to buy more.  I go into some of that in this blog post:

https://www.biggerpockets.com/renewsblog/15-year-m...

Good luck

Jay

Curt Smith · Answer

Cap rate, the measure of financial performance in most cities is at most 10% and drops like a rock as purchase price runs above 200k.  Not debating putting money into the market today, but assuming that the next 5 yrs will met the average,  10%-12%, a cash rental doesn't make any sense.  Put your money into the stock market.  Just a fact.

Rentals only peform when "leveraged" 4:1 ie with 80% LTV debt.  Cash on cash, after paying debt service and only considering your cash into the deal, might be 2x the cap rate.  Cap rate is 8%, using debt, you should run 16% cash on cash +/-.

Then considering appreciation, tax benefits of depreciation, debt paydown (on the loan) your total return might be quite high.  2x the cash on cash depending on factors.

If new money today was to go into un-leveraged rentals vs the market, I would suggest the market instead.

The only reasons that I would say new money into rentals would be if you where buying in a low priced, growing jobs, growing appreciation environment.  If you are in a high priced low cap environment, then no choice, put your new $$ into S&P500 ETF.

See my file off my profile, how to buy a bullet proof rental portfolio.  But its of little value if you'll be buying low cap houses.