Buying house with cash vs using loan (here me out)

Contractor · South Vienna, OH · Member since 2019 · 41 posts · 22 votes

So I’m currently in the market to purchase my first rental property, and I’ve been brainstorming for good ideas and I remember Dave Ramsey saying that he buys all his properties with cash which allows him to offer way less than market value and people are more willing to accept because the closing is so much quicker and easier.

So if I could borrow the cash from my parents to purchase out right then turn around and refinance after the deal is closed then give them the money back would that be a smarter option than obtaining the loan before I make the deal?

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Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

Except that DR isn't right. Those properties where cash gets you a lower asking price are few.

Now the real bad news. The total cost of a rental property to you is what comes out of your pocket...as in your cash.

Assuming you have $100k to spend. Answer the following 3 questions
Question #1: You have two options to make an offer on a property (or properties) where the AP is $100k. Which use of funds option costs you more money?
A - Pay all cash and get the AP down to $90k. Cash Flow = $10k/year

B - Pay using 20% down payment. Cash Flow = $20k/year

Question #2: Which use if funds option returns your cost the fastest?

Question #3: Which use of funds option is the most profitable?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Except that DR isn't right. Those properties where cash gets you a lower asking price are few.
Now the real bad news. The total cost of a rental property to you is what comes out of your pocket...as in your cash.
Assuming you have $100k to spend. Answer the following 3 questions
Question #1: You have two options to make an offer on a property (or properties) where the AP is $100k. Which use of funds option costs you more money?
A - Pay all cash and get the AP down to $90k. Cash Flow = $10k/year
B - Pay using 20% down payment. Cash Flow = $20k/year

Question #2: Which use if funds option returns your cost the fastest?

Question #3: Which use of funds option is the most profitable?

8 Reply
Chris Coleman
Rental Property Investor · Washington, DC · Member since 2015 · 429 posts · 393 votes
6y
@Nick Cooper
There is a major difference between destructive debt and smart leverage. DR teaches and preaches against destructive debt, which is good and everyone should adhere.
But if you want to be successful and grow as a real estate investor, then you need to make it a goal to learn and use smart leverage, which Js what @Joe Villeneuve is describing.
You should do the analysis to answer the questions from @Joe Villeneuve. You’ll see the power of smart leverage.
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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
6y
Cash certainly reduces loan costs and hassles. My avg savings closing with cash (appraisal fee, lender's insurance, processing, doc prep, origination fees) is $3400. Not to mention skipping 45 days of hassles and risk of it not funding in the end.

if your goal is to BRRSR (dont forget seasoning) , I'd by with cash to reduce fee redundancy.

Cash can also get me a bigger discount, but not always. My last few have needed too many repairs to qualify for a loan, were off market and had 0 competition so cash increased my equity capture at the buy significantly.

Having cash and borrowing from parents are not the same. I like to buy commercial and odd or fixer properties with cash, but wouldn't borrow from my parents.

Dave talks about paying cash for everything, yes. (I don't do all RE with cash) What does he say about borrowing from family, or anyone? Give him a call and ask. Get the scoop on how it will change Thanksgiving. LOL
6 Reply
Nick Cooper
OP
Contractor · South Vienna, OH · Member since 2019 · 41 posts · 22 votes
6y
my plan is to cashflow using the banks money. But the question I was asking is instead of using my loan to purchase the property from the beginning, would it be better to borrow from my parents, purchase and close with cash. Then immediately get a loan by refinancing the property, repay my parents with whatever I get from the loan plus money from my own pocket to equal up to the amount that they gave me (assuming you can only get 70% of property value).
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Originally posted by @Nick Cooper:
my plan is to cashflow using the banks money. But the question I was asking is instead of using my loan to purchase the property from the beginning, would it be better to borrow from my parents, purchase and close with cash. Then immediately get a loan by refinancing the property, repay my parents with whatever I get from the loan plus money from my own pocket to equal up to the amount that they gave me (assuming you can only get 70% of property value).

How is this better?
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Nick Cooper
OP
Contractor · South Vienna, OH · Member since 2019 · 41 posts · 22 votes
6y
@Joe Villeneuve
That’s what I’m here for to ask?
I was just assuming you could possibly close easier and faster and possibly get the property for a bit less when the seller knows that you will be able to close sooner. Then In the end id still have the same mortgage, same out of pocket cash, but had paid less for the property plus closed faster.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
The attraction to a seller of the possibility of closing sooner isn't going to save you enough to offset double closing costs, the cost of the loan from your parents, etc...
See my questions. Those answers are more valuable than this answer.
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Pete Barrow
Investor · Indianapolis, IN · Member since 2017 · 145 posts · 158 votes
6y
It depends on what you buy. If you buy a listed house through a broker you are unlikely to save much by paying cash. If you buy through a wholesaler, you might save substantial money but will probably have to come up with quick cash. If you dig up your own deal from a homeowner who wants to sell a possibly distressed house quickly, you can get a deep discount by having cash and being able to close quickly.

The saying is, "You make the money when you buy." I don't see how it's possible to buy houses at retail, pay a contractor to rehab them, pay for management, and make any money.
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Jim K.
Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
6y
@Nick Cooper

For us, cash make the biggest difference for fixer properties, as @Steve Vaughan has pointed out. This is what we invest in. Cash makes by far the biggest differences for properties that are just south of the habitability line, properties that very clearly need rehab before a tenant can be moved in, the sorts of properties that for one reason or another a bank will not loan money on.

Even more important than cash in these cases is making your offer to buy with no home inspection or waiting period and a significant earnest money offer. What's called a "straight cash and no contingencies" offer. If the title clears, the sale goes through, the buyer puts himself in a position where s/he cannot back out when the seller signs on the dotted line and takes the earnest money. That's one of the ways experienced flippers and local BRRRR guys with their own ways of getting things done buy single-family properties with after-repair values that are well above the property's purchase price.

I mention the above only for the benefit of other people reading this. This is a high-risk investment strategy that only experienced investors, ideally residential renovation specialists with years of working on the sorts of properties they're trying to buy this way, should think about. This is your first rental property, Nick. I don't think this is the kind of strategy you should be looking at right now.

As I understand things, you should you use the bank's money here. That way, if something goes sideways and you can't come up with the money to pay them back, you can talk to your parents and get a loan from them and save your credit. Your parents' money is best utilized as a source of peace of mind, not funding for your deals.

My parents are dead and in any case, they never had any money to spare. But I have a friend who is also a private lender, and he's always ready to loan me up to $150K at 12.5%. I do not go to him when I need money for a new deal. I go to him if everything goes wrong on a deal and it's either liquidate assets or pay his fee. If I were you, I would treat my parents the same way and pay them the same kind of interest if I every utilized money from them.
1 Reply
Clifford C Toth
Member since 2019 · 16 posts · 3 votes
6y
@Nick Cooper my experience shows that if you pay cash and close the deal then go to mortgage the property your cost will be higher. Banks charge more for that type of funding.
Do your own research first.
0 Reply
Charlotte Dunford
Investor · Johns Creek, GA · Member since 2017 · 463 posts · 488 votes
6y
@Nick Cooper I disagree with Dave Ramsey. Always use leverage. Remember that the more cash you put in, the lower your cash on cash is it's just Maths.
2 Reply
Al Pat
Rental Property Investor · Atlanta, GA · Member since 2016 · 325 posts · 253 votes
6y
@Nick Cooper I advise against doing that. When you borrow money and do closing, you will pay closing fee, anywhere from $3000 to $7000. Then when you refinance it, obviously seasoning period unless you are doing delayed financing then you once again pay the closing fee. Both are tax deductible but you are still out of that money. Dave Ramsey model works well for primary home but not for investment or rental business. In this business you need to look at the cash on cash return.
3 Reply
Jeff Cichocki
Lender · All 50 States · Member since 2015 · 401 posts · 250 votes
6y
@Nick Cooper,
Everyone else's comments are correct. There's really not much benefit financially to paying cash and then refinancing. It very well may end up costing you more.
But, here's a question no one else has asked... What if you can't refinance the way you think you can? If you go to refinance and there is no loan in place, it's a cash-out refi. The rules are very different in those scenarios. There are seasoning requirements, liquid asset requirements, cash flow requirements, credit score requirements, etc.
Here's a few questions about your parent... What if something in your life changes before you get to refi? How will that affect your parents? How long are your parents willing to lend you the money? Do they need it back by a certain time? What if you don't meet that timeline?
Borrowing from family & friends is great. But few actually think about the consequences of what will happen if/when something goes wrong. I've yet to meet an investor who will answer more than 0 to the following question...

How many investors (including yourself) do you know of or have heard of that have gone out, negotiated what they believe to be the deal of a lifetime, get it under contract, escrow open, deposits made, contractors lined up and chomping at the bit to get started and drool running down their chins who went home to tell their significant other that they can't wait to lose a ton of money in that deal?
The question is a very real question (albeit a bit sarcastic). Borrowers/investors rarely ever ask themselves any questions remotely close to this. Why, because every single one of us thinks that every deal we want to by is a good deal. That's why we want to buy it. Except, things happen. Deals go bad. Deals have hiccups. Unexpected things happen all the time.
So... the real question is... Do your parents understand the real risks or are they just offering to help because you are their kid?
Before you make a decision as to which way to go, you should have a deep meaningful financial discussion with them about the risks. If they still agree to do the deal with you, then go for whatever works best financially for both you and them.
Good luck!
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Originally posted by @Al Pat:
@Nick Cooper I advise against doing that. When you borrow money and do closing, you will pay closing fee, anywhere from $3000 to $7000. Then when you refinance it, obviously seasoning period unless you are doing delayed financing then you once again pay the closing fee. Both are tax deductible but you are still out of that money. Dave Ramsey model works well for primary home but not for investment or rental business. In this business you need to look at the cash on cash return.

Well said.
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Tim DelaneyPro Member
Buffalo, NY · Member since 2018 · 790 posts · 530 votes
6y
Nick I think many people got caught on your subject line and didn't actually read your question. My understanding is that you are asking if you should borrow the cash from your parents to make the acquisition and then refinance with a bank and pay them back as soon as possible. You are not really asking if you should buy with cash or a loan.
That said, it isn't a horrible strategy, but I don't think it is going to be as lucrative as you think. The seller probably isn't going to reduce their price enough for you to cover the double closing (once for the purchase and once for the refinancing). Even if your parents don't file a mortgage there will be expenses for you at both transactions. I would recommend you thoroughly investigate those costs (including some interest to your parents for the period you are using their money) to see how much of a discount on a house you would need to make it worthwhile.
Once you do that, you can make two offers on a property, one "cash" for that lower price you determined would still save your money (plus take a bit more off of that to make it worth your hassle) and one with traditional financing. If the seller likes the idea of the potential for a quicker closing they may take that discounted price. Just remember when you do this, you are waiving your financing condition, so once the contract is approved by lawyers and you approve your home inspection you will have to close or forfeit your deposit.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@Nick Cooper in many cases a cash offer will get a lower offer accepted. Wholesalers based their entire business model off this principal and buy properties for as little as half or less their value. Even when making offers for properties on the MLS, a cash offer is stronger compared to an offer continent on financing.
The question is not whether a cash offer gives you advantage, but rather whether the advantage is enough to offset the extra closing costs.
You are not really paying double closing costs, because some closing costs are bank fees. Even appraisal is only required because of the bank.
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Nick Cooper
OP
Contractor · South Vienna, OH · Member since 2019 · 41 posts · 22 votes
6y
@Tim Delaney just the answer I was looking for 👍 thanks for the wise answer
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Tim DelaneyPro Member
Buffalo, NY · Member since 2018 · 790 posts · 530 votes
6y
Anytime
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Nicholas Dinis
Rental Property Investor · Member since 2018 · 25 posts · 18 votes
6y
@Nick Cooper
Definitely a great idea if you can refinance out the cash. I wouldn’t want to do it if I couldn’t pull my money back out though. You can get 4 similar properties through Mortgages with the money it costs to buy 1 house. 20% of the cost for 60% of the income
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Robert Tucker
Lender · Denver, CO · Member since 2019 · 37 posts · 10 votes
6y
@Nick Cooper
I have done both. I started with all cash, now I use financing.
1 Reply
Guifre Mora
Lender · San Diego, CA · Member since 2019 · 874 posts · 355 votes
6y
Originally posted by @Nick Cooper:
So I’m currently in the market to purchase my first rental property, and I’ve been brainstorming for good ideas and I remember Dave Ramsey saying that he buys all his properties with cash which allows him to offer way less than market value and people are more willing to accept because the closing is so much quicker and easier.
So if I could borrow the cash from my parents to purchase out right then turn around and refinance after the deal is closed then give them the money back would that be a smarter option than obtaining the loan before I make the deal?

If you have the cash pay cash. Refinance at your leisure. No seasoning required. Yes, you will need to keep equity in the deal when you refi. Up to 20%.

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Ryan KeeslarPro Member
Rental Property Investor · Mary Esther, FL · Member since 2019 · 29 posts · 11 votes
6y
@Nick Cooper there is a 6 month period where you cant refi however you can always do a heloc to repay your parents without all of the closing fees
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Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
6y
Originally posted by @Nick Cooper:
So I’m currently in the market to purchase my first rental property, and I’ve been brainstorming for good ideas and I remember Dave Ramsey saying that he buys all his properties with cash which allows him to offer way less than market value and people are more willing to accept because the closing is so much quicker and easier.
So if I could borrow the cash from my parents to purchase out right then turn around and refinance after the deal is closed then give them the money back would that be a smarter option than obtaining the loan before I make the deal?

Delayed financing has slightly higher rates, but other than that, the benefit is that your offer will be a lot more attractive than one that is contingent on financing. There is no double closing cost if you choose this route. Your offer will also allow for a much shorter escrow period.....thus you will be able to make a lower offer. I bought some homes and duplexes in Ohio full cash that were substantially below the list price with the intent of doing delayed financing. But the main reason I did it was because I want to act as quickly as possible when I find a property with very good numbers.

And, in case you're interested, I ultimately decided not to do delayed financing. I'm keeping all my Midwest holdings debt-free....not because delayed financing isn't an effective tool. It had more to do with the small size of the loans that would be involved. I had the option to do a portfolio loan, but the rates weren't that attractive to me.

Also, it's quite a thing to be able to close within a week on a house with just a few hundred bucks in fees.... I love the Midwest! Go Buckeyes!
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Remington LymanBusiness Member
Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
6y
@Tony Kim go bucks!
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Brock Waters
Specialist · Sarasota, FL · Member since 2020 · 3 posts · 1 vote
6y
@Nick Cooper I’m interested in this answer too! I’m in a similar position.
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