First rental property

18 Replies

I'm getting ready to buy my first property. Is it better to pay cash even if it will take almost all my cash or is it better to put say 20 to 30 percent down and finance the rest just to have some back for a rainy day?

What I was looking at is a place that currently has a tenant in place so I guess it would be concidered turnkey.

@Mark Alphonse  

I tend to prefer to finance. You have to with your own comfort levels and consider external factors. As my lender says: 'Money is cheap' right now. Interest rates are incredibly low. Go fixed, go 30 year. Take the rest of the money, buy another property or do something else (investing) with it. 

With the spread between 20 & 30 you will get much better terms as you head toward 30. It's all a matter of personal preference. If you're having trouble deciding, split the difference, and go with 25% down. I use this technique often when attempting to decide between two investment extremes.

@Mark Alphonse - Congrats on taking the leap!   I tend to agree with @Trevor Ewen .  25% down is a nice, conservative amount of equity to start with...as long as you buy right. (even more important than the type of financing you decide on).   Again - it is really a matter of preference.  You could always finance it and pay it off shortly if you are not comfortable with the debt.  For me, debt on rentals is different than debt on your own personal home. Your renters are paying that interest, not you.  

The cash vs finance question is a tricky one.  Here are some high points that I personally consider:

NEVER BE CASH POOR!  If you can't pay in cash and keep a solid cash reserve, don't pay in cash.

You should get better terms on the sale with a cash offer than with a financed offer.  If your offer is a cash one, low ball the offer.

Once purchased, your returns, as a percent, will be higher if you finance the deal.   

Rates are very favorable for us right now.  I would lock in as many 30 year fixed mortgages as I can.

One option is to buy in cash to get the better terms and then do a cash-out refi.  You always run the risk of not being able to refi, but when this works, you can get most of your cash out within a few months.  If you go this route, get a detailed plan in place with a lender BEFORE you buy in cash.

Happy hunting.

Thanks for the replies. My gut was telling me finance so hopefully I'm on the right track.

Hi there,

I prefer financing using a 30 yr fixed loan.  My lender requires 20% down (25% for 2-4 unit) and I pay .5% more in interest, but I have cash for future purchases sooner!

After the property has been in your possession and rented for some time (1-2 tax returns depending on the lender) then it is considered income instead of a liability.

Kelly

@Mark Alphonse  I agree, financing is the way to make your money go a lot farther.  And rates are currently so low that the borrowed money is cheap.  That said having no debt on a property can be less risky, it just depends on your goals and risk tolerance.

Congrats on your Rental!!

I would agree with other's suggesting that you finance vs. all in with cash. Money is cheap right now...why not borrow someone else's cash? I think it is dependent upon your investment strategies, however I personally would not use "all" of my cash for a property unless it was a tax lien (and that's still a maybe). If it was my rental, I might want some of that cash for reserves on the property.

@Mark Alphonse  

My rule is 20% down.  But, I don't over extend myself.  Meaning if all the properites are vacant, I can personally still pay the mortgages without losing sleep.  Once I hit my target rental number, I'll pay off all the mortgages and get fat.  

@Mark Alphonse

This isn't an easy question to answer because it really depends on what your goals are, how the property will cash flow with and without financing, if you you pay cash- will you still have reserves left, etc. One of the great things about REI is that we have so much flexibility.

Anyway, congrats! The first house is the hardest! 

@Mark Alphonse  

If you forget everything else, do not forget this:  Never underestimate the power of leverage: use it anywhere you find it and it will reduce your 10 days' journey to one.

Good luck

Again thanks for the replies. I was thinking finance but was not sure if there was anything I might be missing.

@Ndy Onyido can you please elaborate? Not sure I get what you are saying but have a feeling I need to understand.

@Mark Alphonse   I say finance and purchase a couple properties. You can obtain financing on properties under $50k and leverage. Max out your cash on cash return! 

Everyone has their own opinion! We personally love to leverage as much as possible when buying the houses! We buy houses that we know has untag potential. Therefore once we tap the potential we have a solid "equity position" without it having to be our own money. This allows us to maximize the number of houses as our plan is maximizing acquisition right now!

Originally posted by @Mark Alphonse :

Again thanks for the replies. I was thinking finance but was not sure if there was anything I might be missing.

@Ndy Onyido can you please elaborate? Not sure I get what you are saying but have a feeling I need to understand.

 Leverage is the art of using borrowed money to make a larger return on an investment than you would be able to do using your own money. Since your using a smaller amount of your money (The down payment of a loan as opposed to buying outright in this case), you'll be able to get a larger return borrowing than you would be able to if you used more of your money on that investment.

Originally posted by @Jeremiah B. :

The cash vs finance question is a tricky one.  Here are some high points that I personally consider:

NEVER BE CASH POOR!  If you can't pay in cash and keep a solid cash reserve, don't pay in cash.

I wrote that down just so you know, great advice!!

@Mark Alphonse 
I like to pay cash but others like to finance. There are lots of variables. What are your long term goals? How many properties do you want to acquire? Do you plan on expanding? The individual deal will make a difference as well. Does it cash flow? Is there plenty of money left to cover expenses? What if your tenant quits paying? There are so many unknowns it is hard to give any advice. If I was going to purchase any property I would first make sure it would pay me to own it. If it passed that test, then I would determine if I wanted to obtain financing or pay cash.

Great thread.  I paid cash for a rental home a few years ago and in hindsight I wish I would have financed.  In fact, I am looking to refinance it now, and use the equity to purchase another home.  I like a common theme we hear on BP "Cash is King" and using that cash for future down payments.

Good Luck

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