First deal..pay cash or finance?

17 Replies

Made our first deal on a buy and hold. Is it better to pay cash or finance personally or pay cash or finance through our business?

If your long-term plan is to buy additional properties and you can finance this deal then finance it by all means. This will increase your cash on cash return. I bought my initial investments in cash which I wish I would have financed. Use as much leverage as as it make sense to your personal finances (and comfortable for you without losing sleep) to increase your return.

Leverage is the first rule of investing, should be your first option. Pay cash as a absolute last resort with a plan to finance asap.

thanks for the quick replies. Anyone have input on the "personal versus business" portion of the question?

@Bob Houston
You can typically get better financing terms personally (aka Fannie Freddie loans) but then you lose the asset protection of your business, assuming it’s an LLC.

If you can find a portfolio lender you might be able to get pretty good loans to your business.

I'm on the other side of the coin. I pay cash for all of my properties up front. Why add the stress of a mortgage and dealing with banks when you don't have to? I save the rent money and put it towards the next purchase, but then again, I buy cheap houses compared to most people. 

Curious to hear thoughts on the advantages of cash purchases. I always thought they would be the preferred method given the speed of closing and appeal to sellers (less hoops to jump through, less likely for deal to fall through, etc). 

My experience with cash offers has always resulted in, what I feel, lower offers to be accepted.

@Derek E. When financing is not a option your ROI is usually minimal. This is one of the reasons low value properties are a much slower path to wealth growth. Obviously not a race however as you grow having hundreds of thousands in dead equity is a major detriment to both growth and income. You will at some point need to consider leveraging your smaller investments into a larger investment to maximise your ROI.

Having said that if your goal is only to have cash flow from a couple of small properties is your goal then ROI is probably not a high priority.

Originally posted by @Thomas S. :

@Derek E. When financing is not a option your ROI is usually minimal. This is one of the reasons low value properties are a much slower path to wealth growth. Obviously not a race however as you grow having hundreds of thousands in dead equity is a major detriment to both growth and income. You will at some point need to consider leveraging your smaller investments into a larger investment to maximise your ROI.

Having said that if your goal is only to have cash flow from a couple of small properties is your goal then ROI is probably not a high priority.

Yes I am well aware. I currently have 5 SFHs that are cheap but cash flow great. I plan to get up to around 10-15 and then leverage them into a Multi Unit of some sort. 

I don't have the credit, available DTI, or W2 income to invest in high dollar properties, and my area is currently loaded with cheap houses that cash flow great.

I understand you think your way is the only way, but there are other ways to invest. While you might be effected by another 2008, nothing will change for me. It all depends on each persons situation and local market (if they want to invest locally which most would prefer.)

Originally posted by @Alex Huang :

Curious to hear thoughts on the advantages of cash purchases. I always thought they would be the preferred method given the speed of closing and appeal to sellers (less hoops to jump through, less likely for deal to fall through, etc). 

My experience with cash offers has always resulted in, what I feel, lower offers to be accepted.

Alex, 

Throughout the MidWest our areas are loaded with cheap houses (less than $40k) and offer great cash flow. Some of these people think you have to be fully leveraged to invest. I would argue that equity is nothing more than false wealth. All these guys who are leveraged are going to suffer when another 2008 crash comes upon us. It's just a matter of time.

I get houses that return 30-40%, and I have had my eye on Dayton for a while. If my market ever dries up I would most likely invest there. You being local there, you are sitting on a gold mine imo. Feel free to PM if you would like to do so.

Paying cash allows you to low ball offers, it is appealing to not have to jump through all the hoops with a bank, and I have no stress as to getting it rented and making that mortgage payment. I got into this business to eliminate stress not create it. Paying cash allows me to invest relatively stress free. 

I handle everything myself by doing my own title searches, write up my own deeds, and arrange meeting with a notary, pay with cashiers check, go to courthouse and record everything.

Why pay $15k down for something to create a mortgage payment when I can pay $15k all in and rent the house out for $600/month for the rest of eternity. 

Last two houses I bought were for $7,000 and yes they are able to be lived in and rented out. One already has a long term tenant for $450/month. Dayton is LOADED with houses like this. You being from the area you know which streets to avoid etc.

Look for houses under $20k/cash that need nothing more that flooring, paint, light fixtures, then do all that work yourself and on to the next one. 

Your first deal huh.

The people who come on the forum stressing and wondering what to do about tenants being late with the rent are usually the ones who bought their properties with a mortgage. 

@Derek E.

Curious, how long have you had those cheaper properties for?  I can imagine cash flow is great obviously, but what has your maintenance and vacancy expenses been like?  Are they in relatively higher crime areas, or have you been able to find houses at that price point that are also in lower crime areas?

Originally posted by @Tae C. :

@Derek E.

Curious, how long have you had those cheaper properties for?  I can imagine cash flow is great obviously, but what has your maintenance and vacancy expenses been like?  Are they in relatively higher crime areas, or have you been able to find houses at that price point that are also in lower crime areas?

First one we bought almost 3 years ago. Also keep in mind that I am just now trying my hand at Sec 8 and started growing faster this year. The two houses for $7,000 are the ones I'm trying out with HUD. The one is in a decent area that is up and coming. The other one is in a crappy area, has been a bit of a head ache thus far, but its a great house. I just need to get it fixed up and rented.

Having said that, for the houses I have spent in the price ranges of $14,000-$30,000 things have been great. I look for houses close to schools, day care centers, corner lots, fenced in lots, close to commercial properties, etc etc. 

My tenants have been great, and typical blue collar worker. Teachers Aide, CNAs, laborer, etc. 

@Bob Houston  Maybe the cash is king, but you want to put all your money in one basket? Financing the properties has an immense advantage in taxes, plus you can benefit from having the lowest rates in history. Why buy a single house, if you buy 3 or 4 with that same money? Now guess what happens with your cash flow and your fixed costs?

@Bob Houston we purchase all of our properties with hard money, then rehab them and immediately refinance them into conventional loans in our own name to get the best terms. There are much better and cheaper ways to get asset protection than an LLC, consult an attorney and Insurance agent. Once you and your wife both have the 10 conventional loans each allowed by conventional lenders, then you'd want to go to the higher rate, lower amortization of portfolio products, like commercial lending.

Originally posted by @Derek E.:
Originally posted by @Tae C.:

@Derek E.

Curious, how long have you had those cheaper properties for?  I can imagine cash flow is great obviously, but what has your maintenance and vacancy expenses been like?  Are they in relatively higher crime areas, or have you been able to find houses at that price point that are also in lower crime areas?

First one we bought almost 3 years ago. Also keep in mind that I am just now trying my hand at Sec 8 and started growing faster this year. The two houses for $7,000 are the ones I'm trying out with HUD. The one is in a decent area that is up and coming. The other one is in a crappy area, has been a bit of a head ache thus far, but its a great house. I just need to get it fixed up and rented.

Having said that, for the houses I have spent in the price ranges of $14,000-$30,000 things have been great. I look for houses close to schools, day care centers, corner lots, fenced in lots, close to commercial properties, etc etc. 

My tenants have been great, and typical blue collar worker. Teachers Aide, CNAs, laborer, etc. 

$7000 for a rental property to add to your portfolio is quite a deal.  Are you self-managing or do you have a hired property management in place?  I think I got a bit mixed up earlier - did you say you are getting these houses in the Dayton market?  I was just recently up there for a conference for the first time and was trying to get a gauge on the area.  I was staying right next to University of Dayton I believe (or is it U of Ohio-Dayton?), and I can see how at least that area would be a great rental area with the student life.

Originally posted by @Tae C. :
Originally posted by @Derek E.:
Originally posted by @Tae C.:

@Derek E.

Curious, how long have you had those cheaper properties for?  I can imagine cash flow is great obviously, but what has your maintenance and vacancy expenses been like?  Are they in relatively higher crime areas, or have you been able to find houses at that price point that are also in lower crime areas?

First one we bought almost 3 years ago. Also keep in mind that I am just now trying my hand at Sec 8 and started growing faster this year. The two houses for $7,000 are the ones I'm trying out with HUD. The one is in a decent area that is up and coming. The other one is in a crappy area, has been a bit of a head ache thus far, but its a great house. I just need to get it fixed up and rented.

Having said that, for the houses I have spent in the price ranges of $14,000-$30,000 things have been great. I look for houses close to schools, day care centers, corner lots, fenced in lots, close to commercial properties, etc etc. 

My tenants have been great, and typical blue collar worker. Teachers Aide, CNAs, laborer, etc. 

$7000 for a rental property to add to your portfolio is quite a deal.  Are you self-managing or do you have a hired property management in place?  I think I got a bit mixed up earlier - did you say you are getting these houses in the Dayton market?  I was just recently up there for a conference for the first time and was trying to get a gauge on the area.  I was staying right next to University of Dayton I believe (or is it U of Ohio-Dayton?), and I can see how at least that area would be a great rental area with the student life.

Yes it was a great deal. I self-manage my properties. I am not currently buying in the Dayton area, but I have been watching the Dayton area for quite some time. If I were to invest anywhere outside of my local area that is where I would personally invest. It is the University of Dayton, they have done a lot of re-vitalization down around the river and stuff too. Best part about Dayton is you can find cheap houses that will rent for a good amount.

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