Should I pay cash or finance?
Should I Buy with Cash or Get a Loan?
It's an age-old question. Should you write a check or get a loan? Well, first off you should determine, do you have the ability to pay cash for the property or is it going to take all the money you have? Depending on what market you're in, such as Cleveland. In the Cleveland market, it's very possible to pay cash for houses because a lot of homes are less than the price of a used car which makes it very nice with great high rates of return. However, in a lot of parts of the country, it's very expensive to buy investment properties, and it's going to require a bank loan. But, with all things equal, let's just assume here for a second, that you have the ability to pay cash and now you are weighing the options.
Well, let's begin by saying just because you're paying cash does not mean you cannot refinance it, and pull all of your money out later on. Here's why you want to do that, because money loves speed, and so do sellers. So, I can tell you, one of my secrets is we're able to buy great deals on properties because we are able to close without financing. That is a great position to be in if you're a seller and you have another “what if” in the deal. What if might be the underwriter? What if it might be the appraisal? What if might be the inspection report? Those are all things that can slow the deal down or kill the deal. When you have an all-cash offer from someone that understands the real estate investment game and they put earnest money down that can significantly lower the cost. It's also going to speed up the process and lower the escrow period for the seller so it works out for both and then you can always refinance later.
So now let's say is it worth it to refinance or financing at the beginning if you have to? It can be because you get to stretch your dollar further, and there are great tax benefits to financing a property. When you're financing a property, you get to write the interest off plus, if you can get all of your money back out of that property. You can take that money and go buy another one and keep recasting it over and over and over again which works out nicely if you're trying to build a large portfolio. However, when the market shifts, if you're buried in debt, it can be a very scary place to be. In ’08, it was a very scary thing to have a bunch of money out on stuff, because things weren't worth what you had out on them.
Not to say it is going to happen again, not saying that happens in all markets, but it's something that you do have to consider. Some of the most successful investors are the old immigrants that came over from another country, barely spoke the language, worked like crazy, lived conservatively, and bought investment properties and owned them outright, and had no debt. The cash hold was tremendous when you can do that if you're buying the right properties.
Are you trying to grow quickly or grow slowly? Growing, either way is great. It's great not to carry a bunch of debt. It's great to try to buy the properties inexpensively enough that cash is an option. If you do have to borrow against them, it's really to borrow against them to buy another property, to pay it off quickly, and have very short amortization periods. That's just my opinion. Am I one of the most successful guys out there that own big commercial properties, such as malls and thousand-unit apartment complexes? Of course, I can own those forecasters. They are all going to have a lot of debt on them and borrowing your way to millions is absolutely a great strategy if you can stomach the stress of market turns.
So, hope that wasn't too much confusion there, but that's my opinion. If you can buy cash and you're trying to grow slow, then you could be better off. But if you're going to try to grow big and be a monstrosity, and you can deal with the stress of the debt during the lean times, then go ahead and borrow away. I'm Rob, The House Guy and nothing works unless you do.