Cash or Bank Financing (loan)?

Question

I'm going back and forth on either using a conventional bank loan or saving enough capital to eventually buy a property in cash (and hopefully utilizing the BRRRR Method). I understand there are benefits to both. What would people recommend and why?

Mark Millich · Answer

@Brandon Nicholls @Brandon Roof Thank you to you both. This is great feedback!

Brandon Roof · Answer

Unfortunately, this is one of the many questions that receives "it depends" as a response.

A conventional loan will allow you to utilize cash for the down payment and possible immediate renovations, leaving the remainder of your cash on the sidelines, ready to be deployed for the down payment on your next property.

With cash, it may set you apart from competition when putting in an all cash offer, allowing the transaction to close quickly.  You'll also get a better overall return on the property in the long run and maximize cash flow, but your cash is now tied up in the single investment and can't be used elsewhere.  That is, unless you BRRRR or obtain a HELOC.

BRRRR, if executed correctly, obviously allows you to recoup most, if not all the cash in the deal to redeploy, thus being more effective than a conventional loan when trying to scale, as you typical leave 20%-30% of your cash behind.  This is easier said than done though as you need to balance the amount of work you put into the property in order to get the desired appraisal.  Not only that, but you have to find a lender that will provide a loan on ARV and not 70%-80% of what you have put in or the appraised value.

A HELOC allows you to go the cash route, obtain a HELOC and use the cash again to buy the next property.  The drawbacks here are that you may only be provided a line of credit for 70%-80% of the home's value, leaving some money still in the previous deal, and the interest rate on a HELOC may very well be higher than a conventional loan.

So, to address your initial question, you really need to ask yourself what you hope to accomplish.  Some people don't like the leverage and would prefer to pay in cash while others want to lever up and scale.  I don't believe there is any one right answer, but hopefully you will find a method that best suites you ambitions and risk appetite.

Brandon Nicholls · Answer

Hey Mark, I think it has to do with your personal situation. I'd run the numbers on the property your looking at or one you would be considering and see what everything comes out to. Can you pay off the conventional loan if your vacant the entire time? How long would it take to save up for that property using your own funds? What would my APR be on the house I'm looking at and can those payments be made with relative ease. If you can pay off a conventional loan just fine and the loan process would take less time than if you were to save the money yourself than id say go conventional to save your most precious resource TIME. If you run a nightmare situation for your property using a conventional loan (termites come, toilets break etc.) Will everything be okay? if so conventional.

All in all make sure you could afford everything if anything goes wrong including your mortgage payments. If that holds to be true go conventional that's my view on the question. Hope it helps!