First time investor. Should I Pay in full or mortgage?

Question

I'm considering buying my first home for rental for 89k and the ARV (at least 2 weeks ago) was between 113k-118k.  It's in a C class neighborhood and current rents are approx 1k.  I could pay for it in full and have enough left over for a 5k renovation (which is all it needs).  I do have a pretty secure job that pays me well so it's not my life savings.  In this covid-19 world, would you guys suggest I pay it in full, have no mortgage, and then HELOC for my next one or put minimal money down and go for a 30yr fixed since rates are so low?  Would really appreciate your opinions.

Annchen Knodt · Answer

Hi @Brent T Galbreath, I think the references here to pulling money out later are referring to doing a cash-out refinance into a conventional loan, which with today's low interest rates provides a fantastic way to secure long-term debt at a very low cost.  Lots of investors use cash-out refinances as part of the BRRR strategy to pull money out after rehabbing and increasing the ARV, but generally need to wait a 6 month seasoning period if the capital they used up front was borrowed somehow (hard money, private money). In your case, if you are using just your own cash, you can take advantage of the "delayed financing exception" to pull cash out and put a mortgage on the property right away.  The Delayed Finance section of this blog post is one place to start to learn more about it.

This approach can be advantageous by allowing you to be more competitive with cash offers and quick closings when you purchase, but a disadvantage is that you have to pay some of the same closing costs again when you refinance (though if you are able to purchase for slightly less with a cash offer it might even out). It can also be a somewhat complicated process so I would recommend talking to your lender before getting started with this strategy.

But if you have the numbers right on your particular deal, it looks like a cash-out refinance could leave you with quite a bit less invested in the property than if you made a down payment on a conventional loan up front. The higher mortgage payment would lower your cash flow but you can run the numbers and see what you think.

In the current environment, I think a consensus is to lock down as much long-term debt as you can, while making sure you have plenty of cash reserves, which sounds like is not an issue for you.  Also keep in mind that mortgage rates, while generally low, are bouncing around quite a bit right now with all the volatility.  This makes the delayed financing option particularly appealing to me - you can purchase the property and then wait for the rates to stabilize in a few months to put your loan on it (I've seen lots of projections that they are likely to bottom out in the summer and stay there for a while).

Another thing to keep in mind in this environment is that you might also want to factor in higher numbers for vacancy, because depending on your tenant market it might be longer before you find someone to move in!

Good luck, sounds like you have a good first deal in the making!

Chris Svendsen · Answer

One, congrats for being in a good financial position.  If I was in your shoes I would put 20 percent down, get a traditional 30 year mortgage since rates are still really low, and keep as much cash as possible to buy more properties if we do hit a downturn in economy.  Also, keep enough cash aside for each property to cover 6 months mortgage payments with no tenants to be safe.  I ran numbers other day to make sure and at this time have enough cash set aside in business to cover all properties mortgage for 12 months just in case I loose all tenants.  Only 3 properties but to me it is important to have some cash aside just in case the worst possible events could happen. Good luck with whatever you do but you are in a good position.  I just wouldn't dump all my cash into one property, use it to get as many properties you can in the changing market.

Joe Villeneuve · Answer

What's the difference between that and just using a mortgage to buy it in the first place...other than the order.

Joe Villeneuve · Answer

Mortgage.  It will only cost you 20% of the Purchase Price at closing...as long as you have positive cash flow.  If you need to pay more the 20% DP in order to get positive CF...don't buy it...it's a bad deal

Account Closed · Answer

traditional. Just look up how it works. And it's repeatable.

Account Closed · Answer

I would actually look into "delayed financing" in your case. You could have a faster closing paying cash, then almost immediately get a mortgage on it and pull your money back out to repeat. If I had that amount of capital liquid I'd try to do it all the time in my market.

Alex Olson · Answer

@Brent T Galbreath I would recommend using at least 20-30% down but not fully leveraged in case you need more cash at another time or want to invest more. You can always pay it off early and put more towards the loan if you wanted to. It is best to do what you feel most comfortable with. On the flip side - you can also pull cash out with a refinance if you do decide to pay all cash. The good news is you have a lot of options. Hope this helps!

Brent T Galbreath · Answer

@Alex Olson when you say if I pay it all in cash I could pull money out in a refinance later; are you saying refinance with a traditional mortgage or HELOC?

Brent T Galbreath · Answer

@Tyrone Jackson by mortgage you’re speaking of a traditional mortgage or HELOC?

First time investor. Should I Pay in full or mortgage?

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