New purchase- pay cash or finance?

Question

Looking for advise. Considering purchasing a SFR for 165K. It needs about 40K in rehab and would then sell for 270K. Does it make more sense to (option one) pay cash and finance later? Or (option two) to get a loan now with 25% down and refinance later? I am not necessarily going to sell after as it would be a good cash flowing rental but would like to take the equity out. If I take a loan now and then refinance later, I would be paying lender fees twice?? right. But if I pay all cash now and finance in 6 months or so, I'm told by one lender that the rates would be higher and require 30% down.

Any help is appreciated.

Maurice D. · Answer

@James Mc Ree examples are great.  the opportunity here is by financing you can use that 110k and buy a second flip with x% down and 40-50k to fix. (doing two flips at once). By buying cash you tie up that money, and lenders typically require 6 months of seasoning so it slows you down.

James Mc Ree · Answer

It looks like either way you are refinancing later, so whatever "later" brings is what you will have. That is likely higher rates. I've never heard of a minimum down payment requirement of 30% in general, but lenders do give better rates with larger down payments.

This is really a math problem for you. If you buy for $165k cash + $40k rehab + closing costs >= $205k. You will save on appraisal cost, lender fees and interest. If you finance with 25% down, you invest ~$46k + $40k + lender fees and closing costs >= $86k. That leaves you with about $100k in your pocket pre-refinance. Your refinance either way will cost about the same. You may be able to save on title insurance if your rehab is a short duration and your insurer is willing to keep the insurance open during that time.

The other consideration is opportunity cost. Think about what plans you have for that $100k that won't happen in this timeframe if you buy with cash.