Would you take the more expensive money if it let you do the better deal?

Question

I had an interesting conversation with an investor recently about something I think a lot of people wrestle with. He had enough cash to put significantly more money into a deal and reduce his borrowing costs.

But his response was basically, “Then what happens when the next deal shows up?”

That stuck with me.

Putting more cash down makes the current deal cheaper. Keeping that cash available gives you more flexibility for the next acquisition, rehab surprises, carrying costs, or whatever else comes up.

Obviously, expensive money can destroy a thin deal, so I'm not saying leverage is automatically better.

But for investors who are actively doing multiple projects:

Would you rather put more of your own cash into a deal to reduce financing costs, or pay more for the money and keep your cash available for the next opportunity?

Curious where experienced flippers and BRRRR investors draw that line.

Divin Kanyama · Answer

@Frankie Vozzi As an investor, I protect liquidity first. I would rather pay a little more for capital than have all my cash tied up when a rehab runs over budget, a refinance gets delayed, or the next strong deal appears. The key is making sure the debt cost does not turn a good deal into a thin one.

My rule is to keep enough cash for the full rehab, carrying costs, a solid contingency, and reserves across the portfolio. Once those are covered, I compare the guaranteed interest savings from putting more down with the realistic return and timing of another opportunity.

I use leverage to increase velocity, not to create risk. If the financing makes the deal too tight, I bring in more cash or walk away. If the deal still cash-flows and my reserves remain intact, I keep the liquidity for the next project.

Warren Mah · Answer

As an investor I always prefer to stay more liquid and keep as much cash reserves as possible. As for the higher costs I simply factor that into my deal analysis to ensure that it will pencil even if I am paying more in lender fees. What the other investor said is exactly how I feel, the opportunity cost of not having the liquid capital available for the next deal will always greatly outweigh the slightly higher fees spent on the current deal.

Steve Waller · Answer

The question is usually framed as a rate comparison and that is what makes it hard to answer. Price the incremental dollars instead and it becomes arithmetic.

Say a 200,000 purchase, six-month hold. At 70% of cost you borrow 140,000 at, call it, 10.5% and two points: 7,350 of interest and 2,800 in points, 10,150 all in, and 60,000 of your cash is in the deal. At 90% of cost you borrow 180,000 at 11.5% and three points: 10,350 of interest and 5,400 in points, 15,750 all in, and 20,000 of your cash is in the deal.

The higher leverage cost you 5,600 and freed 40,000 for six months. That is 14% for the half year, about 28% annualized, on the incremental money. Notice it is nowhere near the one point of rate difference, because the extra rate and the extra point are charged on the whole loan, not on the 40,000 you actually gained.

So the real question is not whether you would pay more for flexibility. It is whether that 40,000 earns better than 28% annualized where it is going. On a second flip it usually does, comfortably. Sitting in the account waiting for a deal that has not shown up yet, it does not, and you have paid a certain cost for an uncertain option. My rule of thumb from the lending side is that the higher leverage is worth it when the next deal is identified, not when it is hypothetical. Three months of idle cash eats the whole argument.

The failure I see most often is the version nobody in this thread has mentioned: taking maximum leverage on deal one and then using the freed cash as the down payment on deal two. Now both projects are at max leverage with no contingency behind either of them, and one bad inspection or one slow permit stalls both at the same time. Liquidity you have already deployed is not liquidity. If the freed cash becomes another down payment rather than a reserve, you did not buy flexibility, you bought a second obligation with the same dollars.

Diana Khan · Answer

@Frankie Vozzi, I’ve seen investors focus so much on the rate that they miss what the rest of the loan is asking them to give up. If I’m considering more expensive money, I’m looking at the full deal. How much cash do I keep available, how flexible are the draw terms, what happens if the project takes longer, are there extension fees, and what happens if I want to pay the loan off early?

For me, paying a little more can make sense if it protects enough cash to handle surprises and still leaves room for the next good opportunity. But I would not pay more just for the sake of keeping cash. The deal still has to work after the higher financing cost, and the loan terms still need to give me enough flexibility if the project does not go exactly as planned.

I’d be glad to stay connected, @Frankie Vozzi. I always enjoy comparing notes with people who look at the whole financing structure, not just the rate.

Erik Estrada · Answer

Liquidity comes at a price.

Stacy Raskin · Answer

Most investors I encounter want to use mortgages even when they have cash to scale more quickly and to not have their money tied up in one real estate deal or fewer deals.

Mike Grudzien · Answer

It's all in the numbers.  And planning ahead...

Would you take the more expensive money if it let you do the better deal?

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