Financing vs All Cash for Buy and Hold?

Question

Hey All,First timer so go easy on me :)We're in a position now to start thinking about moving into real estate through low end buy and hold properties (100k range), but one question that keeps coming up for us is whether to finance or to go all cash. I understand the cash on cash return on financing is going to be higher, but does going all cash to buy a property have anything going for it other than the peace of mind of not having a loan? For instance, does going all cash open up deals that otherwise would be unavailable?

Raymond Wai · Answer

@Jeremiah Ashe @Josane Cumandala @Russell Holmes Thank you for the advice all, looks like I have a lot more to read on!

Russell Holmes · Answer

@Raymond Wai search the forums and podcasts for the BRRRR method. Having cash makes it much easier. Don't base your decision on my summary below, as there are many finite details, however buying with all cash up front vs a hard money loan with short term removes much of the risk. BRRR (Buy, Rehab, Rent, Refinance, Repeat) in a nutshell: find a distressed house in a decent neighborhood for $60-70k that needs a lot of work but could be worth $150k when rehabbed fully (after repair value, or ARV). With cash you can buy one in too rough of shape for a bank financed buyer, but be sure to have expert opinions on the scope of work needed. Spend $30-40k on a new roof, HVAC, plumbing and electrical repairs if needed, flooring, paint, kitchen, baths, etc. When done you'd have about $100,000k invested into a house worth $150k that can rent for $1500/mo. (all hypothetical numbers, you must run the numbers on each property to see if it would be a BRRRR candidate). Since you've paid cash, your holding costs are low, so you could keep most of the cash flow after setting aside reserves. However, you can go to a lender and refinance your $150,000 property, often times pulling out 70-75% of the appraised value on a 30 year mortgage. You'll have 25-30% equity, a few hundred in cash flow, and $105,000-$112,500, minus closing costs, back in your pocket to do it again. If pulling 75% equity out makes the margins too thin for your comfort, leave some money in it and pull out 60% equity or something. If you recycle your cash flow from the first BRRRR property into the next, it can grow even faster.

Josane Cumandala · Answer

Paying all cash only opens you up to deal that a typical bank would not lend on. The only reason a bank would have not to lend on a property is that the asset is too risky. If it's risky and a bank doesn't want it, why should you?In most deals it shouldn't matter if you pay cash, conventional mortgage, or some kind of creative financing. As long as everyone gets paid and leaves the closing table happy who cares? The key is negotiating a deal that works for all parties. That said if you are paying cash do not let any external pressure to close quickly trick you into cutting corners on due diligence. You don't want to pick up the bill for someone else's deferred maintenance or contested title.

Jeremiah Ashe · Answer

Raymond, There are definitely pluses and minuses with purchasing all cash. One advantage is that you can sometimes get better deals by making an offer that is all cash compared to a financed one. You are also able to close quicker and skip some of the closing costs associated with a bank loan. You could also then refinance and get some of your money back while still benefiting from getting the property at a better price. Please be sure to still put an inspection contingency in the agreement so that you can step away if there are major issues you were unaware of. The downside would be your cash on cash return in investment is typically lower. Also, some people say you may become less motivated to get a renter in the space since you do not have a mortgage. Others would say it allows you to take your time and get the tenants that you want, not the first ones that show up with cash. You mentioned that you would be buying “low end” with the 100k. If you used financing, you could potentially buy upto a $500k property, thus getting you something that is not “low end”. Make sure you analyze the deal and account for things such as vacancy, repairs, renovations, taxes, and insurance. The calculators on biggerpockets are really useful if you have not tried them before. Whatever type of investing you decide is for you, good luck! I think you will find that the first purchase is the toughest one. Also, make sure you buy right and find a property that cash flows from day one!