Purchasing an Investment Property in Full?

Question

Hey everyone,

I came across a deal that i can fully afford out right and all i have to do is write a check.

I feel as though going into a 15 or 30 year fixed just will cost me more in the long run.

Would i be wise to consider paying this property out right? what would be a good option for me to expand after this property  with my money i have in it.

What are your thoughts?

Jonathan Holmes · Answer

That would be the most conservative and safest way to invest in real estate. However, there are many draw backs. Firstly, you cash on cash return will be tremendously lower. Assuming this property is not a dog house in a war zone you will need to shell out significant cash to buy it and you will receive the same rent  as a leveraged property. While yours would not have the mortgage payment to make, a good leveraged deal will generally out perform a cash deal.

Second, you will have to save up an equal or greater sum for your next property. If you instead only put 20-30% down you could almost immediately repeat this purchase 3-5 times. That is assuming your debt to income ratio would support such a draw. This would allow you to collect rents from a few similar properties and each would be getting paid down by the tenant. Which leads me to three.

Third, one of the best parts of real estate investing is the benefit of having a tenant pay off your mortgage. Thirty years of this will build some incredible wealth. If you purchased multiple cash flowing properties and held them for long term your equity build up and net worth will far out perform a cash buyers.

Last, your total cash payment could be used to purchase a larger or nicer property giving you a greater return (if purchased correctly). If you pay 50k for a single family you have the cash flow from that one unit and all the equity in the house. If you put 50k down for a 250k four unit, you have four rent checks potentially and you equity grows every month. These number are obviously fictitious and have no bearing on any real deal but you get the idea.

That said their is something to be  said for all cash purchases. They may suite you personally better and there is nothing wrong with that. The most important part of a deal is that it is a good deal not how you pay for it.

Michael J. Beasley · Answer

Interesting…  I was just having this conversation with my uncle 10 minutes ago. If you buy cash, you lose out on your ability to write off the interest toward the loan which would show you more income at the end of the year and thus you’d pay more in taxes. Also, when you buy cash you have to pay for the entire property with your own money vs. having your tenants pay for the bulk of it. With a loan, even though the property ends up costing double in the long run, only a fraction of the purchase has to come from your pocket as long as you run the numbers before purchasing and you get a good deal.

Before buying, I’d recommend using the calculator provided by the BP site and see what your cash on cash return would be if you purchase outright. After you factor in taxes, property management (if needed), repairs, vacancies, utilities, whatever is leftover is yours to keep. If that number (your cash-on-cash) is at least 12% of your initial purchase price, you should be looking good. However, typically if you buy cash, that percentage tends to be lower than if you borrow. But it all depends on your goals.

Take this advice with a grain of salt. I’ve never invested, myself. But I’m getting closer to it. Just been reading and listening and watching everything I can before I make the leap. Someone more experienced and qualified can go ahead and shut me up whenever they feel ☺️

Bill F. · Answer

@Cody Jensen I buy for cash and get a mortgage on my own time. Makes closing easier, more likely for the deal to close, and the banks can impact closing.

@Michael J. Beasley has some good points about running the numbers to flesh out opportunity cost and compare other deals. Your CoC will not be optimized, but there is some thing to be said for a simple purchase. Both have their pros and cons.

However, I've never bit off on the rational of getting a mortgage to save on taxes. Say I have 10K in taxable income and pay $2k if I own the property outright. If I have debt I'll have $6 in taxable income and pay $1.2k in taxes. In the first case I'm left with $8k the second I have $4.8k. Yes I paid less in taxes, but I made less over all. Mortgage interest deduction is only a piece of the pie, look at the whole deal from an IRR perspective over time.

Brent Coombs · Answer

@Cody Jensen, would "going into a 15 or 30 year fixed" really "cost (you) more in the long run"? Answer: No. Why? Because - it's your tenants who are paying it off, not you!

[But sure, it would mean that you'd receive less dollars out of each property per month].

But, how else can you buy 3-4 properties using that same amount of cash, instead?

[So, can you see the result of adding all that extra income?]

My main point is: If it doesn't cash flow positively at 70-75% borrowings, how is it a "deal"?...

Purchasing an Investment Property in Full?

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