BRRRR with All Cash or Financing?

[Leo Kotschenreuther]

Dear BP-community,

I just finished David Greene's book "Long-Distance Real Estate Investing: How to Buy, Rehab, and Manage Out-of-State Rental Properties". Before I had read the book, I was convinced that I wouldn't be able to do an out of state rehab considering my lack of experience with rehabs and it being out of state. My view on that has changed quite a bit now that I have read the book and I want to start doing the BRRRR strategy.

Right now I have about 15k in cash available for real estate investments. From what I have been reading on the forums, I could probably get a loan of another 45k to buy and rehab a property in the next months.

On the other hand I also own a rental property in Texas. It cashflows but not great, it's only 5% cash on cash return. I'm thinking about selling that property in about a year and to use every dollar I have available to reduce the mortgage until then. If that goes smoothly I could have 40k in cash available once the property is sold in a year (some equity from the property and some additional savings over a year).

If you were in my position, would you rather wait until you have enough cash available to buy and rehab a property without any financing or would you find financing and start now?

What are the advantages of all cash purchases? Lower closing costs, no interest payments until the property is refinanced and the potential to negotiate a lower purchase price of the property?

Thanks for your input!

[Joe Villeneuve]

First, you have to understand the difference between cost and expense as it applies to a rental.  There are a number of ways to explain this, but in this case, the best way to look at it is this way:

Cost:  What you pay out of pocket (cash).  An example would be the down payment (or if you paid all cash).

Expense: What your tenant pays from the rent. An example would be property taxes (even though you pay them, it comes out of the rent), insurance, and the big one...the mortgage payment. This it the one way too many REI misunderstand and as a result include the interest on the mortgage when they are discussing the "cost " of the property.

As long as the property is positive cash flow, this is true.  When you are negative cash flow, that negative number becomes a cost.

As far as paying down your mortgage,...why?  That's your money, you're only helping your tenant do their one and only job (pay off the mortgage), and that cash you're putting in has the same value in your equity as it would have in your hands.  The difference is while it is in the property, it is dead.  In your hands, it is alive...and can grow.

Cash is not a noun, it's a verb.  When it becomes a noun, you lose.