Cash vs Financing on low cost properties?

[Pedro Torres]

Hello everyone, 

I'm looking into buying my first property. Currently I have 25k in cash (with 2k added each month from my 9-5 job) and was looking to buy in the east (Milwaukee, Cleveland, or Detroit areas), because of how inexpensive these properties are. I want to buy and hold. 

The question is, do you think it's financially better to buy a property in cash or use my HELOC (5.5%)?

Here's an example property, something like this is what I'm looking for: 

https://www.zillow.com/homedetails/5524-Maryland-S...

Of course I will fly to Detroit and check out multiple properties while I'm down there. Also take time off of work to organize contractors for the light rehab that needs to be done. Check to see if there are any taxes or other expenses attached to the property before purchasing it. Hire a good property manager. Check the neighborhood (currently according to niche I live in a D+ area and I've been happy for the 2 years I've lived here. 

So I really just want to know is it worth spending my 25k, buying and holding. Then repeating the process by saving up money from my 9-5 and rental income to purchase another house in cash? Maybe this time upping the price to 35k. Then 45k. Then 55k etc. 

What do you all think? 

[Chris Mason]

If you can be a cash buyer, be a cash buyer. They get their pick of the litter of homes AND generally can expect a discount relative to what a financed buyer would pay.

Then, the day after closing, go apply for a cash out mortgage to recoup your capital. 

Thus you enjoy all the advantages of leveraging with a mortgage and all the advantages of being a cash buyer.

[Jason Macht]

@Pedro Torres, I love the concept personally. The only thing I would add is to think of your HELOC as more of short term financing for acquisition. As @Chris Mason mentioned, there is strength in being a cash buyer and being able to close quickly. However, once you've closed on the property, there are better financing options than your HELOC. You may want to consider adding some value (if that's a part of your strategy) and then refi into a conventional loan. This should improve your cashflows.

I'm from Detroit myself; I haven't started looking out there yet, but I am actively looking in MKE and hope to execute a similar strategy. Let me know where you land!

[Andrew Syrios]

I lean toward financing what can be financed. This is unless you 1) have cash to spare and don't think you'll have an investment to put it into in the near future or 2) it just won't cash flow with debt (in which case, it better be in a really good area you think will appreciate, or you should probably flip it).

But overall, OPM (other people's money) is one of the biggest advantages of real estate since you can earn a big return on a small investment and protect yourself from risk by buying right and getting built in equity.

[Joe Villeneuve]

In your case, if this is a rental, I'd say go with the cash...but try to get it out as fast as you can so you can use it again...as soon as you can.  Your cash does you no good buried in the floor boards somewhere in your house.  HELOCS are short term funding solutions.  You can't keep it with a balance owed for very long...in most cases.  

Now, if you had the option of normal financing (mortgage), then go with the loan...without question.

There's no contest between a property that cash flows with a mortgage vs all cash.  The all cash property costs you the entire cost of the property.  The property with only 20% cash, only costs you the down payment...since the rest of the money comes from the rent (tenant).

That means you would have 5 properties cash flowing instead of just 1....for the same cash our of your pocket.

[Lucas Cochran]

I agree with Syrios.  Take advantage of using other peoples money by financing as long as you pay off loan quickly so you save the interest.  

I Invest in ran down properties and rentals and I use my HELOC only. Here is how I think about investing. Investing is about making money so you can keep money so you can hopefully acquire lots of money. Why spend your own money when you do not have to. Just keep it and keep on investing. The Money I have in my bank accounts needs to stay there. Using your heloc is the same as getting financed, other than with a heloc you do not need to wait for approval to get funds (less hassle). Now with that said, I have never had any worries or thoughts of loosing my home if things go south. If there is a worry about that then think a little harder about investing at this time and definetly do not use your cash. 25k can get ate up fast with a rental. Purchase price, initial repair costs, sitting on it for a month or 2 with no renters, more repair costs, renter does not pay rent and skips out and the list goes on.

I like the idea of flipping a few first before having a rental.  Rentals can be expensive at times and lots of hassle at times.  With flipping a few first you learn the process of choosing the right property and the process of buying it.  Then jump into a rental.  Also you can build up your bank account quicker and be more comfortable with the rental game.     

Anyways, I wish you luck.  Its a lot of fun!!! 

[Kevin Rodriguez]

If you can go with a loan do so. I would absolutely without a doubt leverage the purchase and rehab costs of the home with OPM. (If it cash flows of course and it better)

i would say try to privately funding this deal if you can, if not HELOC is fine; if the deal is a killer one act fast take out the HELOC and figure out re-payment later. Especially now, you never know what can happen going forward with the market that could damage your chances of refinancing for higher ARV. That said in my honest opinion, never buy a property that does not cash-flow with a loan; leave that to the doctors and lawyers who have nowhere else to put their cash. You need to be able to leverage and have cash-flow coming out in order for the deal to make sense if not than you are overpaying and deal is no good.

Also if this is your first deal and if its 1-4 family deal you don't need a property manager, just ensure you do proper background checks and screen tenants thoroughly. Get in contact with any local handyman and come to an agreement to be on call for any potential issues. It seems like you are looking for single family deals so just be aware that 1 vacancy=100% vacancy.

Lastly, Please be careful with MLS listings and don't overpay; I can't emphasize that enough.

[Bala A.]

Cash is King. 

In any market, and especially in cities like Detroit, it makes A HUGE difference.

Your offer will stand out and you should be able to buy at a Discount. 

(normally 80% of Retail)

And if you are willing to put some elbow grease even 70% of Retail comps.

The logic is simple - The seller does not need to deal with the uncertainty of Financing, Appraisal, etc etc.

As the values are coming highly skewed. And many a time the Sales fall through because of the Lending condition.

[Jim K.]

@Pedro Torres

I'd like to point out the glaring flaw in your proposed buy-and-hold business model that seems to have gone unremarked on so far in this thread, although it's been discussed many times on this website:

Long-distance landlording in a Rust Belt slum ain't easy.

This place is in MorningSide, Detroit. Do you know anything about the area? You're not going to find many property managers eager and willing to start with you on one cheap property and grow with you slowly. You're not going to find contractors willing to run out to MorningSide at all hours to take care of your D'class tenants in their 1923-built house. You, or your property manager, are not going to find high-quality tenants to fill this place reliably. You are very optimistic about the "light rehab" you mention here. I would not have quite the faith you evince in the veracity of a listing description of a property being sold for under $19,000. It's much more likely that the place has been patched up and rigged six weeks from Tuesday to get it on the market and once you have a tenant in there all kinds of expensive stuff will start to go wrong from Month 1.

I'm a self-managing DIY landlord with C/D rentals in a Rust Belt city running a small mom and pop operation. I know this sounds like a good idea when you look at the numbers and fail to consider the actual mechanics of how this could hurt you. You can be leeched dry on these properties from across a continent, death by a thousand cuts.

In closing, I know at least six other guys in my area who are making this work in properties like this. I don't know a single long-distance outfit that finds it worthwhile.

[Marisa R.]

Originally posted by @Pedro Torres:

Hello everyone, 

I'm looking into buying my first property. Currently I have 25k in cash (with 2k added each month from my 9-5 job) and was looking to buy in the east (Milwaukee, Cleveland, or Detroit areas), because of how inexpensive these properties are. I want to buy and hold. 

The question is, do you think it's financially better to buy a property in cash or use my HELOC (5.5%)?

Here's an example property, something like this is what I'm looking for: 

https://www.zillow.com/homedetails/5524-Maryland-S...

Of course I will fly to Detroit and check out multiple properties while I'm down there. Also take time off of work to organize contractors for the light rehab that needs to be done. Check to see if there are any taxes or other expenses attached to the property before purchasing it. Hire a good property manager. Check the neighborhood (currently according to niche I live in a D+ area and I've been happy for the 2 years I've lived here. 

So I really just want to know is it worth spending my 25k, buying and holding. Then repeating the process by saving up money from my 9-5 and rental income to purchase another house in cash? Maybe this time upping the price to 35k. Then 45k. Then 55k etc. 

What do you all think? 

 Cash

Detroit is a tough market, financing adds a layer of risk. I would look at buying and bedding to make sure your asset is performing first

Cash will also be very attractive, Detroit is on the move, good stock getting harder to source

[Matthew Paul]

I wouls like to add to @Jim K. statement .  I looked on zillow at the add , And then at what else was for sale . It was like the TV show American Pickers , they were bundling , " 5 houses for $25,000 ' .  When the area is full of cheap houses for sale , doesent it make you wonder why ?     There were over 1000 houses for sale under $65,000 and even more for rent .  The law of supply and demand comes into play in this area .

[Jamiel Strickland]

Hey @Pedro Torres

I really like when people have good experience with investing in Detroit and I think you will but it is some small additions I like to add to help you.

1. @Bala A., he is right, cash goes further in Detroit, whether buy from realtor or wholesaler you will get a lower priced house if you do cash. 

2. Class D+ in Detroit is probably not Class D+ in other cities, I do like Morningside but its a reason it's hard investing in Detroit because market evaluations are hard to grasp for most investors. 

You have a good plan, when you come to Detroit you will be more confident in your buying strategy. 

Here are a few things to know to give you knowledge about Detroit.

https://www.biggerpockets.com/blogs/11212/79827-wa...

[Marcus Auerbach]

@Pedro Torres going in with a cash offer is obviousley the way to go, but if ROI matters to you, you want to finance the property later, ideally after some value add.

But please do yourself a favor and go out and look at these places, the people and the issues. Talk to an established, quality PM and hear them on why they are not going to serice these areas. Talk to contractors and see who is willing to do work there for you. I hate to be so blunt, but ask yourself this, if that would be such a great idea, how come you don't see any seasoned investors buy up all these "deals". What do they know, that you have not experienced yet?

You don't need to make all your money on your first deal, but you need it to work. If you get burnt on number one, there will not be a number two. My recommendation would be, find someone in Detroit (and not in Rochester, NY) who is doing what you want to do and ask them to mentor you a bit.

[Ian Walsh]

Ideally the lowest leverage is the safest position but usually slows most people's ability to grow.  It's a balancing act.

[Joe Villeneuve]

Originally posted by @Marisa R.:

Originally posted by @Pedro Torres:

Hello everyone, 

I'm looking into buying my first property. Currently I have 25k in cash (with 2k added each month from my 9-5 job) and was looking to buy in the east (Milwaukee, Cleveland, or Detroit areas), because of how inexpensive these properties are. I want to buy and hold. 

The question is, do you think it's financially better to buy a property in cash or use my HELOC (5.5%)?

Here's an example property, something like this is what I'm looking for: 

https://www.zillow.com/homedetails/5524-Maryland-S...

Of course I will fly to Detroit and check out multiple properties while I'm down there. Also take time off of work to organize contractors for the light rehab that needs to be done. Check to see if there are any taxes or other expenses attached to the property before purchasing it. Hire a good property manager. Check the neighborhood (currently according to niche I live in a D+ area and I've been happy for the 2 years I've lived here. 

So I really just want to know is it worth spending my 25k, buying and holding. Then repeating the process by saving up money from my 9-5 and rental income to purchase another house in cash? Maybe this time upping the price to 35k. Then 45k. Then 55k etc. 

What do you all think? 

 Cash

Detroit is a tough market, financing adds a layer of risk. I would look at buying and bedding to make sure your asset is performing first

Cash will also be very attractive, Detroit is on the move, good stock getting harder to source

 Detroit "areas"...not just Detroit.  The suburbs are not "risky"...as you have mentioned.

[Eric Wagner]

Please, please, please listen to @Jim K. I bought turnkey rentals in C neighborhoods in Cleveland.  The costs of repairs, leasing, turnover, eviction, taxes etc especially for a long distance owner is so much more than the "pro forma".  There is a LOT of work that goes into it. The low, low purchase price is so deceiving.  Frankly you are probably better off in the long run buying a nice house in your city (don't know where you are) and putting the $25k down as a down payment.  Do that once a year and in 10 years you will have 10 really nice properties instead of D houses in Detroit. They are cheap for a reason. 

[Pedro Torres]

Thank you all for the responses. 

@Matthew Paul The sample property that I linked is just for a reference, from my research that I've done over a few months on the MLS I've seen houses like that all over the Detroit area spanning different neighborhoods. With cash though I'd like to get off the MLS and find better deals. As for the bundling of houses, my assumption (and I know it's not good to assume) is that those properties were purchased and left to rot a long time ago which is why they are unappealing. Doesn't mean the entire city is doomed.

@Jamiel Strickland I read your post about investing in Detroit, what are your thoughts on property management? Some have mentioned that nobody will want to service parts of Detroit, do you find that true? Would you stick in the 25k range or have you found that upping it to 50k brings better results? 

@Marcus Auerbach Correct me if I'm wrong but wouldn't a seasoned investor have the credit/cash to purchase and invest in "higher end" cities/neighborhoods? My thought process is that why would they settle for $500 a month rent in Detroit when they can goto another city and get $1500 a month rent? Sounds like established investors would have moved on from cities/deals like these but that makes room for others like me to start investing

@Jim K. I can admit that I don't know anything about Detroit and it's areas which is why I'm still doing my research. I've read posts on Morningside and did google searches, some people say they like investing there and others say that it's not worth it. Doesn't seem to be a universal agreement on Detroit in general. You do bring up a great point which I'm going to look into further which is property management and how they service less desirable areas. Again, that property I linked was just an example. The 25k I have isn't fixed, it grows every month and with research maybe I will find out that 35k properties is the way to go or 50k, maybe I have to use some of that for rehab...maybe I use financing for rehab. I'm still in the researching phase. 

[Pedro Torres]

@Eric Wagner Yeah, I do worry about situations like that. I just updated my profile to show where I'm from, ideally I would like to invest here in Las Vegas but everything got expensive here lately. I purchased my house 3 years ago for 150k and now it's around 212k and it keeps increasing (I also don't live in a great neighborhood). Great that I have equity in my current one but when I look for investment properties it's hard. 

Just a quick look shows that for 150k I could get Mobile homes (in parks), Condos, and a few townhomes (all with a high HOA fee). I know you can make money here in Vegas but I think it's geared more towards the established investor.

[Jim K.]

@Pedro Torres

[Christopher Lombardi]

@Pedro Torres, for small low cost properties that you are looking at, I would recommend cash with quick closings to get the best deal possible.  Once you get a few you can do a cross collateralize loan against all the properties and pull your cash out and do it over.   Just make sure the lender will allow you to pull individual properties out of the loan and sell without a penalty.  Good luck to you.

[Kyle Neff]

@Jim K. Thank you for your candor in this post. As much as I like to think of myself as an optimist, sometimes this is the most valuable type of feedback around.

[Jim K.]

@Kyle Neff

"I’m a pessimist because of intelligence, but an optimist because of will." Antonio Gramsci

[Dennis M.]

You should be more worried about getting a PM and your guys/systems in place than the property itself . Jim brings up good points worth looking into . Left coasters are always trying to buy up the Midwest and many fail . They see cheap properties in lousy neighborhoods and think of the ROI potential from what they see on paper . Heck ,I can buy cheap 10-15k houses all day near where I live and the numbers look good too on paper , but I don't because I understand the unique challenges involved first hand if it did that and it's not worth it ! Those houses are cheap for a reason ! You think because your flying out and touring the building or driving around for a weekend its going to make you a knowledgeable investor for the area lol? You better figure on getting a turnkey in a b class neighborhood somewhere

[Steve Vaughan]

Gotta watch your cost of capital (finance fees) when dealing with small loans on small assets.

My max is cost is 7% of dollars received.   Some people refi at 14+.  A guy recently got $14k out but it costed him $7k.  What kinda sense does that make?

Leverage does not work always with low value assets. Know the costs.

[Matthew Paul]

@Pedro Torres   you said in a post

  " I purchased my house 3 years ago for 150k and now it's around 212k and it keeps increasing (I also don't live in a great neighborhood)."

Those are the properties to look for . You can find a deal in any area , you just have to look harder .  I am 20 minutes from Baltimore city . Lots of cheap properties , I could buy cash all day long .   But I dont . Like @Dennis M.  said "  Those houses are cheap for a reason" .

The one thing not mentioned is you have to have an EXIT plan .   Buying cheap is easy , selling is a whole different story 

[Matt M.]

@Pedro Torres

I took a 1.5 hour ride a few months ago to a cheap area in Pa. I was in contact with a realtor, we had 15 houses to look at. I had my checkbook, ready to buy something. Well, 15 houses between $9k-$40k and there wasn’t a single house that remotely sparked my interest. The towns were garbage, rents are low, drug use high.

Was a waste of a day, but definitely a good education on stay away from certain areas.

My suggestion is to stay away from depressed areas. Especially if they are far away from you.