If you have CASH, should you use it to finance your deals?

[Andrew McCotter]

Hi BP Community! First time posting. I'm curious to hear what people think about using your own cash vs going out and getting financing.

A little background on myself - I'm 31 years old living in downtown Chicago. I've been fortunate to start and run a couple successful businesses so far in my life, but I've found myself a bit bored over the last year or so. I've always been interested in real estate investing (And actually own 3 apartment units in the city), but haven't dived completely in yet.

My question - Would you finance your buy/hold deals with your own cash if you had the money in the bank? And if not, what are the best finance options for a newbie? 

[Joe Villeneuve]

No.  Spend your seed money and you get one use out of it.  Use it, and you can get an infinite number of uses out of it.

Your seed money (cash) is your most valuable asset...don't spend it, use it.

Example:  $100k in cash

Option #1:  Spend it all on 1 property
Cost = $100k
# of properties owned; Asset(s) value = 1; $100k
Cash Flow/property; total = $10k/year;$10k/year
# Years to break even (profit starts) = 10
Asset value (5% appreciation/yr) after 1 year = $105k
# of years to buy next property (assuming same way) = 10
Cash flow at end of 10 years = $10/yr
Asset value at end of 10 years = $265k

Option #2: Spend 20% on 1 property, leverage the rest
Cost = $20k/property
# of properties owned; Asset(s) value = 5; $500k
Cash Flow/property; total = $5k/year; $25k/year
# Years to break even (profit starts) = 4
Asset value (5% appreciation/yr) after 1 year = $525k
# of years to buy next property (assuming same way) = 1
Cashflow at end of 10 years = $215k/yr (PM me and I'l show you the math)
Asset value at end of 10 years = $4.975M