When to purchase with cash?

Question

Any advice on when a cash purchase is a good choice when buying multi unit properties?

Michael Woodward · Answer

@John Homich , Let me say first that I think "buying" with cash is always the best way to get the best deal on a property and it's also a very strong position during the bidding phase.  It will give you an advantage over your competition if there are multiple offers (sellers love cash deals).  The question of how much cash to keep in the property is a little harder to answer.

I've read the book "The Millionaire Real Estate Investor", by Gary Keller three times now.  Your question reminded me of a segment in the book where Gary said that most top investors will limit their cash/equity in their properties. I think it ranged from a minimum of 30% equity and a maximum of 70% but I don't remember for sure.  I could be way off those numbers so you'll need to verify that.  Regardless, the premise is that you reach a point of diminishing returns from the standpoint of leverage. In other words, if you keep too much cash in your investment, you're losing some of the leveraging power.....your money could do more if you pull some equity out and buy more leveraged properties.

I'm not an expert in this area but I thought you might get some value from the perspective of the book.  Good luck!

Matt Devincenzo · Answer

@John Homich like Jean said it's such a multi layered answer there really is no concrete answer I could give even for my own decision making process.

Case in point if a property is so distressed that no lender will touch it then your cash offer is the only real viable option. Now let's assume this is a buy and hold and you have a portfolio lender that will cash out refi in 90 days at a new appraisal. You get the property rehabbed and rented within that 90 days and get 105% of your initial investment out and still cashflow $150/mo so what was your return on that money?

Just on the cash out refi you're getting a 20% return per annum since you got back more money than you put in. But now how do you calculate the cash on cash of your $150/mo since you really don't have any cash in the deal? Obviously this may not be the most likely scenario but it is possible and I'm sure several people here can attest to that.

If you were comparing financing on that same deal (we'll assume hard money) against using your own cash to do it, and your HM costs would be say 10% of the purchase price for that 90 day hold, would you want a 10% reduction in your purchase price for your cash purchase or would you want more like 15% to make it give you a better upside? Or is just not using your own money the benefit that you receive and that is worth the extra 10% cost to you?

Obviously these are going to vary from person to person and also depend on your personal financial status at the time. I may have 100K in the bank but would rather spend an extra 5-10% on HM because I have another big project going on and need to be sure I'm liquid in case there is a surprise. So for me at that moment in time there might be no return on that cash that could entice me to use it because it is too much of a risk for other commitments.

Hope that helps at least get you some ideas of the different aspects that would go into the decision for me personally. Like @Jean Bolger said if you could give some real numbers/situations that might help get some more detailed "I would be looking for XXX on that deal" responses.

Jean Bolger · Answer

Personally? gee- I don't think I could boil it down to that as there are just so many variables at play. You'd have to consider your longterm goals, your plans for the property and the conditions of the local market-- what return you could get for your money with an alternate investment, your risk tolerance...

So, this is a pretty theoretical question, the way you have it presented- I think that may be why more folks have not chimed in! Do you have a specific deal you are looking at? If so, you could post details and probably get quite a bit of feedback from people. Otherwise you might want to just use the search bar to look for related threads. Sounds like "Cash on Cash return" would be a good place to start?

John Homich · Answer

Thanks Jean

Is there a minimum % return for the cash that you would consider the deal?

Jean Bolger · Answer

probably when financing it is too much of a pain! High vacancy is a problem for most lenders- if you can purchase a place for cash at a good price and get the occupancy and income up you should then be able to refinance and get some of your cash back out. You may need to wait six months to a year, depending on the lender.