Buy using leverage, or save-up, buy in cash and then refi?

[Jeremiah B.]

Here’s the short question: Should we buy 1-2 rental properties next year using a 25% down payment, or save/wait 24-36 months and begin a cycle of buy in cash and getting delayed financing.

Here’s the context: My wife and I own 4 rentals and will purchase another 7-8 in the next 5 years. Long-term, we hope to get to 40 doors and $10k/month income in 17 years.

We have very good credit, good/secure W2 jobs, and good non-real estate finances. We also have an adequate cash reserve to cover ourselves and other rentals though this cash reserve is off-limits for any purchase or planned rehab. Our real estate capital fund is currently depleted due to a recent purchase.

We do not use partnerships, hard money lenders, seller financing, Sub-2, turnkey companies, or LLCs. We are sticks in the mud who buy through a realtor and use 30-year traditional financing. Ultimately, we need to leverage these houses to let us continue to grow and retire on-time.

We plan to target SFR with a total cost of around $75K, though we would consider anything from $50K to $100K. We are out of state investors who will buy in Charlotte for a while, and will move to another market (Atlanta?) in a few years.

We have historically used financing at the time of purchase, but we are wondering if that’s the best route to go. And for the next 24 months, I think we have two options:

Option 1 – Buy using traditional financing. This route is what we have done: Once our capital fund is where it needs to be, we find a house, put 25% down using traditional financing, pay for repairs in cash. Then save up again until the capital fund is large enough to do it again.

This approach lets us be nimble, and lets us directly control things like leverage and financing. This also ensures that our money is always working. The down side is that we cannot work with wholesalers or buy pursue cash-only purchases.

Option 2 – Save up until we have enough in our real estate capital fund to buy a house and do any repairs in cash. Once the house is purchased and rehabbed, do a delayed financing (or a refi) to get out most of the capital and put it back in the capital fund.

This approach would certainly save us money – though I have no clue how much. If we were cash buyers, we could buy through wholesalers and probably get a better deal than on the MLS, and even if we buy through the MLS using cash, we would have stronger offers to present. The downside is that we could not buy anything for the next 2-3 years, and we would always be at-risk for having our money locked-up in a property. I'm also not a fan of so much capital ‘sitting around' between purchases.

I know that the answer to questions like this is 'it depends' but I'm interested in your thoughts.