Cash vs. Lending when just starting out

Buying & Selling Real Estate
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Cash vs. Lending when just starting out

Brian Garrett
Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

I have a fairly basic question that hopefully some of you more experienced investors can help me with. Let's assume someone is new to investing, preparing for their first deal and they have $100k cash (for simple numbers purposes and arguments sake) to invest and get started. Let's also assume they are planning to utilize the BRRRR strategy for their initial investments.

Is it better to buy a property in cash, pay for the rehab in cash and then do a cash-out refinance as soon as possible to pull that original investment back out and roll it over into a new property and then continue leveraging that same initial investment this way you're ultimately saving on interest, points and holding costs associated with a loan? This is assuming you bought the deal right and were thorough with your numbers during your original due diligence prior to purchase of course.

Or is it wiser to spread that $100k cash you have to invest among multiple 25% down payments on properties via lending so that you can scale quicker by utilizing leverage from the start on each one and not have all of your cash sitting tied up in one project until you can cash-out refinance?

I would think the cash route might be better for a "newbie investor" since their overhead is ultimately lower and they don't have interest and all the other fees associated with a loan so if the first deal takes a little longer to complete it's not costing them a fortune in holding costs.

However I also think that limits the ability to scale at a faster rate and I see the potential advantages in leveraging right from the start so you have more diversity and can start building up your investment portfolio quicker. Remember this is just a hypothetical scenario to help me learn.

What are your thoughts on this? Would it be the same for flips as well or would your answer/opinion change based on the investment strategy? (I.E. Flip vs. Rental)

Thanks in advance as always and I appreciate all input, insight, feedback and advice!

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  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    9y

    Can anybody more experienced chime in with their advice here?

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  • John Sanderson
    Investor · New Cumberland, PA · Member since 2016 · 67 posts · 32 votes
    9y

    I'm all for using leverage when buying properties, but I see where you're coming from. If you're unsure as to whether you've got the right numbers on a property, in my opinion, you've got 2 options.

    1.) Partner with a more experienced investor, if you can. They can help you go over your numbers, make sure they're correct and work for the property in question, help you with any rehabbing that's needed, and ultimately lower your risk significantly. I can't speak for everyone, but I know if someone came to me with money to invest and offered me an equity share in a property just for guidance, I'd be more than happy to accommodate them.

    2.) Use leverage, but put down more than the required down-payment, probably somewhere in the ballpark of 30-50%, depending on your risk tolerance and how sure you are of your numbers. This way you're not 100% into the property, but you're holding costs during rehab will be lower and more manageable than if you were leverage at closer to 80%.

    I'd also like to add this is from a BRRRR standpoint, and not a flipper's perspective. I haven't done any flips, but depending on what your relationship is with private money or hard money lenders in your area, it may be easy to break into flipping using your own cash, and once you've done a deal or two, you'll be able to bring that to the table when approaching a PML or HML.

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  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    9y
    Originally posted by @John Sanderson:

    I'm all for using leverage when buying properties, but I see where you're coming from. If you're unsure as to whether you've got the right numbers on a property, in my opinion, you've got 2 options.

    1.) Partner with a more experienced investor, if you can. They can help you go over your numbers, make sure they're correct and work for the property in question, help you with any rehabbing that's needed, and ultimately lower your risk significantly. I can't speak for everyone, but I know if someone came to me with money to invest and offered me an equity share in a property just for guidance, I'd be more than happy to accommodate them.

    2.) Use leverage, but put down more than the required down-payment, probably somewhere in the ballpark of 30-50%, depending on your risk tolerance and how sure you are of your numbers. This way you're not 100% into the property, but you're holding costs during rehab will be lower and more manageable than if you were leverage at closer to 80%.

    I'd also like to add this is from a BRRRR standpoint, and not a flipper's perspective. I haven't done any flips, but depending on what your relationship is with private money or hard money lenders in your area, it may be easy to break into flipping using your own cash, and once you've done a deal or two, you'll be able to bring that to the table when approaching a PML or HML.

    Good suggestions John thanks for your input. I like the idea of putting maybe 30-50% down on a property. That's something I actually started thinking about yesterday after my post. That strategy seems like it could be a nice hyrbid between the two so that I can still learn on my first few deals while hedging my cash at the same time. Limits the risk some and allows better scale ability from the start assuming I'm able to obtain lending that makes financial sense. If not that's another story and I'll have no option but to go all cash. As far as partnering with someone I'm also open to that route and currently trying to network and find some successful real estate investors in my area to perhaps do that with. Right now I'm just asking questions and educating as much as possible!

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  • Kerry Boyle
    Lender · Bethesda MD · Member since 2017 · 283 posts · 123 votes
    9y

    The strategy of putting a higher than required amount down is an interesting middle of the road take! 

    From the perspective of the lender, the lower LTV there is, the lower the risk. That means you should be able to get lower points/interest than maxing LTV on your first project.

    1Reply
  • Brian Garrett
    OP
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    9y
    Originally posted by @Kerry Boyle:

    The strategy of putting a higher than required amount down is an interesting middle of the road take! 

    From the perspective of the lender, the lower LTV there is, the lower the risk. That means you should be able to get lower points/interest than maxing LTV on your first project.

     That's exactly what I'm thinking as well. Could be a great option for me.

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