How much of a benefit to BRRR purchasing with cash?

Buying & Selling Real Estate
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How much of a benefit to BRRR purchasing with cash?

Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes

I'm using the BRRR strategy and trying to figure out how much of an advantage it would be for me to purchase with cash, and then cashout refi after renovations are complete. My alternative is financing with a local bank, that will finance the purchase as well as repair costs (as long as the ARV of the property appraises well) for 20% down.

If I buy with cash I would be able to purchase 1, or possibly 2, properties at a time (I'd be limited by my capital).  If I use financing I could probably manage 4-5 at a time (at various stages of completion).

So, I'm trying to decide how much of an advantage it would be for me to be able to give sellers cash offers and quick closings.  Can anyone provide input on how much of an advantage this might be?  Is there any way to quantify how much of a discount I might be able to purchase properties at if offering the cash/quick closing terms?

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Heidi Wilson
Charleston, SC · Member since 2017 · 84 posts · 46 votes
8y
The best BRRRR properties are going to be competitive situations where terms of the deal are an important lever. I always pay cash first and then refinance. You will never get another chance to create that much equity as with the purchase price. Do everything you can to get the best deal possible and you will reap the rewards later. When the market is less competitive it would be less important but I can say for me in this current market paying cash is super important.
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  • Heidi Wilson
    Charleston, SC · Member since 2017 · 84 posts · 46 votes
    8y
    The best BRRRR properties are going to be competitive situations where terms of the deal are an important lever. I always pay cash first and then refinance. You will never get another chance to create that much equity as with the purchase price. Do everything you can to get the best deal possible and you will reap the rewards later. When the market is less competitive it would be less important but I can say for me in this current market paying cash is super important.
    2Reply
  • Eric James
    OP
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    @Heidi Wilson

    Yes, purchasing with cash would (most likely) allow me to get more equity (by purchasing for a deeper discount), though I'm unsure of just how much. The disadvantage would be only acquiring about half as many properties in a given period of time, and therefore increasing my cash flow (approximately) half as much.  That's the issue I'm thinking about.

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  • Heidi Wilson
    Charleston, SC · Member since 2017 · 84 posts · 46 votes
    8y
    My thought is not so much that cash gets you the discount but rather it gets you the deal. Bidding on the “best” properties gets tough so while you might think you can get more properties with a mortgage, you have to win the deal for it to work. So even if you are willing to pay a bit more on these deals, you may find yourself at the losing end anyway when you are dealing with a seller who just wants to close. Also, cash sales are faster so factor that in. I guess this may be a matter of “it depends.” If there are a lot of properties on the market where you are shopping then maybe trying for multiple properties at once is a good idea. Where I am, the inventory is tight and there are a lot of investors competing so it’s hard to find and win a good BRRRR.
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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    8y

    I have got properties for less because I paid cash. I have done a few cash out refi's and it's a pretty simple process, really. It's my preferred way of doing it if I want to access my capital again. 

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  • Eric James
    OP
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    @Heidi Wilson The market where I purchase is somewhat competitive, but isn't a 'hot' market. There are numerous SFH in solid B areas that rent for >1% of purchase price. If purchasing with cash I would expect to get them cheaper than this, but then when refinancing at the ARV I'd be back closer to 1% based on that financed value.

    @JD Martin  Yes, I will definitely be refinancing if I purchase in cash.  The bank I use offers the same terms for a cashout refi as for an initial purchase.

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Eric James, if you pay cash, you'd be eligible for the "Delayed Financing Exception".

    ie. It wouldn't be a RE-finance, and, you might get all your outlay back, straight away!

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    8y

    By purchasing with cash, you save all the money you would have spent on closing fees with a private lender and don't have to pay any interest while you rehab the property. That being said, you lose the opportunity cost of doing anything else with those funds and some banks are hesitant about doing cash out loans.

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  • Eric James
    OP
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    I use a local bank that gives me the same good terms for an original purchase as for a cashout refi. They will also lend me money for a cashout refi without any seasoning period.

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  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    8y

    Cash doesn't provide me any discounts, but it does provide me with far more efficient and faster closings.

    trying to line up mortgages with home purchase is horrible, especially when rehab is included. Pay cash, used delayed financing, get your money back in ~8 weeks, rinse repeat.

    Look to raise private capital to fund it even faster, or HELOC, or and LOC really.

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  • Eric James
    OP
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y
    Originally posted by @Alexander Felice:

    Cash doesn't provide me any discounts, but it does provide me with far more efficient and faster closings.

    trying to line up mortgages with home purchase is horrible, especially when rehab is included. Pay cash, used delayed financing, get your money back in ~8 weeks, rinse repeat.

     Interesting suggestion.  My bank takes about 5 weeks to prepare for a purchase/renovation loan.  It isn't too much of a hassle, but there would be value in being able to close and begin work quickly.  Thanks.

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  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    8y
    Originally posted by @Eric James:
    Originally posted by @Alexander Felice:

    Cash doesn't provide me any discounts, but it does provide me with far more efficient and faster closings.

    trying to line up mortgages with home purchase is horrible, especially when rehab is included. Pay cash, used delayed financing, get your money back in ~8 weeks, rinse repeat.

     Interesting suggestion.  My bank takes about 5 weeks to prepare for a purchase/renovation loan.  It isn't too much of a hassle, but there would be value in being able to close and begin work quickly.  Thanks.

     Paying cash allows to me close as quickly as 3-5 days. Also, it depends on condition and cost of the house. Buying cheap houses in horrible conditions is much better to pay cash.

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  • Ola Dantis
    Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
    8y

    @Eric James Hey Eric, this is a tough one to quantify. 

    As I was reading your comment, the one saying that kept coming to my mind was "CASH IS KING" lol. 

    In my opinion, I think banks are more receptive to REFIs more than they are to funding Rehab projects. So with this mind, and if you have the financial bandwidth to buy cash now and REFI later, I think this is beneficial from a qualitative perspective.

    Quantitatively, there are some many variables to consider to get an accurate picture. 

    Hope this helps, Eric. Goodluck and I guess it'll be nice to know what strategy you go with in the end. Thanks! - Ola 

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  • Joe P.
    Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes
    8y

    @Alexander Felice I think nailed it. I'm not a rehabber and not terribly interested in major renovation projects, so having little cash in the game with good cash flow and COCR is important. If I buy a house with cash outright, sure my cash flow may be excellent, but the return on my cash is probably not as good as a 25% down payment. It also could mean my ability to invest in multiple properties is limited if all my cash is tied up into one property. BUT, if you are able to buy cheap, rehab, and get it rented...sure why not!

    Run the numbers -- they won't lie. Divide your annual cash flow by your all-in cash, and run it for both a mortgaged property and outright cash purchase. See which one would be more attractive to you, and make this just part of your overall financial analysis. Just because one is better than the other, doesn't mean you should choose a property solely based on that.

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  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    I have done plenty of cash purchases and closed the same day with a bank to finance the property with a construction loan. It will cost a few extra bucks to do it that way, but if you got even a $500 discount on the purchase because of the cash offer, then you did fine. 

    1Reply
  • Eric James
    OP
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    @Joe Papp. Even if I purchase with cash I would be refinancing as soon as the rehab is done.

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