Should I pay all Cash??

Question

With the Real Estate Market being down and properties being cheap I was thinking instead of going to the bank to get a loan to buy these properties that i should instead buy 3-4 of these properties with my own cash.  i will then have great cash flow from these properties with out all the fees from those loans. Just wanted hear what others have to say about this  :D

Matt T. · Answer

It might pay dividends to do a little local research before you make up your mind.  Scout some smaller local banks and credit unions.  Find one that is "investor friendly" and will let you refinance once you buy the property.  Check current rates, seasoning requirements and percentage of value they will lend for investment properties.

Being an all cash buyer is an excellent way to make sure your offer gets accepted, but it's good to know how to get some of that cash back out for potential future deals.

A lot will depend on your goals.  Will you be satisfied owning the 3-4 properties or are you looking for more?  Rates are great right now; I'm looking to leverage as much of this cheap money as I can.

Gregory Childs · Answer

Ray,
I live close to Tampa - from what I see prices are still dropping in most low income/entry level areas. So buying correctly is key - you have to buy under market just to ensure that any deteriation in the pricing will not impact your equity position. Buying cash will give you that leverage.
I agree with Matt on the refi option - but more importantly do you have a long-term exit strategy? How will tying up your capital impact that strategy?
It's hard to go broke if your debt load is insignificant.. cashflow is king. Remember, real estate isn't as liquid as it used to be, so make sure you can support the debt load if you do use finance. 
Equity building in Tampa is also a longer term objective than it used to be - so see if their is a way to add value (add an extra bath/bed) to make the property more marketable (and comparable) to the neighborhood standard. In some neighborhoods parking can be an issue - so off street parking is a big plus.
Whatever you decide this is definately a time to be adventurous - we haven't seen these RE prices in a long time in Florida. Although, in the interest of full disclosure, we invest out of State - but that's because we have a short-term focus.
If you dont know her, Tiaa Cartright (TBRIA) is a great contact to have - she runs a meeting every Wednesday up on Bruce B Downs/I-75.
TTFN,
Greg

Max B. · Answer

Although cash is king right now I would strongly advise against an all cash deal. If you are able to obtain a loan at 6% with 20% and a 30 year amortization you will pay around $24,000 in interest over five years and, yes, that is money that you could save by paying cash. Lets also say that by paying cash you saved 8% on the purchase price. That increases your total savings of paying cash to $32,000.

The alternative would be to obtain financing and theoretically do 5 times the amount of deals through leveraging.   After five years your addition to net worth, assuming a 11% cap rate 6% appreciation and including amount paid down on the loan, with the five properties is around $300,000. This is compared to one property (including the savings) of around $100,000.

In real estate, including appreciation, your return can easily be in the double digits. If you think you are able to beat whatever interest rates are by investing, you should leverage as much as possible (while still being smart about it).

I'm sorry for all of the numbers but I believe it's the best way to show the point. The best combination of the two would be to purchase cash and refinance. This way you are able to get the cash discount while still leveraging your money.

I hope that helps somewhat with your decision.

Mitch Kronowit · Answer

Offering all cash is a powerful "weapon". Not only will you be spared all the bank/lender BS, you should be able to negotiate a much lower price since you have no loan contingency and can close very quickly.

Go get 'em!

Andrew Syrios · Answer

That's certainly a way to go about it, just remember that you'll have a lot of money tied up in these properties and you have to consider the opportunity cost of having so much money unleveraged.

Luke Myers · Answer

Many people fail to point out that some markets are cash flow markets and others are appreciation markets.  You can get both in both markets but the main strength of the market is one or the other. Also use leverage at times and pay cash at times in a hybrid system is best for me. I have NOT always used cash but going forward I am doing flips with all cash. Let us compare:

BRRR strategy is a max leverage system

Typical Deal

ALL in 50k

ARV  80k

Gross Rent 750

Cash out @75% =net 57K  -3k close costs - 60k total

Net cash flow income 145 Mo

Value 80k      Dept.  60k  Equity 20k     Do it again !

Cash Flip Snow Ball

All in 35k

ARV: 55,000

Gross Rent 750

Net cash flow income 525 mo

Value 55k  Dept 0  Equity 20k   Sell for  55k increase cash 20k do it again and snow ball !

After 5 purchases or 5 x doing this:  BRRRR investor has 5 houses 300,000 in dept ! $725 free rental income if all stay full and 100k in equity. ( If he sells everything he gets - 100k - commissions ) largest benefit is getting houses with little of ones own money in and rent pays down dept over time. Drag from Interest and Fees

Cash investor has  275,000 in equity no dept payment .   2,625 per month in free spendable cash flow total gross rent is $3,750 just like the BRRR.  If he sells he gets $275,000 - commissions)  Clearly big difference no interest or bank fee drag. Both can snow ball theoretically thousands of times.

ALL cash example is

Cash flow higher

Equity higher

No dept. no worries

Can keep snow balling just like the BRRR people.

Conclusion of thought

Clearly this is just an example and not perfect and results can vary but I think it can show the benefits of all cash investing.

Leverage can be good for some big buys but for growing a rental housing business I like my system better. Less risk, less stress, less work, higher returns, for my system. Not for everyone I understand, and the BRRR crew is happy and it works for them. I just want to let people see why the good old fashion way is also good. Don't worship at the temple of dept without open eyes! Skywalker out.

Kirk Ayzenberg · Answer

The return on an all cash investment will be much lower than if you were to even get a 5.5% rate at a bank and pay some extra fees.  You will tie up less cash and be able to use it for other investments by getting loans.

Dennis Marshall · Answer

Definitely Cash!!!!

Cash is king right now. I don't even deal with anyone talking about paying with a loan. Find a wholesaler in your area that will bring you the properties you want and you can sit back and relax a bit. Unless you like being in the field.

Peter Seely · Answer

Hi,

This was a question I was also wondering. For me though, I have no choice but to pay cash because I am in Bermuda so an out of country investory and getting local financing from what I can tell at a reasonable rate is out of question. Getting financing here is also out of question because I am an expat living in Bermuda. I am a Canadian citizen who has separated his ties to Canada for tax purposes therefore not able to get financing in Canada either without possibly being deemed a resident of Canada.

What I am wondering, once I buy a property with cash in a state, can I later be able to take equity out of the property to purchase another property through a US financial institution or would they likely not allow because I am not a US Citizen or resident? I just don't see how if I pay 100% cash I will later(1or 2 years later) be able to purchase another property without selling that one.

Thanks

Peter

Mark Anderson · Answer

I just voted for your post Matt.  I agree 100%.

With rates being so low, I would definitely consider leveraging.  It may allow you to purchase a few more properties.

But without knowing your full situation, its tough to really say.  Do you need the cash flow or are there other income sources?

Paying cash and getting a line a credit is a decent option too.

Should I pay all Cash??

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