All cash purchase or should I get a loan?

Question

Hello Folks,

I am interested in purchasing a home and am trying to figure out if I should purchase it all cash, and then refinance after rehab, or if I should get a loan.  This is an investment property, and I thought since I have the cash, I can benefit from an all-cash purchase and hopefully get a lower price.

My questions are:

1) Does it make sense to buy with all cash, and refinance in a few months, knowing i will pay closing costs twice?

2) Is it more difficult to get a mortgage on an investment property even though i would own it free and clear?

I do not want to tie up all my money in the investment, so I will definitely be getting a mortgage on it, but I want to get the benefits of being a cash buyer.

Thanks!

Michael B. · Answer

Personally if you are just starting out I would leverage upfront and finance my first few deals.

1.)  Having your money all tied up in one deal exposes you to a lot of liability. If your financial situation changes between now and the refi then you will have a hard time getting your money back. If that would happen then you might need the money to feed your family until you get back on your feet. Refi won't be an option because nobody will lend you the money if you are financially distressed.

2.) Let's say you have $100000 available and you buy ONE investment property that cash flows $1000 after taxes insurance and management. If you don't do delayed financing you will probably have to wait about 6 months until you can refinance your property. This means in 7.5 months you will have your money back. You will have it back in full IF you negotiated the deal right. Otherwise you will leave 20% (or less) in the deal anyways.

For the same amount you could buy 5 properties that cash flow $530 each with a mortgage @ 5.8%. If your DTI and credit score allows for quick acquisition you could technically buy one property per month using conventional financing. So in 5-6 months from now you could have an extra income through cash flow of $2650 Dollars per month.

It's not that likely that you get those smoking deals when you are just starting out. Especially if you are buying from the MLS. When I talk to sellers Agents (and mention double dipping), I hear a lot of:"I think the sellers would be willing to go down to $60000 (on a house listed for $62000) and $58000 for an all cash offer." Just starting out you will probably fall for the $58k if it is presented the right way by an experienced agent that knows the market.  There is also the chance that you just blow an awesome deal because you low ball too much based on what you have learned on BP without real world experience in your market.

Buy your first rental properties in a way that makes financially sense - for high cash flow. Use your credit and finance the first few properties upfront. Once you have your first, second and third deal completed you will have learned enough to shoot for better returns. In the meantime you will have created great cash flow that increases your monthly income! Don't shoot for the stars right from the start otherwise you will never get started.

Dennis Adler · Answer

@ Happy Sohi.  I was wondering about your decision.  Which way did you go with your deal - cash offer or get a loan? Any reflections to share?  I did all cash for my first deal for some of the reasons mentioned above.

Ali Boone · Answer

Other people have already answered this, and I haven't read all the responses so I might repeat something, but I'd say #1 makes the most sense if paying cash upfront will get you the deal or a better deal than if you leveraged upfront. Because then you get the deal or the better deal and then you get to take advantage of what leveraging gives you for returns. All of that combined well makes up for the doubel closing costs. Plus the closing costs won't really be double, they'll be cheaper for the cash buy.

In my experience it's just as easy to get the refi on an investment property as it is the initial loan. Just be sure you are working with an investor-friendly lender and everything will be easier. Don't count on a big bank (Wells Fargo, BOA, etc.) to get the job done.

Victor Umeh · Answer

@Michael B. & @Jaysen Medhurst really sound advice. I’m in the same boat as @Happy Sohi  Thanks for sharing. Hoping to post first property photos here soon.

Caleb Jordan · Answer

@Jaysen Medhurst and @Michael B. have good analysis.

Another option, you could do a hard money loan to finance the purchase and renovation. This essentially gives you the power of a cash offer to the seller. It also allows you to not spend all your money in that deal and have a ability to pursue another opportunity if one arises before your rehab is done.

You will spend a lot more in a hard money loan. but it is worth it if you are able to pursue another deal because you still have cash to available or you just really don't want all your cash tied up. You can get a higher ROI than an all cash purchase because you are only putting in a small portion of the cash into the deal. Some hard money lenders are also able to do a refi out of a flip loan or all cash purchase without the seasoning of the traditional mortgages, rental income history, or W2 income qualifications.

You can also ask what problems and risk you are willing to take. Cash, conventional loans, hard money each have their own potential problems.

Jaysen Medhurst · Answer

@Happy Sohi, if you have the cash for purchase, reno, and contingency, I say go that route. That puts you in a great position when purchasing (as you eluded to).

You will pay "closing costs" twice, but not really. You won't have to get an appraisal when buying cash and any costs associated to the mortgage are only when you get the loan.

I recommend you do the lender legwork now, though. Talk to several local/regional banks/credit unions. Find out what there terms are, not just rates, but seasoning requirements, etc. Best case scenario, you refi all teed up at closing, then pull the trigger when it's time.

All cash purchase or should I get a loan?

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