Buying Properties With All Cash

Account Closed · 2013-07-20T15:58:07-07:00

I'm only 23 and I'm trying to figure out a strategy for investing in real estate for the long haul. Is there a distinct advantage of buying properties for all cash, if you're in real estate for the long run? I know that the four sources of money from property come from income, capital appreciation, tax deductions, and principle reduction. Without any debt you wouldn't see any advantages from principle reduction, and, if you're an owner-occupant on say, a multifamily, you wouldn't be able to deduct interest on your personal residence either. I was told that a few local guys got started this way. After WWII, they came back and bought a house for say $10,000 and then saved money for the next, then kept leapfrogging until they had 10 to 15 units, which only at that point would they incur debt. Now these families are worth $400-500 million. There could be many different reasons for this continued success but I thought it was interesting because I always thought that incurring debt would probably be the fastest way to accumulate wealth in real estate, especially given that interest rates are at record lows. If you're in for the long haul and you have a lot of time on your hands, and most importantly, you have the means, is it a good idea to buy say a property for $150,000 cash or buy three properties with mortgages and put down $50,000 on each? I'm just using these numbers for simplicity's sake.

Kevin N.

Investor · raleigh, NC · Member since 2010 · 45 posts · 18 votes

13y

Hi Peter,
I see one of the biggest advantages of cash buying is you can have deals that financed buyer can not have so potetially you would have good deals. With regars to long terms buy and hold, all cash holding would keep you sleep better at night, however cash on cash return would be less than leveraged investment.
So if i have cash and a good w2, i would buy all cash, then wait for seasoning time then refinance, then repeat..
Kevin

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Ned CareyPro Member

Moderator

Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes

13y

Financing your properties is a way of using leverage. You can get greater returns on you investment by financing your deals.

In your example buying one $150K property. Lets say it doubles in value over 15 years. You now have a $300K property

In the second scenario you buy 3 properties putting down $50K ea. and borrowing $300K with interest only loans. If we forget about cash flow after 15 years you have 3- $300K properties or $900K value total. You still owe $300K so you have a net worth of $600K. That is double the net worth in the first scenario.

I also ran it through my spreadsheet and with some conservative but realistic calculations you would probably actually get more cash flow in the second scenario.

So borrowing will normally give you are greater return and increase you wealth long term. However there is risk. We just saw from the recent crash what can happen when you are over leveraged. There is also a value to the peace of mind knowing that your properties are paid for. to same degree this is a personal choice.

Good luck - Ned

1 Reply

Bryan H.

Investor · Willow Spring, NC · Member since 2013 · 788 posts · 285 votes

13y

Buying with cash gives you ability to move quickly. Buying with leverage allows you to increase your ROI.

1 Reply

Annette Hibbler

Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes

13y

Although buying cash has it's distinct advantages, such as more leverage to negotiate a better price, seller financing offers you the opportunity to stretch your investment dollars.

Here's an example: Let's assume your interested in purchasing five SF rentals and financing them over a six year (our most popular) term.

$15K DOWN - 6 YEAR TERM

House cost 33k each
15k down 18k financed over 6 years at $250 a month
Each house returns $750 a month rent
Monthly cost to finance $250

Monthly Gross Rent: $750
Less monthly finance payment $250
Less Expenses $270
Your total monthly income of $230 rent paid to you.

FOR 5 SF RENTALS your numbers are:

Monthly Gross Rent: $3,750
Less Monthly Finance payment $1,250
Less Monthly Expenses $1,150
Your Total Monthly Income of $1,350

The property management fee charged for one individual single family home is typically $100 per month. Since you would be purchasing a block of five, you would receive a discounted management fee of 8% each thus the discrepancy found in your monthly net income for five versus individual purchases.

1 Reply

Stephanie Dupuis

Residential Real Estate Broker · Bremerton, WA · Member since 2013 · 494 posts · 142 votes

13y

Peter - I enjoy that you asked this question, and I have spent far too much time reading, reading researching and crunching my own numbers on this myself.

I come from a family that made some good money in RE buying properties with cash during the depression - A great uncle bought silver before the depression crash (when it was undervalued), sold it when silver skyrocketed, used the cash to buy tax deeds (WA State), and that's how my family got started in RE. If I have the story correct, this uncle (who I never met, he passed before I was born) sold many of his properties and land to high-end businesses in downtown Seattle when the economy started to rebound. He also held on to cash flowing properties for income. Created wealth this way.

My grandfather also made his first purchase with cash. My grandfather said that back then (1945ish), very few ppl could get a loan or much of a loan - so they bought with cash. Times are different now. We can get loans. btw, my grandfather started making money on his first investment (a trailer park) by L/O it (this was before gurus :) because he needed to get out of the investment, and no one could get a loan.

To answer you question: Financing provides leverage and faster ROI (as stated by others). Cash provides flexibility (gives you options). When I'm looking at the two choices, I always weigh what is needed. Sometimes you need flexibility, sometimes you need ROI.

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Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

13y

You seem to be missing the reason why somebody buys "all cash". It allows for purchasing properties where a lender won't finance due to property condition. It also takes away the long times that a lender needs to approve a loan. No appraisal or inspection limitations.

It does not mean that the buyer won't later on get a loan.

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Account Closed

OP

Pittsburgh, PA · Member since 2012 · 3 posts · 0 votes

13y

Ok thanks this confirms what I thought about debt financing versus cash buying. If you don't need to close right away, repair, etc and you plan on holding a while then debt financing usually makes sense. I just wasn't sure I wasn't missing some obvious positive aspect of buying with all cash that would better suit my needs. Sounds like debt is the way to go right now.

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Marco SantarelliPro Member

Specialist · Orange County, CA · Member since 2008 · 2k+ posts · 623 votes

13y

Peter Alfieri,

Welcome to BiggerPockets!

I recommend to our investor clients that they finance their investment whenever possible because the leverage real estate offers you is one of the major benefits of this asset class. That allows you to buy more property with the same amount of capital. It also increases the rate of return on your invested dollars. And with interest rates as low as they are today, it would be almost crazy not to use financing.

There are times where an all cash purchase makes sense, but in the end, if your a buy-and-hold investor then you'll want to have financing in place.

Feel free to post any other questions you have.

Continued success!

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Jason Merchey

Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes

12y

This is all enlightening. It seems like the age-old question. There is something to buying with cash that I think represents a "a bird in the hand is worth four in the bush" kind of feeling (assuming that your leverage would be 1/4th of your cash x 4 purchases). Meaning, the cash flow is more secure, easier, and the whole process is easier (for so many reasons). I totally get that there are many reasons to leverage four properties instead of buying one. I think it should be emphasized though that holding four balls in the air if times get tough is much harder than one free and clear property. Further, what if appreciation does not happen, or doesn't happen soon enough? As long as your cash-flowing it's probably not a big deal, but it does suck some of the wind out of the sails of the leverage argument. I kind of like inspecting houses - I am even going to buy a infrared camera I think - so looking at 40 houses to buy 4 with loans is not that much of a bad thing. However, it's a slow process to use a loan; I think it's also possible that one would get out-competed in my market due to the fact that a large percentage of buyers buy with cash at the present time. So some of it depends on how you feel about paying market value. With the possibility of refi-ing, I think that cash also gains another point. I dunno, maybe I am just very conservative or risk-averse, but something about a bird in the hand feels good. I would bet though, if I had to bet, that four leveraged deals is better overall.

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Steven Stokes

Specialist · San Francisco, CA · Member since 2013 · 227 posts · 158 votes

12y

Like others I have crunched the numbers and financing leaves a better ROI.

I use cash to buy quickly and buy at a discount for buying quickly then financing the property to increase my ROI.

I don't like leaving money in a property especially since money is so cheap right now it's far better to leverage it than lock it up inside of a property.

The only exception to this I believe if it's your own property and you want the safety of never having to worry about someone beside the tax man coming to take it away. But as an investment leverage safely is better.

Just my opinion.

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David Krulac

Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes

12y

@Account Closed

When I started out I did not have the option of paying all cash. I had to finance or I wasn't going to be buying any property. In one way or another all 5 of the first properties that I bought were 100% financed. I could not have done it any other way.

That being said my end goal was to have real estate that I owned free and clear. So once I was well over the hump I started looking at ways to not only buy with cash but also to pay off existing mortgages of which I had about 50

While debt service (interest) is tax deductible, even at the 28% tax bracket the deduction is only worth 28 cents for every dollar you spend in interest. so it costs you 72 cents out of pocket to get that 28 cent deduction.

Once you pay off those mortgage which most times is the biggest debt against the property and the biggest bill to pay, the cashflow increases enormously. Instead of $100 a door, your talking $1,000 a door or more. Which allows you to own fewer properties and still maintain the same level of income net to you without the mortgage payments.

The debt no debt question involves factors such as your age, your finances, and your goals and the decision is as individual as the person making it.

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Buying Properties With All Cash

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