Buying Properties With All Cash

[Account Closed]

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.

[Ned Carey]

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