Buying with cash vs financing

[Robert Quiroz]

Hello All,

I will have around $1M in capital that I'm looking to generate 8-10% CoC returns for the purpose of replacing active income. I've decided to go the financing route to protect the value of that $1M against inflation over the next 40 years. However I wanted to get people's opinions here for discussion. I've listed some considerations below for financing vs buying in cash for multifamily home. I'm looking at MFH $450k and up in the Ohio markets (Dayton, Cleveland and Columbus).

Cash:

- Higher CoC returns

- No risk to being having negative cash flow with a loan (excluding capex)

- Buying/negotiating power with speed of transaction 

- No interest payments

- No risk of foreclosure

Financed:

- Possible exponential equity growth 

- Growth of initial investment is leveraged ~4x and most likely beat inflation in a decent area

- Mortgage interest tax deductions 

- Better financial efficiency from more doors

- Better diversification across more properties 

Are there other considerations I'm missing?  The ultimate goal here is to retire as soon as possible and not wait to grow equity over 5-10 years to be able to retire. 

[Randall Alan]

Quote from @Robert Quiroz:

Hello All,

I will have around $1M in capital that I'm looking to generate 8-10% CoC returns for the purpose of replacing active income. I've decided to go the financing route to protect the value of that $1M against inflation over the next 40 years. However I wanted to get people's opinions here for discussion. I've listed some considerations below for financing vs buying in cash for multifamily home. I'm looking at MFH $450k and up in the Ohio markets (Dayton, Cleveland and Columbus).

Cash:

- Higher CoC returns

- No risk to being having negative cash flow with a loan (excluding capex)

- Buying/negotiating power with speed of transaction 

- No interest payments

- No risk of foreclosure

Financed:

- Possible exponential equity growth 

- Growth of initial investment is leveraged ~4x and most likely beat inflation in a decent area

- Mortgage interest tax deductions 

- Better financial efficiency from more doors

- Better diversification across more properties 

Are there other considerations I'm missing?  The ultimate goal here is to retire as soon as possible and not wait to grow equity over 5-10 years to be able to retire. 

@Robert Quiroz

Hi Robert,

Just an observation... you have "higher cash on cash returns" under all cash deals - it depends on how you view that.  If you are talking about "Rate of return - then that actually belongs under "financed" - as with financing you only have to put 20% (max) down on the property - therefore your cash on cash return (as a percentage rate - which is usually how it is viewed) will be better with a financed property.  The total cash returned will be less on a financed property - but in all actuality it is better to finance because you would be able to do far more deals with your $1mm and ultimately you would come out way ahead financing all your properties.  Not only due to better cash on cash - but because of appreciation on more properties - which is where much more money is made than on the cash on cash side. 

I know you mention $400,000+ multi-family properties - but the numbers below will work out the same regardless of price point - I just chose simpler numbers to make the calculations easier to follow:

Example:  $100,000 house - $1,000/month rent, $100 taxes/month, $100 Insurance/month - 7% on Financing 

Cash Versus Financed:

Cash:

$100,000 invested.  $12,000 in gross income, less $2,400 in expenses = $9,600 yearly return

$9,600/$100,000 = 9.6% cash on cash return

Financed:

$20,000 down - financing $80,000 at 7%

Monthly payment (P&I for 30 years) $532

With Taxes & Insurance $732/month

Net income: $1000 - $732 = $268/month * 12 months = $3,212/year

$3,212 / $20,000 = 16.08% Cash on Cash return

I would also point out that interest payments aren't really a negative on the financing side, because your tenant pays all the interest.  It also gives you a tax deduction as well.  So interest really doesn't bring a 'down side' in the big picture.

Appreciation Example:

10 - $100,000 cash properties appreciating at 6%/year = $40,000/year appreciation

50 - $100,000 financed properties ($20,000/unit down) appreciating at 6%/year = $300,000/year appreciation

In addition - you get to depreciate 3.3% of your properties each year.

3.3% depreciation on $1,000,000 in cash properties = $33,000 in depreciation

3.3% depreciation on $5,000,000 in financed properties = $165,000 in depreciation.

All the best!

Randy

[Robert Quiroz]

@Randall Alan

Thanks for that scenario; I'm not sure how I missed that calculation, or I never did it. I plotted the range of down payment vs CoC and it's pretty obvious, the less you put down the better your CoC is. Thanks for clarifying that.

Your examples for appreciation and depreciation are also helpful.

Are there any convincing arguments for buying in all cash?  Risk mitigation?

[Randall Alan]

Quote from @Robert Quiroz:

@Randall Alan

Thanks for that scenario; I'm not sure how I missed that calculation, or I never did it. I plotted the range of down payment vs CoC and it's pretty obvious, the less you put down the better your CoC is. Thanks for clarifying that.

Your examples for appreciation and depreciation are also helpful.

Are there any convincing arguments for buying in all cash?  Risk mitigation?

 @Robert Quiroz

From an efficiency perspective of making your money work harder - no. 

There are minor functional advantages - such as cheaper closing costs due to not having to perform bank required steps.   Closings can also be quicker.   But as to best use of your money - leverage gives you 4 to  5 times the volume of properties that you control with the same amount of money invested.  That’s always going to win in the end as to coming out ahead as long as you make smart financial investments (such as maintaining control of your own investments, and making smart choices on properties that cash flow, etc).  

Randy 

[Sam McCormack]

Quote from @Robert Quiroz:

Hello All,

I will have around $1M in capital that I'm looking to generate 8-10% CoC returns for the purpose of replacing active income. I've decided to go the financing route to protect the value of that $1M against inflation over the next 40 years. However I wanted to get people's opinions here for discussion. I've listed some considerations below for financing vs buying in cash for multifamily home. I'm looking at MFH $450k and up in the Ohio markets (Dayton, Cleveland and Columbus).

Cash:

- Higher CoC returns

- No risk to being having negative cash flow with a loan (excluding capex)

- Buying/negotiating power with speed of transaction 

- No interest payments

- No risk of foreclosure

Financed:

- Possible exponential equity growth 

- Growth of initial investment is leveraged ~4x and most likely beat inflation in a decent area

- Mortgage interest tax deductions 

- Better financial efficiency from more doors

- Better diversification across more properties 

Are there other considerations I'm missing?  The ultimate goal here is to retire as soon as possible and not wait to grow equity over 5-10 years to be able to retire. 

 I see both as valid options with pros and cons. I honestly think it depends on the property. if it is a good property listed at a price to sell/has a motivated seller, then offer cash. Your offer will stand above most, if not all. If it is a property that has sat for a bit and you can get the price down, try to work the numbers financing. 

Also, I couldn't help but notice you are looking in markets similar to and close by Greater Cincinnati. Would love to talk to you about the market on both sides of the river down here! Let me know if we can talk some more about Greater Cincinnati and how I can help you best

[Austin McClain]

I've seen investors have success buying in cash and then doing a cashout refi after their purchase to replenish the funds. 

Cons - you have to wait a few months depending on the seasoning period to do the cash out refi. Also, the interest rate can be higher than a traditional purchase mortgage. 

Pro - You can get significant discounts buying cash, to build in more equity day 1

[Justin Moy]

Most investors will use debt to purchase their deals, debt is one of the great advantages of real estate investing. 

Some will buy with cash with the goal of refinancing the cash out later, so that could be a strategy. 

One thing to consider too is diversification, you can invest in more assets with debt versus having 1 or 2 properties with all your cash tied into them. 

If your goal is to replace an active income, have you looked into debt funds? 

Usually when people are looking to live off passive income the best value is in consistent payouts and low risk, of which I'd argue debt funds are the most consistent with the lowest risk of the investing niches out there depending on the fund of course.

[Travis Timmons]

1. I am always cynical of those that post on here stating that they have X number of dollars, but I'll play along.

2. Index funds will outperform cash purchased real estate in stagnant, low to no population growth markets. 

3. Leverage + appreciation is what makes real estate worth the hassle. Unless you love it or really have the itch to get into real estate, I'd suggest that you pass and keep doing whatever it is that allowed you to pile up $1M in the first place. 

4. Living off of real estate is hard. It's like the property knows you need the money and something will break. 

5. I'm a big fan of Wes Moss's work if you want to retire early. His teachings suggest a paid off home, $500k in assets, and more than 1 source of income (SS if of that age, real estate, part time job, retirement/pension, etc.).

[Debbie Fales]

As lenders, we are biased toward leverage for many of the reasons already mentioned. Although a cash offer may help you win the property or gain concessions in the short-term, there are long-term benefits to using debt. 

Amplified Returns: Rental income and potential appreciation are magnified because they work on the entire property value, not just your down payment. It revs up your investment engine!

​Build a Portfolio Powerhouse: Leverage lets you acquire multiple properties, accelerating your path to generational wealth.

Tax Advantages: Mortgage interest and depreciation can be tax-deductible, further sweetening the deal.

Best of luck to you! 

[Rick Albert]

Another consideration is how long would it take to make your cash back. For example:

Buy a $450K property with 20% down, you save $360K in the bank. How many years would it take to get $360k in your bank account based on the rental income if you paid all cash? Your mortgage payment would be in the range of $2400/month (assuming 7% interest rate). That means it would take 12.5 years to get that back. Think about how many more properties you missed out on because you paid cash and it was tied up in the property. Versus if you leveraged, you could buy multiple properties (or larger projects), and be in a better position in the long run.

The reality is real estate kind of only makes sense if you leverage. You gain appreciation on the value of the property, regardless of the loan amount.

[Robert Quiroz]

Quote from @Travis Timmons:

1. I am always cynical of those that post on here stating that they have X number of dollars, but I'll play along.

2. Index funds will outperform cash purchased real estate in stagnant, low to no population growth markets. 

3. Leverage + appreciation is what makes real estate worth the hassle. Unless you love it or really have the itch to get into real estate, I'd suggest that you pass and keep doing whatever it is that allowed you to pile up $1M in the first place. 

4. Living off of real estate is hard. It's like the property knows you need the money and something will break. 

5. I'm a big fan of Wes Moss's work if you want to retire early. His teachings suggest a paid off home, $500k in assets, and more than 1 source of income (SS if of that age, real estate, part time job, retirement/pension, etc.).

 @Travis Timmons

I appreciate the opposing viewpoint and the suggestion to look into Wes Moss. The $1M came from investing in real estate and my family has been in SFR rentals for 40+ years so I'm familiar and comfortable in real estate and believe that Multi-family investing is significantly more efficient that SFR.

So my take away from your points are:

- Invest in a growth/appreciation market (that still cash flows)

- Consistent cash flow from real estate is not dependable/suggested and will require significant effort. Look at other options

My take aways from the other posts my takeaways are:

- Financing provides diversification

- Financing leverages my cash 4x/5x to work harder for me for cash flow, tax deductions and return of initial investment

- Look at other options for retirement income

[Travis Timmons]

@Robert Quiroz

I wasn't taking shots at your particular post. It just seems that there is a lot of, I have $2M to invest...what should I do? That's just my baggage and cynicism.

In general, the S&P will outperform real estate purchased with cash. If, however, you look at real estate as fixed income, that's okay.

If I could only give you one piece of advice, it would be to buy the property you want to own the most 10 years from now. Most folks forget and/or do not mention rent appreciation. Good properties/locations will see values and rents grow at a greater rate. We all chase year 1 cash flow in the beginning, but it's not a good goal; and you don't really make any money in year 1 regardless of the property. It'll take a year-ish to stabilize the property and to work out the kinks/maintenance that you did not know about when you bought it. 

[James Hamling]

@Robert Quiroz I need to correct your notion that the MFH is "better", as is stated in a manner that seems to be a type of state of permeance. 

Just as there is times of buyers market, sellers market or level market, there is times where it's a SFH market, Small Multi market, and MFH market.

For the most part, today, is NOT a good time for MFH, not at all. It's a whole other thread to get into but do some research on the issues with commercial real estate, Ben Mallah is a recent high-profile additional person to come out publicly on this and who is putting his $ where his mouth is. 

Today, acquisition wise, best opportunity is in SFH, specifically below median. Again, speaking in generalities as there is several niche and MSA specific opportunities as well.

 It is with mathematical certainty that soon coming will be opportunity to best acquire commercial residential properties, I am speaking in very near term, under 18mnths and it's currently looking to be making this shift somewhere in Q1 '25' and well into it by Q2 '25'. 

The BEST acquisition today is positioning for the soon coming FTHB "make it rain" party. Which will inflate market prices int he segment seemingly over-night. Stoking a new run on inventory, and even greater equity growth potential. Long story short, all roads point to significant equitable returns in that segment in a near term (under 18mnths). Which profits can than be utilized to carry forward into the then "good" MFH acquisition timing of things.

Buy low, sell high, it's really that simple. Buying high hoping on higher, higher, higher doesn't work too well. Just ask any MFH operator who did an acquisition in last 18-24mnths. 

Backs are against the wall on the inventory issue, and there is no way around it. Fed's can talk all they want about "creating" however millions of homes, it changes nothing unless Harry Potter comes into office and shezams them into existence. 

Fed's "create" things by "making it rain" to create the actual producers to produce. What happens when you add purchasing power into a product shortage environment? Prices go where? Yes, up, it's simple obvious supply demand metrics. 

Or, acquiring in satellite markets at sub replacement cost values. Again, SFR's and small multi's.

Next year there will be regional lenders and various operators all too happy to move on things, and pressed to do so. Especially as maintenance bombs increase in there detonations, the opportunities to acquire from failed operators is at the door step. 

[Robert Rixer]

First of all, congratulations on having the liquidity - it's a great problem to have. Many good responses already. I'll add that for the cash option, you'd need 8-10% cap rate properties which, even in the Midwest, will likely be older Class C/B- product where there is greater risk of higher maintenance and delinquencies versus newer/nicer builds. So your odds of reaching that 8-10% CoC potential is possible, but tougher. Property management execution is key. Best of luck!

[Adam Bartomeo]

With cash 

- you can get deals that you cannot get with loans.

- you can refi later

- you can carry the insurance you want, not what the lender wants

[Ashish Acharya]

@Robert Quiroz

Buying with cash offers higher immediate cash flow, no interest payments, and less risk, but limits your ability to diversify and leverage. Financing provides potential for exponential growth, tax benefits, and diversification but introduces risks like negative cash flow and interest rate fluctuations.

Since your goal is to retire quickly, a balanced approach—using some cash for immediate income and financing for long-term growth—might give you the best of both worlds. Consider liquidity needs, inflation, and your risk tolerance in deciding the mix.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Jake Andronico]

@Robert Quiroz

My vote is cash. If the goal is replacing income, cash will allow you to get a better deal on the buy, cash flow from day one, and you can still set capital aside for improvements/capex. 

Also, you can always finance an asset later if you already own it in cash. 

A bank will be pleased you called :) 

Best of luck to you no matter what you decide!

[Evan Polaski]

@Robert Quiroz, to finance or not at the time of acquisition has several variables to it.  Let's assume you are only looking at deals that you could buy cash.

The biggest factor that goes into the decision is whether you are taking on positive or negative leverage.  If a mortgage is going to cost you 6.5% and your going in yield on the asset is 5.5%, then you are diluting your returns by buying cash.  For simple math, you are paying 6.5% to make 5.5% on your money. 

Now if you can buy at a 6.5% return and borrow at 5.5% then, yes, borrow as much as you possibly can and get more assets.  

The other factor to consider is less tangible, but comes with mental security.  Having loans out will mean you owe money every month, no matter the current status of the asset.  Maybe just lost two tenants, and have to come out of pocket for the mortgage.  When you talk about replacing income, the safety of that cash flow is much more imperative, since presumably you are living on it, too.

And then you combine both thoughts: safety in income stream to live off of, and cap rates/yields from assets.  Most Class C/D areas will pencil to positive leverage, if you use generic underwriting assumptions.  But there are many things that are fixed costs, that if you buy in lower rent areas are a higher percentage of your rent each month.  The actual cost of any maintenance/repair/capex is a higher percentage of rent to reserve, the lower the rent levels are.

Additionally, and this is just my personal experience, if you buy in a Class C area, you will get a Class C tenant.  To me, this meant longer vacancies between tenants to find a qualified tenant.  It meant more frequent turn overs (cycling tenants every 2-ish years versus 4-5 in my nicer properties), which came with turnover costs.  And these tenants, typically, were rougher on the property during their tenancy, so those more frequent turnovers cost more each time.  When you factor all those into your underwriting, I would say, yes, you CAN make higher cashflow from Class C rentals, but it is a bigger risk.  Again, if you plan on retiring on this income, that is a risk you need to consider.

Lastly, as another posted noted, you can buy cash today, and if there is opportunity to renovate and increase your yields on the property, refi later, once you have the property stabilized. This would be a way to get into a better deal without diluting your returns with negative leverage.

[Robert Quiroz]

Quote from @Travis Timmons:

@Robert Quiroz

If I could only give you one piece of advice, it would be to buy the property you want to own the most 10 years from now. Most folks forget and/or do not mention rent appreciation. Good properties/locations will see values and rents grow at a greater rate. We all chase year 1 cash flow in the beginning, but it's not a good goal; and you don't really make any money in year 1 regardless of the property. It'll take a year-ish to stabilize the property and to work out the kinks/maintenance that you did not know about when you bought it. 

 @Travis Timmons When you say "the  property that you want to own the most in 10 years from now," what do you mean? And try not to over idealize like A class neighborhood/new build.  I'll still have to pick a property that will cash flow as well as possible which will dictate some of my buy box parameters. 

[Robert Quiroz]

Quote from @James Hamling:

@Robert Quiroz I need to correct your notion that the MFH is "better", as is stated in a manner that seems to be a type of state of permeance. 

Just as there is times of buyers market, sellers market or level market, there is times where it's a SFH market, Small Multi market, and MFH market.

For the most part, today, is NOT a good time for MFH, not at all. It's a whole other thread to get into but do some research on the issues with commercial real estate, Ben Mallah is a recent high-profile additional person to come out publicly on this and who is putting his $ where his mouth is. 

Today, acquisition wise, best opportunity is in SFH, specifically below median. Again, speaking in generalities as there is several niche and MSA specific opportunities as well.

 It is with mathematical certainty that soon coming will be opportunity to best acquire commercial residential properties, I am speaking in very near term, under 18mnths and it's currently looking to be making this shift somewhere in Q1 '25' and well into it by Q2 '25'. 

The BEST acquisition today is positioning for the soon coming FTHB "make it rain" party. Which will inflate market prices int he segment seemingly over-night. Stoking a new run on inventory, and even greater equity growth potential. Long story short, all roads point to significant equitable returns in that segment in a near term (under 18mnths). Which profits can than be utilized to carry forward into the then "good" MFH acquisition timing of things.

Buy low, sell high, it's really that simple. Buying high hoping on higher, higher, higher doesn't work too well. Just ask any MFH operator who did an acquisition in last 18-24mnths. 

Backs are against the wall on the inventory issue, and there is no way around it. Fed's can talk all they want about "creating" however millions of homes, it changes nothing unless Harry Potter comes into office and shezams them into existence. 

Fed's "create" things by "making it rain" to create the actual producers to produce. What happens when you add purchasing power into a product shortage environment? Prices go where? Yes, up, it's simple obvious supply demand metrics. 

Or, acquiring in satellite markets at sub replacement cost values. Again, SFR's and small multi's.

Next year there will be regional lenders and various operators all too happy to move on things, and pressed to do so. Especially as maintenance bombs increase in there detonations, the opportunities to acquire from failed operators is at the door step. 

 @James Hamling Thank you so much for this perspective. I didn't consider trying to time when to enter the MFH market based on the current valuation of MFH CRE. Besides Ben Mallah, what are some other resources that I can familiarize myself with to understand the current valuation and the trends? Am I just looking at MFH values over the last 24 months and trying to project? At face value, it sounds like you believe that some of the operators of MFH that have purchased in the last 18-24 months may have to cut losses next year providing new investors a much better deal.

[Robert Quiroz]

Quote from @Ashish Acharya:

@Robert Quiroz

Buying with cash offers higher immediate cash flow, no interest payments, and less risk, but limits your ability to diversify and leverage. Financing provides potential for exponential growth, tax benefits, and diversification but introduces risks like negative cash flow and interest rate fluctuations.

Since your goal is to retire quickly, a balanced approach—using some cash for immediate income and financing for long-term growth—might give you the best of both worlds. Consider liquidity needs, inflation, and your risk tolerance in deciding the mix.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

A balanced approach seems like a reasonable approach.  Thanks for the suggestion!

[Robert Quiroz]

Quote from @Evan Polaski:

@Robert Quiroz, to finance or not at the time of acquisition has several variables to it.  Let's assume you are only looking at deals that you could buy cash.

The biggest factor that goes into the decision is whether you are taking on positive or negative leverage.  If a mortgage is going to cost you 6.5% and your going in yield on the asset is 5.5%, then you are diluting your returns by buying cash.  For simple math, you are paying 6.5% to make 5.5% on your money. 

Now if you can buy at a 6.5% return and borrow at 5.5% then, yes, borrow as much as you possibly can and get more assets.  

The other factor to consider is less tangible, but comes with mental security.  Having loans out will mean you owe money every month, no matter the current status of the asset.  Maybe just lost two tenants, and have to come out of pocket for the mortgage.  When you talk about replacing income, the safety of that cash flow is much more imperative, since presumably you are living on it, too.

And then you combine both thoughts: safety in income stream to live off of, and cap rates/yields from assets.  Most Class C/D areas will pencil to positive leverage, if you use generic underwriting assumptions.  But there are many things that are fixed costs, that if you buy in lower rent areas are a higher percentage of your rent each month.  The actual cost of any maintenance/repair/capex is a higher percentage of rent to reserve, the lower the rent levels are.

Additionally, and this is just my personal experience, if you buy in a Class C area, you will get a Class C tenant.  To me, this meant longer vacancies between tenants to find a qualified tenant.  It meant more frequent turn overs (cycling tenants every 2-ish years versus 4-5 in my nicer properties), which came with turnover costs.  And these tenants, typically, were rougher on the property during their tenancy, so those more frequent turnovers cost more each time.  When you factor all those into your underwriting, I would say, yes, you CAN make higher cashflow from Class C rentals, but it is a bigger risk.  Again, if you plan on retiring on this income, that is a risk you need to consider.

Lastly, as another posted noted, you can buy cash today, and if there is opportunity to renovate and increase your yields on the property, refi later, once you have the property stabilized. This would be a way to get into a better deal without diluting your returns with negative leverage.

 @Evan Polaski I really appreciate you speaking to risk alongside the pros and cons of cash vs financed.  Perhaps a strategy to explore would be to buy in cash, exploit the buying power and get a better deal, stabilize the property over 12 months, have a better assessment of the properties expenses, then finance the property.  I'd minimize the risk of having negative cash flow in the first 12 months when things are the most unknown and I'd be able to increase the gross rent of the property which should give me a better loan or at least bigger margins to cover my risk for negative cash flow. 

[James Hamling]

Quote from @Robert Quiroz:

Quote from @James Hamling:

@Robert Quiroz I need to correct your notion that the MFH is "better", as is stated in a manner that seems to be a type of state of permeance. 

Just as there is times of buyers market, sellers market or level market, there is times where it's a SFH market, Small Multi market, and MFH market.

For the most part, today, is NOT a good time for MFH, not at all. It's a whole other thread to get into but do some research on the issues with commercial real estate, Ben Mallah is a recent high-profile additional person to come out publicly on this and who is putting his $ where his mouth is. 

Today, acquisition wise, best opportunity is in SFH, specifically below median. Again, speaking in generalities as there is several niche and MSA specific opportunities as well.

 It is with mathematical certainty that soon coming will be opportunity to best acquire commercial residential properties, I am speaking in very near term, under 18mnths and it's currently looking to be making this shift somewhere in Q1 '25' and well into it by Q2 '25'. 

The BEST acquisition today is positioning for the soon coming FTHB "make it rain" party. Which will inflate market prices int he segment seemingly over-night. Stoking a new run on inventory, and even greater equity growth potential. Long story short, all roads point to significant equitable returns in that segment in a near term (under 18mnths). Which profits can than be utilized to carry forward into the then "good" MFH acquisition timing of things.

Buy low, sell high, it's really that simple. Buying high hoping on higher, higher, higher doesn't work too well. Just ask any MFH operator who did an acquisition in last 18-24mnths. 

Backs are against the wall on the inventory issue, and there is no way around it. Fed's can talk all they want about "creating" however millions of homes, it changes nothing unless Harry Potter comes into office and shezams them into existence. 

Fed's "create" things by "making it rain" to create the actual producers to produce. What happens when you add purchasing power into a product shortage environment? Prices go where? Yes, up, it's simple obvious supply demand metrics. 

Or, acquiring in satellite markets at sub replacement cost values. Again, SFR's and small multi's.

Next year there will be regional lenders and various operators all too happy to move on things, and pressed to do so. Especially as maintenance bombs increase in there detonations, the opportunities to acquire from failed operators is at the door step. 

 @James Hamling Thank you so much for this perspective. I didn't consider trying to time when to enter the MFH market based on the current valuation of MFH CRE. Besides Ben Mallah, what are some other resources that I can familiarize myself with to understand the current valuation and the trends? Am I just looking at MFH values over the last 24 months and trying to project? At face value, it sounds like you believe that some of the operators of MFH that have purchased in the last 18-24 months may have to cut losses next year providing new investors a much better deal.

No..... No, no, no. 

Look, were talking Commercial Real Estate now and that is a completely different universe from what 97% on BP know or ever speak of. Parts of it are similar to SFR, some aspects translate, but they are different worlds in different universes.

See, in SFR (1-4 unit) the primary driver to valuations is comp's, market sale comparable, what so-n-so sold there place for last week/month etc..

In Commercial, nobody gives a squirt what so-n-so sold at other then to laugh at, or with them. 

Values in Commercial are a RESULT of the factors that formulate it's financial performance. 

Have you noticed on BP thread after thread about assorted syndications suspending distributions, going belly up, taking measures to prevent going belly up? 

The existing performance of those properties may be a-ok. They may have same rents going, same maintenance, same vacancy, nothing changed there BUT change the financing and it changes EVERYTHING. 

Most Commercial is on terms up-to 7yrs. That's the general rule. And 5yr is rather common also. So, those who have been hit with there financing adjusting to triple and quadruple the money cost, slingshotted from life in the green to being deep in the red. And then add a sluggish market where they can't raise rents to compensate...... 

So if I had to pick just 1 thing as "the" biggest thing in Commercial space to monitor for determining biggest impactors to market prices for MFH, without doubt it's COST OF CAPITAL. 

You can literally change the market price of a property by millions with just a few percentage point change. 

SFR is very different in this regard. SFR is far less impacted by such, mainly because the debt being capitalized over 30yr terms vs, 3-5-7.

So unless the Fed is willing to start dropping hundreds of basis points at a time and without doubt unleashing a significant inflation "spring", or Fed's stepping in to convey some form of CRE finance relief something...... well the math is clear, Q1/Q2 '25' is gonna get real interesting real fast for Commercial Properties.

I know many who have been stacking capital, serious capital, for this exact reason. 

I think the "sweet spot" is going to be getting in early, right as the "pain" is first being released and as all the big $ starts doing acquisitions. 

But again, were talking full-out Commercial right now. If your patience is not measured in Quarters and years, your not cut out for CRE. It's a whole different timeline.

[Marcus Auerbach]

Definitely leveraged. Strictly analytical speaking you cannot make a financial case for unleveraged investing in real estate. For some people, it is a preference thing and that is fine too. But you can leverage a bit more conservative to get the cashflow to where you want it.

Multifamily is a good strategy, but not the only/best. It depends on what type of experience you want to have. The worst MF is probably the small 5-12 unit space: you have all the disadvantages of MF, without the synergies. That works much better at 50+ unit properties.

I have made the decision to invest exclusively in SF homes a long time ago, because it requires the lowest amount of management and provides the highest revenue per unit. The resident takes care of everything and usually stays 3-5 years at least. 

I also support the point of thinking at least 10 years ahead and only buy properties your future self will be happy. This is why we buy only in the suburbs of Milwaukee, even though prices are higher, but taxes are lower and overall you have better demographic pools to rent to.

[Basit Siddiqi]

I personally think a 8% to 10% cash on cash return is hard to achieve right now.
It is easier if you are talking about overall return(Cash on cash plus appreciation).

I normally aim for 4% cash on cash and 4% appreciation annually.

Furthermore, using financing makes it harder to achieve higher cash on cash returns because in most markets, the interest rate is higher than the rate of return.

Best of luck

[Siraj Alsafar]

You've gotten some great responses here. I'm a licensed commercial and residential agent and looking to acquire 28 units though owner financing. 

someone knocked it out of the park when they said your return is theoretically higher if you use financing vs cash.

The second best comment which I also love to make but someone else beat me to it is how an appraiser values the property which is comparable sales in residential vs the income approach in CRE.

I love Ben and his family so I'm glad you're watching his content. I almost sold a hotel for him haha. Anyway I would definitely consider using 30 percent down for two properties