Paying cash vs financing multi family ? Strategy ?

Question

Opinions on financing vs paying cash ? ✅

I have always been in the mindset of leveraging the banks money to buy rentals  but with interest rates increasing & difficulty finding cash flowing properties I have thought about doing an all cash buy strategy. Using all cash I am not able to leverage as I would like but it reduces the risk in this market & prints cash without a mortgage/interest.

Hypothetical options

Option 1 - Buy a multi family “ 8 plex “ , in cash and use those profits to fund more cash deals. Slowly build a small real estate portfolio throughout the next ten years.

Option 2 -  Buy a 16 unit building with 50% down to reduce the mortgage payment and make the building cash flow more, reducing risk. Overtime pay the building off and use profits to eventually buy another building

Option 3 - buy 10 to 16 unit  multi family and BRRR the building using cash, increase rents, remove equity and finance another multi family eventually.

I am curious what other investors would do if you were to have cash to buy a large multi family in cash. I like the strategy of paying cash in this economy and waiting to see where interest rates are headed. If they fall again I have no problem leveraging and financing properties again but figured in this economy paying cash might be a good thing. What are your thoughts and ideas? Appreciate your time & advice.

Ryan Muska · Answer

Current High Interest Rates: Less buyers, reduced prices (despite still being inflated) because people cannot afford as much with higher interest rates, less competition, ability to win more deals.

Future Projected Lower Rates: More buyers flood the market, prices increase because people can afford more property, more competition, easier for people to find "buys" due to numbers being easier to work with.

Future Potential Same/Higher Rates: Rates do not go down, this is the new norm, get used to it. People slowly (and many have started) realizing that this is what we can expect for the foreseeable future.

Date the Rate, Marry the Price. There is something to say about prices being very high right now, but statistically, within the last 75 years, home prices have only dropped about 10% of the time. That being said, it is highly likely that they will increase, and with the projected lower interest rates, they are all but guaranteed to increase.

Why am I writing all this? Because I think it is best to leverage. If you are intending on putting most of your cash into a property merely to negate having to get a loan, you better have a sound plan for the cap ex that comes with that property. It is expensive and sometimes difficult to take equity out of a property. What happens if the property goes 50% unrented for 6 months? Do you have the reserves to cover the payments? What about a flooded basement? By leveraging, you leave additional reserves for you to utilize in the case that something unforeseen happens.

Minimum down payment or 50%: What is better? Let us look at it statistically on a $2 million property. For this example, let's use a minimum down payment of 25% and an interest rate of 10% to make the numbers easy:

25% --> 500k down payment | 13,163.57/month principal and interest

50% --> $1million down payment | 8,775.72/month Principal and Interest

In order to save 4,387.85/month, you need to put down 500k more. Sounds like a lot saved. But wait, what if you put that money into a CD/Savings at 5%. Now you are making 2083.33/month. Now you are only saving 2,304.52/month to add 500k to your down payment. With the lower down payment, you have the capital available to do what you please.

I apologize if this was confusing.

Calvin Baughman · Answer

Your contemplation of the cash-buy strategy in the current real estate market is indeed a prudent one, given the rising interest rates and the challenge of finding cash-flowing properties. Each of the hypothetical options you've outlined has its merits, and the choice largely depends on your risk tolerance, investment goals, and the specific market conditions you're dealing with.

Option 1 seems like a gradual and conservative approach. By buying an 8-plex in cash, you can minimize risk and use the generated profits to fund additional cash deals. This strategy provides stability and can steadily grow your real estate portfolio over time.

Option 2, with a 16-unit building and a 50% down payment, strikes a balance between leveraging and reducing risk. It can offer better cash flow and, over time, paying off the mortgage will increase your equity, allowing you to purchase more properties.

Option 3, the BRRR strategy, involves using cash to improve a property, increase rents, and then refinance to pull out equity for further investments. It can be a dynamic approach that recycles capital and potentially accelerates portfolio growth.

In this market, paying cash has its merits, as you've mentioned, especially in reducing the risk associated with mortgages and interest rates. It provides you with a solid financial foundation. However, it's also worth considering the opportunity cost and the potential advantages of leverage if interest rates become more favorable.

Ultimately, your decision should align with your long-term goals, risk tolerance, and market conditions. It's advisable to continue monitoring interest rate trends and being flexible in your approach, as the real estate market is dynamic and subject to change. Best of luck with your investment journey

When it comes to investing in multi-family properties, the debate between paying cash and financing is always intriguing!

Paying Cash offers peace of mind, quicker transactions, and no debt hanging over your head. It's all about financial security and lower overall costs.

On the other hand, Financing allows you to leverage your investment, potentially giving you access to bigger and better properties. Plus, there are some tax benefits and the chance to diversify your investments.

The choice ultimately depends on your individual goals, risk tolerance, and market conditions. Whether you're Team Cash or Team Financing, make sure to consult with experts and choose the path that aligns with your real estate investment strategy.