When is paying cash okay?

Question

I am 23 years old with 30k saved. I am looking to invest in Rochester, NY where some SFHs and duplexes are on the market for 30k. Because of my age and that I don't have a high paying salaried job [I work two part time hourly jobs and have little track record with taxes to show a bank], the big obstacle I am facing is getting a mortgage to leverage OPM which I know is one of powers of REI.

Do you think this might be a time where paying all cash for an investment is appropriate? I could see myself, as I have more income to show banks, getting a HELOC [since I would own it outright] to buy the following investment.

All thoughts are welcome!

Thanks, Brian

Dave Savage · Answer

@Brian R. I would definitely not put all of your money into one property, but you have a few options.  I would look to partner with someone to get your first property.  Talk to your family, friends, neighbors, co-workers and show them numbers from a few properties and you might get someone else to put up $30k to buy a $40k duplex in Rochester (rents for $1300/mo) that you might put $5-8k into and then have a reserve fund of $12k which you can adjust as you get some more experience.  These types of properties can be found every day in Rochester.

You could also contact Hard Money Lenders, but they typically have shorter terms that might be tough if you can't qualify for a loan to close out that loan.

Another option talked about in one of the BP Podcasts was lendingclub.com.  I haven't used them but it might be an option to get more case to buy your house.

You just don't want to get over extended on your first purchase so be conservative in your strategy.

Brian R. · Answer

@Andrew S. @Phil Z. @Greg Meech Thank you all three for your comments. I think you are all right and I would be well served by investing some more time in learning how I can obtain financing. I think I've thrown the towel in prematurely.

Brian

Greg Meech · Answer

Why pay all cash if you do t have too? You sound like you gave up on mortgages before trying. It may not be as hard as you think you just can't give up so easy. Besides cash is king and if your new having extra cash can really come in handy and be safer  if you run out of cash then know one will lend you money. Try again and see what you can get.

Phil Z. · Answer

You definitely do not want to spend 100% of your savings on a piece of real estate.  You need to account for vacancies and repair costs to say the least.

Andrew S. · Answer

@Brian R.  Also keep in mind that it's hard to get HELOCs on rental property and you still have to qualify for HELOC based in part on your income.  Finally, if you pay cash for your property, you will not get all of that back out with a HELOC or refi - only about 70% of assessed value.

Brian R. · Answer

@Eric Xie Thanks for the reply! I know there is no hard and fast rule but when you put up cash offers, what would you say as a rule of thumb you can offer below the asking price? 5% off? 10% off? 15%? I know every property is different but would love to hear what your experience has to say about this.

Pam R. · Answer

Question: have you actually talked to a broker about obtaining a mortgage?

If you really can't get a mortgage, there's nothing wrong with paying cash - you just can't empty your bank account on the purchase. You need reserve funds.

Good luck!

Eric X. · Answer

i always pay cash to get the best price but heloc if i need cash out of it.  however with limited cash, I would probably not put all your cash all in on one unit when nothing is guaranteed.