New investor buying cash, why am I wrong?

Question

Hello everybody!

I've just started following the BP podcasts and discussions and find all the information very useful; thank you everybody for sharing!

I'm looking to get started as a buy and hold investor on rental properties in the SC upstate area within the next year. I have a 9 to 5 job that I plan to keep but I'm thinking of real estate as an additional way to invest for retirement, kids college and lastly to increase cash flow.

My current plan for my first property is to save up and pay cash for it; however, on the podcasts interviews and BP discussions I always hear of investors using loans to finance their deals, using whatever cash available as a down payment for a 'bigger deal' and even using the equity on their properties (even personal home) as a way to leverage their next deal. In my 'investment' situation (and perhaps short sighted newbie view) I equate the experts' approach to getting loans to invest in the stock market and therefore I cant imagine why I would want to have mortgage payment on my investment. Why am I wrong?

I'll appreciate and thank your advice on why my approach is contrary to that of the experts.

Thank you again being active and sharing in the great BP community.

Daniel

Daniel Galvan · Answer

@Arianne L., thanks for the information and sharing how you and your in-law structure your deals. Also, your guys' website looks great congratulations!

@Paul Timmins , thanks for the list of links!

Risk aside, I guess I am still struggling to understand with how one gets better returns when one is leveraged than when buys outright. I'll be doing more research to understand the topic better in my own terms (It'd be great if you guys can refer me to videos or blogs where this might be discussed.).

Paul Timmins · Answer

@Daniel Galvan

Welcome. Fill in the foundation below.

Check out the Start Here page http://www.biggerpockets.com/starthere

Check out BiggerPockets Ultimate Beginner's Guide - A fantastic free book that walks through many of the key topics of real estate investing.

Check out the free BiggerPockets Podcast - A weekly podcast with interviews and a ton of great advice. And you get the benefit of having over 100 past ones to catch up on.

Locate and attend 3 different local REIA club meetings great place to meet people gather resources and info. Here you will meet wholesalers who provide deals and rehabbers (cash buyers). Find them through Google and meetup.com

Two Great reads, I bought both J. Scott The Book on Flipping Houses,  The Book on Estimating ReHab Costs  http://www.biggerpockets.com/flippingbook

Download BP’s newest book here some good due diligence in Chapter 10. Real Estate Rewind Starting over

http://www.biggerpockets.com/files/user/brandonatbp/file/real-estate-rewind-a-biggerpockets-community-book

Good Luck

Paul

Arianne L. · Answer

@Daniel Galvan People have different risk tolerance and goals in general. My father in law is nearing retirement age and prefers to buy rentals with cash because he would rather have fewer properties to think about even though he is only getting 5-8% returns on his cash. My husband and I on the other hand, prefer to either buy with leverage (25% downpayment) or buy with cash and use delayed financing (BRRR) to pull all our cash out almost making it a no money down deal. We aim to at the very least make 15% cash on cash return. It's all about what your personal goals are.

Daniel Galvan · Answer

@Jeff Graves Thank you so much for your thoughts. I totally get the point and give me some points to consider. I don't necessarily consider loans as risky, I'm coming from the point of tying up the loan payment money and having negative interests to pay VS getting that payment money to work for me some other ways (lending, flexibility in negotiations, etc.). For sure I'll take your comments into consideration when I'm ready to pull the trigger.

Greetings from SC!

Daniel

Jeff Graves · Answer

@Daniel Galvan I wouldn't say you are wrong...as every investor has a different level of risk tolerance.  I do believe the real estate market is much more stable than the stock market however.

The advantages of course for getting a loan, as you mentioned, is leverage and you can minimize your risk through the research you do before making a purchase decision.  Frankly if you have extra money you can keep that in the bank as a safety net until you feel comfortable enough with the income from that rental to then buy a second property.

Most of my clients purchase with a loan but then as they generate income the revenue is put back into the property, through either improvements or paying down the mortgage.

The idea most have when investing is to have someone else pay for the property.  If you pay all cash, you don't realize that benefit or the tax write-offs...but you will have added income you'll have to pay tax on.

Aloha,

Jeff