Developer · Raleigh, NC · Member since 2019 · 6 posts · 20 votes
I just purchased my primary residence in a new city with cash ($350k) and have another $250k sitting in cash.
Should I buy our first rental unit(s) with cash (after reserving 6-8 months living expenses)? As context, we have no debt of any kind.
I realize interest rates are low but don’t like the idea of taking out a loan if I can avoid it. Also, I realize mortgage interest can be deducted—but so can insurance and taxes which I would still realize.
Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
6y
@Payton Reid - there's a personal comfort that comes with paying cash, but strictly from a numbers stand-point it's not going to provide your best return on investment.
Let's say you purchase a second property for 200k that rents for 2k/M. For the first option, you get an 80% mortgage with roughly a 850/m payment. Let's say after paying all mortgage, tax/insurance, accounting for vacancy/maintenance/capex, you have $300/M left over. Your first year, you're earning 3.6k on 40k invested (40k is your 20% down payment)
If you bought pure cash, you eliminate the monthly 850/M mortgage so you now cashflow roughly 1,150 (300+850). In your first year you're earning 13,800/200k, not as high a ratio as the first example and you're also much less liquid.
The first option has a higher CoC and more importantly it does not even account for equity paydown (as others will say, the job of your tenant), tax write-off, or ability to scale. Lastly, any appreciation you gain is much sweeter as you are obtaining 100% of the appreciation of an asset while only owing 20% of it. This is the true beauty of leverage.
If you want to dive deeper into the weeds, I can gladly share my IRR spreadsheet that runs my examples with and without financing to show the difference outcomes. I personally tend to buy smaller houses with cash to obtain a better deal/close quick and then refi out after our value-add (hopefully BRRR and keeping no money in the deal).
The strategy is completely up to you as everyone has different objectives and we are all in different phases of our lives, I just wanted to point out the math aspect.
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
6y
@Payton Reid congrats on the buys! If you want to scale borrow; if you have money on the shelf and can easily get more then there is no harm in using cash; just never run out! All the best!
Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes
6y
@Payton Reid - there's a personal comfort that comes with paying cash, but strictly from a numbers stand-point it's not going to provide your best return on investment.
Let's say you purchase a second property for 200k that rents for 2k/M. For the first option, you get an 80% mortgage with roughly a 850/m payment. Let's say after paying all mortgage, tax/insurance, accounting for vacancy/maintenance/capex, you have $300/M left over. Your first year, you're earning 3.6k on 40k invested (40k is your 20% down payment)
If you bought pure cash, you eliminate the monthly 850/M mortgage so you now cashflow roughly 1,150 (300+850). In your first year you're earning 13,800/200k, not as high a ratio as the first example and you're also much less liquid.
The first option has a higher CoC and more importantly it does not even account for equity paydown (as others will say, the job of your tenant), tax write-off, or ability to scale. Lastly, any appreciation you gain is much sweeter as you are obtaining 100% of the appreciation of an asset while only owing 20% of it. This is the true beauty of leverage.
If you want to dive deeper into the weeds, I can gladly share my IRR spreadsheet that runs my examples with and without financing to show the difference outcomes. I personally tend to buy smaller houses with cash to obtain a better deal/close quick and then refi out after our value-add (hopefully BRRR and keeping no money in the deal).
The strategy is completely up to you as everyone has different objectives and we are all in different phases of our lives, I just wanted to point out the math aspect.
Rental Property Investor · Stratford, CT · Member since 2019 · 154 posts · 115 votes
6y
Payton - Congratulations on your investment. Huge accomplishment to be able to do what you have done.
To emphasize on Tom's point above. I was always a believer of living debt free, if I could afford it. The first few years out of college, all of the extra money that I could save was going towards the principal in my personal home, in order to pay that down as quickly as possible and one day to say I was living debt free. I always saw investing in RE as a risky business until I made the leap to purchase the first rental property (20% down) near a private university. Renting to students, cash on cash return was over 20% and It took less than a year for me to realize that this was a much better use of my money than to put in my personal property. Within the next 4 years, I kept saving and repeated the process 2 more times. Now I own 3 properties with an average return of around 30% CoC. The point I am trying to make is that depending on one's situation, it might be worth to diversify your investment and purchase more properties with less down, and take on some of that debt, because it in the long run it could pay off. Other factors need to be considered in this decision but from a principle point of view, it can work.
Developer · Raleigh, NC · Member since 2019 · 6 posts · 20 votes
6y
@Tom Shallcross thank you for the great summation! Really good info.
I realize that the debt method is a better CoC; just trying to get comfortable with it. I do like the idea of additional liquidity and renters paying down debt. I just need to ensure the property cash flows properly.
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
6y
Buying cash gives you the ultimate holding power. Don't let anyone ever talk you out of it. Like Mike mentioned it doesn't have to be all or none. 1 cash 1 finance. Many ways to invest.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
@Payton Reid - I did something similar several years ago... Moved to a new town and bought 10 units for renting and my home all for cash. The great thing is you can pocket all the free cash flow from the investment and save all cash for the next property. I really dislike using loans unless I must. I currently am trying to increase my income and to do that I will sell my initial properties and buy something using leverage - and i will see little difference in my income for the first few years and it wont be until year year 5 that i start to see some real changes ..... and this is with historically low interest rates..... so... while most folks talk about leverage I am not yet convinced it is the end all and be all....
do some IRR calculations and decide what gives you the best returns..... there is more to life than number of doors!
Rental Property Investor · New York City · Member since 2019 · 703 posts · 538 votes
6y
Whatever way makes you feel comfortable is what you do. I personally dislike debt of any kind and I like appreciation residential properties or commercial property. I have two MF properties that are paid in full and will not borrow against it, but that's me. It all depends your plans for purchasing investment property. Do you want lots of units or will you be happy with a couple/few? If you want cashflow from residential units will you be be happy pocketing Maybe $200-$300/month per property, it may or may not be worth it for you even though the ROI is double digit %. Since you are in a good position with liquid, the commercial real estate route may be an idea to consider.
Just remember that you're not losing equity paydown by using cash. The tenants are still paying the same rent, but you get to keep it all if you pay cash for the property vs. paying down a mortgage. When I paid off my first rental property I had a huge sense of security that I wasn't expecting. Having one property that was free and clear provided a lot more cash flow and security to my whole portfolio.
Investor · Dublin, CA · Member since 2016 · 344 posts · 228 votes
6y
@Payton Reid of course you will be able to go bigger and faster by using leverage. On the flip side, you don’t have to worry about mortgage expense when you bought with cash.
I just purchased my primary residence in a new city with cash ($350k) and have another $250k sitting in cash.
Should I buy our first rental unit(s) with cash (after reserving 6-8 months living expenses)? As context, we have no debt of any kind.
I realize interest rates are low but don’t like the idea of taking out a loan if I can avoid it. Also, I realize mortgage interest can be deducted—but so can insurance and taxes which I would still realize.
Just curious on your thoughts. Thanks!
The real answer is, of course, "it depends".
What are your goals? Do you want to add as many rentals as you can as fast as you can? Do you just want a good place to park that cash that earns a better return than where it is now? Do you want to start slow and get your feet wet before charging full steam ahead? That will tell you what you should do.
If you are unsure, buy with cash and finance later if you feel the need.
Hubby and I also have no debt, and bought all of our rentals with cash.
Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes
6y
I prefer cash for myself as I am not in a position that I have to be aggressive. I also am not looking to create more of a job than I already have with my 35 doors. I could easily push that to 100 doors with financing but that's 3 times more headaches, calls/emails, new roofs/HVACs, etc.... I have property managers on most of my properties but still need to manage the managers, deal with taxes, etc.... So for me cash is king.
Investor · Johns Creek, GA · Member since 2017 · 463 posts · 488 votes
6y
@Payton Reid congrats! I personally don't buy all cash unless the all cash offer significantly lowers the price. For me, it's all about the numbers and cash on cash return. The lower amount of cash you put in, the higher the return is. Of course, don't take on too much debt to the point you have very little cash flow. It's just maths - find the sweet spot where the returns make sense. I personally would always use leverage. However, that's not to say you made the wrong decision as everyone has different investment goals. For me, it's the returns percentage. For others, it might be comfort, and monthly cash flow.
Lender · San Diego, CA · Member since 2019 · 874 posts · 355 votes
6y
@Payton Reid remember loans would be paid by your tenants at the end.
Scale.... split your 250 into 25-30% down payments to get good rates and hold the properties. Some will yield immediate cash flow some won’t but if you are financially in a good spot pay them off with the rents in a few years the ya are paid off your money and equity grows exponentially.
Wholesaler · Dallas, TX · Member since 2017 · 306 posts · 133 votes
6y
Hello Payton! Maybe you could down pay about 30 % down payment, makin your debt payments will be a little lower and help you increase your positive flow and make your returns look better on- paper and make it look easier to sell. There is nothing wrong with debt as long as you have positive cash flow after the debt payment made.
The more units, the better. Each vacancy will not hurt so bad, if that is your top interest. If you buy a house for yourself locate it in in an area where people rent which is another sale or rental property.
Rental Property Investor · Wilton, NH · Member since 2019 · 57 posts · 32 votes
6y
If your goal is to purchase 1 rental property and that is it, i would buy Cash. If your goal is to scale and purchase more properties i would use your cash for down payments and leverage bank money. Your cash on hand right now could get you 3-4 properties on borrowed money. The cash flow from those properties would be equal or close to if you paid cash on 1 property. Now take into account deducting the interest on the 3-4 properties you have loans on and your now paying way less in taxes on the money you make from these 3-4 properties compared to the 1 property you purchased cash.
It really depends on what your long term goals are if you just want to buy 1 property now cash and save up cash to buy another in 5 years then if it makes you more comfortable i would buy them cash.
Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes
6y
I paid cash for my first 2 S.F.H they both double in value bought in a A-B area after the 2008 crash, the 3 I bought from a friend did a 30 year on it .Just the 2 paid off houses paid for college for my 2 kids .
The one thing I like about cash deals you always lot of capital to make moves ,lots of folks on here do the all debt method.
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
6y
@Payton Reid I am not sure what market your in for investing , but if you are in a competitive market then yes buy with cash otherwise you will not get a good deal, Simply refi cash out after, Double digit net caps are to be had if you know where to look and have the proper team around you
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
6y
@Payton Reid - your ROI is very low when you buy all cash. So it's really just psychological comfort vs math. Why not split the difference or do some sort of ratio that you are comfortable with so your ROI goes up but your monthly payment is still very low? Or you could do private lending and get a great return without having to deal with any real estate. My private lenders get paid in one of two ways: 1) interest only loans 2) equity w/preferred returns and/or quarterly disbursements. In both cases they don't have to deal with the daily grind of real estate ownership.