when to use my own saved Funds and cash VS Mortgage/credit line

Question

So i have a couple properties i payed for with cash out of my own savings and another i payed for with a primary residence line of credit. What are the advantages of using your own cash or going to bank and having lines of credit ready? Im wondering also should i always use all my savings to pay for it, like getting my line of credit back and having funds ready off the properties i already payed cash for. Help with this would be greatly appreciated thx

Also have Roth ira with wife

Joe Villeneuve · Answer

I've said it before, the first of 2 rules of REI is to "NEVER spend your cash".  Once it's gone...it's gone, and you need to re-generate new cash to move forward.  This means however long it took you to generate the original cash, will be when you get your next lump of cash.  Then, spend that, and you repeat the steps all over again.  These are NOT the steps you want to repeat.

Like I said above...NEVER SPEND YOUR CASH..., but you should use it as many times as you can, repeating that use as fast as you can.  There's a difference.

You should use your cash to continually generate new profits to "spend".  See, you "spend" your profits, not your cash.  Your cash works for you by constantly going into a profitable investment, then back out "with friends", then back in, and out, and so on.

Your cash needs to fund what amounts to your own personal ATM of profit, that you use to invest/spend on your more permanent investments (holds).

Thomas S. · Answer

Paying cash means you are receiving a return on that cash at the present mortgage interest rate.

Your cash is being abused by not earning it's keep, lying dead in a property earning next to nothing.

Pull it out, spread it around with minimum DPs and make it work for you.

If you can borrow money at a lower rate than you can invest it that is the entire principal behind investing.

Joe Villeneuve · Answer

LOL.  Go for it.  Keep the underlined meaning in mind though.  Doing it this way means you will always stay in the game...and, you can recover from lost money, as long as you bail out of losing deals, since it isn't your money you're losing.

It's like playing poker.  The only hand you have to win is the last one, and the only way to be have a chance at that hand is to stay in the game.  What's the secret to REI?  To "Stay in the game".  What's the fastest way to get out of the game?  "Spending, and losing, YOUR money"

In Poker, every hand you lose, no matter how many chips you put into that kitty, you haven't lost any money...it's just in a different pile on the table...but it's still on the table.  If you're still in the game, you can always get it back, as long as you fold a bad hand.

In REI, you can always recover lost money, in a different property, as long as you "fold" a bad property...and move on.  You'll get those lost funds right back in the next property..as long as you're moving forward, and not treading water, or worse, losing money in a property...like negative cash flow.  This is the number one reason why I say negative cash flow is bad....It keeps you from moving forward....all the while it's pulling you backwards.

It's like throwing an IOU into a kitty that says, "the holder of this IOU shall continue to collect additional chips (money), long after the hand is over".

Peter Vekselman · Answer

Hey @Joshua D.

Thomas S. has some great advice for you.  Remember, we are in the business of leverage.  Ultimately if too much of your cash is tied up in properties you will sooner or latter run out of it and then you will non longer be able to do any more deals.

Be smart with how you leverage.  Make sure you have enough equity left to have a good ROI.

In the end you may not have enough cash and or your borrowing power may also run out.  So I would start thinking about other various avenues to make money through in this business.

For instance those of us that have successful wholesaling models set up are able to fund other types of deals through the cash we make through wholesaling.

Hope this help.....PM me if you need any more help.

Peter

Joshua D. · Answer

lol go for what?

Joshua D. · Answer

albert bui

Thats the way i was seeing it also with having fast cash or lines of credit to close on a deal quickly. Thanks

Joshua D. · Answer

Does this make sense i look at it like this. For example the last property i bought was for $27,500 i claimed as my primary residence and got a line of credit back for $75,000 no fees or anything with first 3 months 0% finance rate and after 2.3% finance rate. I then used half that line of credit on my last property i just bought for $36,000 which the value of the house is from 90,000-120,000 thinking of getting a invesment line of credit off that. I also bought a duplex for $16,000 in cash which was my first first property. I rented out for about a year now and im actually gonna sell and prob get from 45,000-65,000 for it. Also selling a 5 acrea property which i will make about $20,000 here soon. Where should i go from here? thanks for all the help

Albert Bui · Answer

As with anything its balance.

It can kind of be hard to sift through the advice or comments you hear since they all represent many different view points.

The main advantage of having funds ready via lines of credit is control and flexibility to acquire a deal quickly when a deal presents itself.

As an example I'll use mostly permanent loans but I'll also have a few 2nd position lines of credit and some 1st position lines of credit to make sure I can deploy capital quickly if needed. I make note to let lenders know that Its a part of my strategy and not necessarily a 100% leverage type of transaction since this is what they think of when they hear about this( on commercial/portfolio loans).

How I see it is I can either forego my interest savings on my cash savings or I can pay down my lines which is like pesudo savings since I can redeploy these funds again instantly. Does this mean I don't keep any savings ? no, just I keep a lot lower than I used to. My old model was to save 20-25% down and buy but that method takes a very long time.

Now I just I buy, create equity, refinance my original acquisition down payment , my rehab funds out, and obtain line of credit on the rest of the newly forced equity and then repeat.  This allows the velocity of the funds to be increased. The BRRR can be great but the issue I see on the lending end is in certain markets the exit refinance on the BRRR does not yield much cash flow so I make sure not only is the value "right," on the purchase, but on the "exit" I also make sure the debt coverage is ultimately 1.50-2.00X at a min even in the worst case so that the model can  scale. If a deal can meet this model then it might be good to proceed assuming the market and other factors are present as well.

Steve Vaughan · Answer

Congrats @Joshua D. on having a couple free and clears and the options available to you now!

Most know I am pretty anti-debt, but here are a couple rules of thumb I go by and have used successfully.

1st- having cash gives you options.  Leverage gives you additional options.  Options are what we need!

If the property can be purchased at a significant discount by closing quickly, use cash. You can refi later and probably get all your money back out.  If you leverage, you will lose the use of your DP.

If the property is distressed and unbankable until you fix it up, use cash. Be sure you have the rehab money plus some reserves, do solid DD and all that.  When stabilized, you can refi if you choose.

DO NOT PAY CASH for regular transactions at or near market value.  Ever. We are investors and don't pay retail anyway. Only pay cash for steep discounts or to acquire distressed property that can't otherwise be financed.

@Joe Villeneuve - love your "spend your profits, not your cash" quote.  I will use that on @Russell Brazil 's favorite REI quote thread with your permission.

Nathan Click · Answer

@Joshua D. - I'd say as much as possible use OPM (other people's money).  This generally maximizes your cash-flow and profitability.

when to use my own saved Funds and cash VS Mortgage/credit line

Most Popular Reply