New Landlord... Buy Property in Cash?

[Jason Byrne]

I'm 33 years old in Orlando, Florida area. We are currently three weeks away from closing on a new house that we are building. We got underwater on our current home by buying at the wrong time, but we did refinance a couple of years ago to take advantage of low rates.

My current plan is to hold on to our current home and turn it into a rental property. It will probably be a money losing venture for a few years with rental rates not yet up to our mortgage. But I'm hoping to turn that potential loss into cash flow as prices continue to rebound and rental rates will increase in Orlando.

So that is rental property #1.

Beyond that I've got a good nest egg already built up in stocks. After recently selling my business, I have quite a bit of money on the sidelines right now that I need to put somewhere. Stocks don't seem very attractive to me right now at the current valuations. I am thinking about putting it into real estate instead and start building rental properties.

Would it be foolish to buy these rental properties cash? I'm kind of debt averse, especially since I will already have two mortgages.

I am planning to go with a rental management company so I don't have to deal with the hassle of managing it since I am a full-time software engineer. Good idea?

Thanks in advance for any advice for this rookie!

[Scott Fanning]

This will be my first post on here... I am going to try and speak to your posted title.

New Landlord... Buy Property in Cash?

Absolutley!  If you can, yes, do it!

Cash or owner financed, would be best if possible.  Not all markets fit this model as it can be hard to reach and hard to get started depending on the price-point of inventory available.   It is worth it if you can do it.   Miss the lenders if you can...   It has been my personal experience that the whole "leverage your money" concept can be overated and it's dangerous for many people just getting into this business.   This is my experience, there are others that have done well with it.  I also know many trainwreck stories that lost everything to the banks and are all out of the game.  Yes the ratios and arguments in favor of leverage can be attractive on paper, (the whole 100-200K can control a million dollars in real estate idea) but having walked in both pairs of shoes I can assure you my lenders never cared to hear about vacancy rates, trashed properties that I had to deal with and many other "chance cards" rental life can deal out.  (not complaining, RE has been very good to me)   So if you are rich already, experienced in RE,  can throw money at problems like lightening to keep the boat on plane at all times, you can make a VERY good  argument for getting on the leverage fast-track to hit warp speed and blow past everyone in the game.   That I will totally agree with.  However, if you are like most people, big ideas on being a first time landlord, or moderatly on your way, I would exercise caution.  Like you as a landlord  will be wanting the rent, lendors want their payments, plain and simple.  My mortgage free properties have always been more understanding to my sympothetic needs  and rough patches than my lenders have ever been.  My mortagage free properties also like to reward me  and pay me lots of money when times are good with low vacancy.  They love me in all markets.   

I started all cash 15 years ago, touched lending for only a short period of time, got the T-shirt,  and quickly went back to cash.  I have stayed cash ever since.  Leverage wasn't for me.  A little word called amortization is an awesome power to understand.  I hear new investors comment that "interest is tax deductable"  as if that makes everything perfect.  I encourage running the numbers again and really understanding the whole big picture of your deductions combined with what you actually pay using amortization, and who gets paid first, the lendor or the balance due. You will also hear how leverage is not a big deal because the world is perfect and the tenants will pay your notes for you and line your pockets with the excess pooring over from the difference between rent and mortgage note.  This is just not reality, there are maintenance costs, bills that come in, municipalities trying to cut your grass for you when over 7" at $125 hour.  I am here to say the rental life is not perfect and it you could have a situation come up where your  95% occupancy for a small family landlord  can turn to a 60% occupancy or worse overnight (okay in a matter of months) due to an alignment of murphys law and things that may be out of your control.   These things can and do happen from time to time.   If you don't have cash reserves to fight back to the top, your mortgages can get missed and  soon you can become a statistic.  House of cards can fall.  Amortization is an awesome power and if I ever find myself playing with it again, it will be from the other side of the desk lending to others.  

Owner finance is a great way to go as a middle ground.  You will have to do your homework learning how to approach it.   You might be surpised how many people will lend you 90-100% of the money to buy their house and won't even charge interest if you know how to ask.  It's amazing how nice 100% equity owners can be to people that are honest and can back up their credibility. My cash investor friends like myself are all in the game still, many of our highly leveraged friends are simply out of the game and don't appear to be coming back any time soon.    If you can go cash, do it!  

Find a rental you can get your initial purchase + rehab costs paid back to you in less than 4-5 years by way of  rent.   That or better would be a good easy to understand goal to shoot for.  Keep it simple.   Those deals are in many markets today, but not all.   Cash is not the fast vehicle in RE, but it is realible, predicable, understandable.   I could have bought my garage full of red sports cars a long time ago, but I drive an old toyota because it get's me where I'm going every time, it's a depreciating item, taxes are low, and I'm in no hurry.  I like that.   You want to do cash?  Do cash, it works.   Good luck to you!