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Updated over 9 years ago on . Most recent reply

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101
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47
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Iman Yu
  • IT Professional
  • Houston, TX
47
Votes |
101
Posts

cash deals: when should you buy a house cash?

Iman Yu
  • IT Professional
  • Houston, TX
Posted

So I have been running my cash flow in Houston area for both SFH and multi's. I am pretty comfortable calculating the monthly cash flow, Cash ROI/CoC, cap rate and etc. I am seeing some good cash flow and some bad ones. If it cash flows more than 8%, then I take a further look at the numbers.

All my calculations for cash flow is based on 25% down payment, 3% closing cost and some estimated repair cost but what do I do if I come across a cash deal?

If a house is sold at 100k and I put 25% down on it vs. if a house is sold at 100k and it requires 100% cash to purchase, the chance for a cash deal to cash flow is very unlikely.

Are you supposed to treat cash deals differently? Is there any reason you would consider cash deal if you are a buy & hold investor?

Also, why would a seller want a cash deal vs. conventional financing? 

would like to know your thoughts on these topics!

Most Popular Reply

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4
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6
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Piet Strydom
  • Investor
  • Marietta, GA
6
Votes |
4
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Piet Strydom
  • Investor
  • Marietta, GA
Replied

One needs to distinguish between gross cash flow, and net cash flow, and then also between Return on Investment and Return on Asset

Gross Cash flow is your rental, net Cash flow = :

Rental - Expenses - Tax.

Where you put down 25% of the value of the house, you finance 75%, and the interest on that 75% is tax deductible. Because of that, your taxes will be lower. If you paid 100% cash for the house, your free cash flow will be a lot higher, even though you pay higher. 

1. I do not therefor understand your comment that a 100% cash deal will not provide free cash flow, actually produces the highest level of cash flow.

2. You would consider a cash deal for multiple reasons - you could just want to get out as much cash as possible, or you could just not want to be exposed to the risk that interest rates could escalate, or you could be of the opinion that interest rates will drop in the near future, and you therefor want to wait for the rates to drop.

3. The reasons why you would want to finance are also many, two most important is probably to leverage your return on investment. If the rental is 10% in your example, then your gross return on asset would be 10%, and similarly, if you paid cash, your return on investment would also be 10%. But if you invested only $25 000, and borrowed the rest, then your gross return on investment, is 4 times more. (100 000/25 000).

4. HOWEVER, it is important to consider your net return, because if you pay more interest than what your rental is, then the leverage is working against you, certain recipe for pain.

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