Paying cash vs financing

Paying cash vs financing

Member since 2021 · 5 posts · 1 vote

Hello BP family! I am looking to start owning single family rental properties. I am 34, active duty military with a big family. The plan is to buy our next house outright and rent it out when we move. After a few years of renting, because we would pocketing all of the rent which would bring in Hopefully 20-25K per year, we would buy another house outright and eventually rent that out. I understand this is a slower more linear plan to owning multiple properties. My goal is to have 6 fully paid off properties in about 10 years or so. I understand the BRRRR strategy. But this is just more attractive to me and would rather have 4-6 paid off houses than 20 houses that I still owe on. I am open to financing though, but I think I just like the idea of buying one house at a time and paying it off. What would you all consider doing and does this goal seem practical or would it make more sense to finance more homes and leverage the banks as much as possible?

Thank you in advance for your replies!

0Reply
73 views

Most Popular Reply

Rental Property Investor · Carlisle, PA · Member since 2013 · 1k+ posts · 543 votes
5y

@Christopher Sellar, I love your question and your strategy.  A lot of folks have given great advice so I won't belabor those.  One alternative is to utilize leverage up front and set the balance aside in an account as @JD Martin mentioned, and re-evaluate your position every six-12 months.  If you find yourself in a position where you just aren't comfortable with the debt, pay it off then.  Leverage will not always be as inexpensive as it is right now.  When I started, I got an investment loan for 7% and I was ecstatic. 

Another factor to consider is the length of the plan.  If it is truly a ten-year plan that is one thing. If that is an arbitrary timeline you picked, then take a hard look at it.  Are you ten years into your military career and looking to retire in ten years?  That is a different story.  Just be clear about the why behind the goal and then work to it.

In your OP, you stated you know leverage is an option but you "just like the idea" of paying the props off up front. No one can tell you what is right for you.  Do what is right for you?  Just do it from an informed position.....

Good luck.

See this reply in the discussion

15 Replies

Jump to latestLatest
  • Member since 2021 · 5 posts · 1 vote
    5y

    Also, I understand that interest rates are so low right now which makes a stronger case to finance, but the fact that it's amortized is what kills it for me. 

  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    5y

    Right now money is as close to free as it will ever be. If you are panicked about having a loan, put all the money that you would have spent paying down the house into bank accounts. Then you get the interest deduction, keep all your own cash on hand (in case you want to buy another house), and a boatload of cash in case you really find that you can't sleep at night.

    The other thing is that when you pay all cash you are taking liquid assets (of which it doesn't sound like you have a lot of right now) and turning them into illiquid assets. That's generally something you do at the end of your life/investing career when you have all the income you could want and are just looking for places to stash cash outside of a .25 APR savings account.

    I understand your thought process - I bought all my houses cash at the beginning. But it will severely constrain your ability to grow. I predict you will not have 4-6 paid for houses in 20 years on a military salary with a big family using your plan of paying all cash. Get the assets working for you and pay them off if that's all the houses you want. 

    Skyline Properties
    View Page
  • Rental Property Investor · Madison, AL · Member since 2019 · 487 posts · 658 votes
    5y

    @Christopher Sellar

    We have similar stories. I'm 34, active military, and have a large family. That said, you can use this strategy and have success. It would help if you defined what your success looks like in the 20-year mark. For example, at 20 years am striving to have $10,000 a month of passive cash flow, net worth north of 1M, and 10-12 SFH's. Look at the BiggerPockets podcast talking about the book Vivid Vision; sorry don't know of the top of my head. After reading it, set down and come up with your retirement goals, then backward plan from there. If you want 4 to 6 homes paid off by retirement, it is a very achievable goal. Also, listen to the podcasts with Richard Carry. He was an active-duty military officer that got out at 20 years and had all his homes paid off. 

    My goal is to leverage VA, FHA, Cash-out REFI, and conventional loans to purchase one to two properties per year, to hold ten newer buy and holds. From there, I will focus on shifting into multi-family properties, scaling my larger SFH portfolio, or focus on debt paydown. 

    Sincerely, 

    Josh 

  • Member since 2021 · 5 posts · 1 vote
    5y

    These are all solid points. Thank you for the quick reply. 

  • Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    @Christopher Sellar You've gotten some solid answers, so I'll keep this concise.

    Debt is incredibly cheap right now, and I am taking full advantage of that. If you can buy as a primary residence, and score under 3% interest, I would jump on that in a cocaine heartbeat, and not worry about paying it off. 

    This is assuming that you're buying a property that makes sense as a rental, and doubly true if you're house hacking!

  • Missoula, MT · Member since 2016 · 163 posts · 55 votes
    5y

    If i was in your situation i would take a 50/50 position.

    Practically free money from lenders and I still have money left over to impress future lenders for deals. Also have cash on hand for any catastrophic repairs or long term vacancies that might come up from current properties.

  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    5y

    Loans are extremely cheap, you'll get a significantly higher return with a leveraged property, and there are tax benefits to carrying a mortgage.

    Use the BP calculator - or any investment calculator - and look at the return you'll earn with no mortgage, 50% financed, and 75% financed. Huge difference in return. Then add the benefit of tax deductions on interest.

    Your idea is safe, but it's not a very good return.

    The DIY Landlord Book4.7247 Reviews
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    5y

    @Christopher Sellar to me it depends on your goals and where you are at in terms of achieving them, and your age. If you are young and scaling you need debt; just keep it under control. If on the other hand you are retired you will want the rental income to live on not have much debt to service. It is sad to see people in their sixties and seventies stand behind a cash register in a grocery store or Walmart you just know they hoped to never end up there; yet there they are and actually I find them inspiring! I have vowed to never learn to operate a point of sale device.

  • Member since 2021 · 5 posts · 1 vote
    5y

    Thank you all so much for the input. Glad to be part of the BP community!

  • Realtor · Fayetteville, NC · Member since 2019 · 97 posts · 109 votes
    5y

    Here is a practical application.  Do a bp calculator for a property paid all in cash and then do it with a 30 year fixed-rate loan.  The cash flow is definitely different but not enough to tie up all your money.  

    How many down payments could you put down instead of buying all in cash?  4 if you are doing 25% down.  That is if you have reserves and everything else sorted.  Now you have 4 properties that the tenant is paying down your mortgage and you are cash-flowing every month.  

    You can take it even further and use the BRRRR and get all of your money back and still have the benefits of a tenant in place.

  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Christopher Sellar If your goal is to grow wealth, the best way to do that is to leverage OPM (Other people's money... this includes banks) safely. This means have a great asset, in a great market, that is underwritten properly... 50/50 doesn't really make you any safer if you miss the market on the asset, market, and deal underwriting. When you have great assets and put great tenants in them, you are outsourcing this debt to the tenant, and they are building your wealth for you!  You can always consider snowballing the debt at a future date, or when you are close to retirement, and pay off the debt. As others have pointed out, bank money is nearly free...why not use it to build your wealth? There are no trophies for not using it.

  • Rental Property Investor · Carlisle, PA · Member since 2013 · 1k+ posts · 543 votes
    5y

    @Christopher Sellar, I love your question and your strategy.  A lot of folks have given great advice so I won't belabor those.  One alternative is to utilize leverage up front and set the balance aside in an account as @JD Martin mentioned, and re-evaluate your position every six-12 months.  If you find yourself in a position where you just aren't comfortable with the debt, pay it off then.  Leverage will not always be as inexpensive as it is right now.  When I started, I got an investment loan for 7% and I was ecstatic. 

    Another factor to consider is the length of the plan.  If it is truly a ten-year plan that is one thing. If that is an arbitrary timeline you picked, then take a hard look at it.  Are you ten years into your military career and looking to retire in ten years?  That is a different story.  Just be clear about the why behind the goal and then work to it.

    In your OP, you stated you know leverage is an option but you "just like the idea" of paying the props off up front. No one can tell you what is right for you.  Do what is right for you?  Just do it from an informed position.....

    Good luck.

  • Rental Property Investor · Memphis, TN · Member since 2019 · 36 posts · 55 votes
    5y
    I take a middle of the road approach.  Personally, I hate paying the fees that come along with a mortgage, so I only do so for investments are greater than $100k.  For the rest, I pay cash.  That keeps my loan to value around 50%.
  • UK · Member since 2021 · 11 posts · 9 votes
    5y

    I say this from the perspective of an investor from the UK, but I think the principle is the same.

    I would think of this in terms of how to spend £100k / $100k - the actual amount is less important than the idea here.

    As a very simple example of my thoughts:

    I could buy a 100k property in cash, which would return 8%pa (net rental income) so $8000pa and grow at a rate of 5%pa so $5000pa (ie appreciate in value). In one year my net worth would be $100k +8k + $5k = $113k.

    OR

    I could buy 2 * 100k properties with 50% down. This would still return 8% pa per property, so $16k. They would also grow at the same rate, 5%, so $10k.  The borrowing would cost me 3% (mortgage) per property so $3kpa. In one year my net worth would be $100k + $16k + $10k - $3k = $123k.

    Clearly there will be other expenses, and there is always an element of risk when taking debt finance but as investors it is one of our jobs to mitigate these risks by buying well. You could extrapolate out those figures for 5 and 10 years and watch as the two figures diverge. You could also do a similar exercise with higher mortgages (3 properties for example). 

    The compounding effect shouldn't be discounted and there would be nothing to stop you combining strategies by paying off one or more properties to 'cash in' the gain in asset price to reduce your borrowing on one or more of the remaining.

  • Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    5y

    Financing is a more efficient use of capital, that's a fact not an opinion. Some people don't like to use and that's perfectly fine too, but it's a personal preference instead of the best use of resources. Especially with debt being so cheap right now. 

    Lots of people don't want to use debt at first because they are worried about the risk, and change their minds as they learn the business more. 

    Don't box yourself into a prison, stay flexible. 

Join the conversationCreate a free account to reply, vote on answers and follow this thread.