Buy houses with Cash or Leverage with Hard Money and Bank Financing?

Question

Hello there.  There isn't much inventory out there, but I'm sure I could find 2-3 decent properties to buy each month.  Would you buy these properties cash if you had it or would you finance so you have cash freed up to buy rental properties?  I'm trying to figure out the best way to maximize cash with the greatest returns, while building a portfolio of rentals.

Strategy #1 - 
- Buy properties to fix and rehab with all cash - create large nest egg (1mil) then buy a lot of rental properties, rinse and repeat.

Strategy #2 - 
- Buy properties to fix and rehab with hard money / bank financing then use other remaining cash to buy rentals (create cashflow and equity).

I'm leaning toward strategy 1 because I wouldn't have to pay a third party therefore, I wouldn't have to do as many rehabs to make the same amount of money.  Which I think is more savvy.

If anyone else knows of a good strategy that would be great.

Thanks again.

Will Barnard · Answer

Jason gave the best advice in my opinion here. Putting buy and hold vs. flip aside, the key factor is the ratio between deal flow and cash sitting dormant. Like he stated, if you have more cash than deals, obviously use up your own cash to have it all working hard for you, if more deals than cash, use leverage to make even more.

I have always stated that leverage (applied responsibly) is one of the greatest advantages to investing in RE.

J Scott · Answer

It really depends on how much cash you have.  These days, any cash sitting in a bank account or CD is going to be earning very little, so you want to keep it working, as you'll surely generate more return than saving it will produce.

So, if you have more cash than you have opportunity, buy everything with cash.

Now, if you have more opportunity than you have cash, the goal is to find a reasonable trade-off of leverage and risk -- you want optimal positive leverage with relatively low risk.  Nobody here can tell you exactly what that will look like for you -- everyone is going to have their own utility function for risk/reward, and you just need to know what you're comfortable with and what works for your goals and plan.

So, for me, here would be my strategy:

1.  Determine my optimal leverage (for me, it's between 50-70%, depending on the specific investments);

2.  Put together a plan that will allow me to optimize my returns using my available cash and my optimal leverage profile;

3.  Get all my cash working and out of savings.

The details of whether I'm flipping or doing buy-and-hold is a completely separate discussion, and is really going to depend on other factors, like amount of time you have to invest, your goals, your skillset, etc.

Michael Lauther · Answer

Strategy 1 uses 100% your cash no leverage = lower return but less risk. If you can only handle 2 or three  rehabs a month then you might as well use your own money . why pay points and interest when your money is sitting on the sidelines.

If you can handle many more transactions and have a satisfactory exit strategy then of course using other peoples money will increase your return by the use of leverage. This however has been the downfall of many investors who get overextended and their mini real estate empire comes crashing down. This approach is suited for a fix and flip operation not so good for buy and hold unless long term financing is available when hard money is done.

Brad Z. · Answer

All good answers here. The only thing I will add that locking in fixed rate finacning at <5% is an excellent hedge against inflation as well. In a perfect world, I would use all cash for fix/flips and financed rentals at no more than 60%-70% ltv.

Justin S. · Answer

Greg

I'm not sure how many homes you've done.  But I would do my first 2-3 deals with cash (if possible) and then once you have your contractors set, material pricing negotiated, etc.  Then I would move over to using leverage.  Once you've accumulated a ton of cash, I would then go back using cash to purchase or expand to more areas or hire extra workers to take on the additional homes.  Or move some money over to rentals to keep it working.  Lots of options.

Stephen Masek · Answer

With loans, you have all of the regulatory and lawsuit liabilities, and the lender makes money with almost no risk, especially if they have a big enough down payment.  If you have the cash or near cash to pay off the loans at any time, that is one thing, but if not, you also have all of the worry over making payments.  A vacancy(ies) in a house(s) owned outright is at most an inconvenience.  It could be a tragedy for someone highly leveraged.  Remember, that lever pries both ways.

Monica Breckenridge · Answer

I like # 1 but I don't like using up my own money. I prefer using other people's money method.  But I understand that deals are getting thin and people are doing more creative things so that is a good idea.  What I have been doing on my thin deals is getting my hard money lender to partner with me.  He doesn't charge me any money costs, at the end of the day we split the deal 50/50.  I make less but it's better than a stick in the eye.

I also like #2.  But I wouldn't have this as your only strategy.  You should probably do half and half.  Half of my deals are fix and flips and the other half if buy and hold.  I am getting hard money loans to buy and fix up the property and then I am refinancing the property with a permanent 30 year fixed loan.  I can only do 10 of these so I am utilizing partners as well.

Buy houses with Cash or Leverage with Hard Money and Bank Financing?

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