Buy with cash or get a loan?

Question

Hello Everyone, I have no experience in real estate investing but I have been really interested in it and am taking courses which will lead me to this filed. I hope to learn from all of you too. My goal is to be a landloard. I am looking at a couple of properties right now. My question is: Suppose I have around $80,000 cash available, is it better to buy a property with all cash or buy two by paying some downpayment and get loans? What's your opinion? Any input is appreciated!

Derek T. · Answer

Leverage and it will allow you to buy more properties instead of having your cash tied up with one.

Gina Chang · Answer

Hi Derek, Jeremiah, Jeff, and Ali, Thank you all for your inputs. They made me more confident as well as careful about what property I am going to buy. Right now I am trying to find a buyer agent, hope I will have good news soon. A lot to learn indeed!

Ali Boone · Answer

There are a gazillion posts on here that debate this. My stance is I leverage everything. More bang for the buck. I'm also not convinced leveraging is that risky.

http://www.biggerpockets.com/renewsblog/2014/01/04/leveraging-really-risky/

Jeff Rabinowitz · Answer

Doesn't anyone remember 2005?  Real estate doesn't always increase in price.  Leverage can and does cut both ways.  It can be a valuable tool but can be dangerous if used in the wrong situations.  It is important for the investor to assess their resources, needs, goals and the market situation to arrive at the amount of leverage (if any) that is appropriate for them.  Unencumbered, cash flowing rental property can be important pieces in one's portfolio.

Jeremiah B. · Answer

Congrats on saving 80K cash.  That's a big accomplishment!

There have been great comments above about the strength of leveraging, and that is all true.  But, I want to expand on one additional merit of financing:

If you have 80K cash, you don't have 80K to spend.

Buy-and-holders MUST keep a cash reserve.  Whether that is 10K or 30K or more is something that I will leave to you.  This will depend on how much you spend, age of the house, insurance, etc - but it should be enough that your roof caves in and you lose your job on the same day, but sleep well that night.

Gina Chang · Answer

Thank you very much Mark, Aaron, Rafael, and Colin for your replies. They are very helpful and insightful. I will keep you updated when I get a property.

Colin G Murphy · Answer

The main benefit of purchasing with finance is that you can acquire a substantial home by paying a 20-30% deposit with the bank lending the remaining 70-80%. In a growing market, the cash on cash return from capital appreciation can be enormous.

For example, if the value of a $150,000 property increased by 5% per year for 5 years it would be valued at $191,500, or a profit of $41,500. If you paid a 30% deposit ($45,000) to acquire the property, that $41,500 profit represents a 92% return on the initial cash invested (versus a 27% return for a cash buyer). These returns will get higher the longer you wait as the balance of the mortgage loan decreases over time.

The flip side is that there are always fees attached to borrowing money (approx 2-3% of the purchase price) and your annual running costs will include hefty mortgage repayments. 
	 
	 In other words, the cash on cash return on a financed property is WAY higher when you sell at a profit, but you need to absorb MUCH HIGHER running costs in the meantime. Depending on the numbers involved, you might not earn a meaningful income from a financed property for quite a few years.

Regards

Colin

Mark Bookhagen · Answer

Hi @Gina Chang  and welcome! Read like the others have suggested, but to answer your question:

Real estate is all about leverage. Use mortgages to maximize the amount of assets you control. Using leverage, you can buy FOUR $80,000 properties with $80,000 in cash (25% down + you'll need to find a little extra cash for closing costs). This allows you to reap the NOI, cash flow, AND the appreciation from $320,000 ($80,000 * 4 properties) worth of real estate instead of a "measly" $80,000 in real estate had you paid cash. What a difference!

Rafael Norat · Answer

Hi Gina,

Definitely take time and read alot hear. Both strategies have their pros and cons. Right now, the rates are so low. So, leveraging can be a great tool in growing your business. I bought 2 properties in the last 5 months and was able to cash out refinance most of it back out. It all depends on your long-term strategy and where along that path you are. How much passive income are you looking for per month? Whats your timetable? That plays into your stragtegy as well.

Hope that helps...

Rafael

Aaron Montague · Answer

@Gina Chang

Welcome to BP!!

Check out the beginners' guides here under the LEARN tab at the top.

Leverage is generally going to get you better returns on your investment.  I recommend that you get started in the business with an owner occupied 2-4 unit.  But with 80k in cash, the 25% down on a 3 or 4 unit property shouldn't be too much of a problem.

Find a property and then I would find out exactly how much the following expense are going to cost you each month. "The tenant pays" is a good answer as well. Put those numbers up here and I'll tell you what I would pay for the place.  Set a goal for both Cash on Cash return (example 15%) and a minimum monthly cashflow (example $250) and make sure you can find a place that will give you those returns.  Not every market has those places.

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. (8% represents 1 vacant month/unit/year)