What’s more important - deals or cash?

Question

Hello all,

I’ve been doing some research into creative financing and I have a couple questions.

My story is my wife and I are saving up for our first house but I’m also wanting to get my first rental property so I can start generating cash flow to fund more rentals and build a solid portfolio.

For my first rental, I’m open to bringing on an investor (and probably need to for my first one) but I’m not sure what’s going to be the best course of action. Is it better to bring some cash to a deal or is a great deal the most important item when approaching investors for funding? Essentially I don’t want to waste an investors time.

The other question is do I just buy the primary residence with my wife and then use the equity from that to fund my first rental? Obviously this would take more time and this option isn’t ideal as l for me time wise.

Eliott Elias · Answer

Deal, your house can wait. Your primary is not going to make you any more, I own 15 properties and still rent where I live.

PJ Boxel · Answer

Hi! To be honest, I found that a deal is FAR more important than bringing cash to the table. There is unlimited cash provided by unlimited investors, but a great deal is hard to find! (Although, I found that the best deals are created, not found). I always find the money when I have an amazing deal.

In my opinion, you have 3 parts: Money, People, Deal (this by the way, is a book written on this topic by Stefan Aarnio). Once you have 2 of the 3, the third (money) will almost always follow!

So go and find amazing deals and try to connect with as many investors as possible in the mean time!

Lyndsay Zwirlein · Answer

Listen to David Greene's "Seeing Greene" latest podcast #723. Talks about his strategy as market is changing and his ideas might help answer your question.

Salvatore Lentini · Answer

@Samuel McCart - planning to use the equity in your home could take a lot longer than you anticipate.  The run up in prices over the past few years is not normal.  You could buy something and it could lose 5-10% in the first 2 years....stay relatively flat for another couple years, then slowly start going up.  And since cash out refi loans at the moment are 75LTV it will need to go up a significant amount  for you to pull money out to use as down money on an investment property.  And you have to account for the fees the lender will charge.  I'm not saying you shouldn't buy a primary.  In my head it's not really a decision of one or the other.  I'm a big believer in home ownership so if that's something you and your wife want you should do it and independent of that decision, figure out how to buy your first rental property (money partner, seller financing, lease option, subject to, joint venture.....lots of options).  I started my real estate investing career with no money and 9 years later I'm closing in on 200 rentals.

Greg Scott · Answer

The shorter path to having your own home is to buy it first.

The shorter path to financial freedom is to buy a rent property first and then use the profits to buy other rent properties and, at some point, your personal residence.  It sounds like buying your home first will soak up most of your cash.  Using the equity from that home to buy a rent property means you must wait, likely several years, for the equity to increase to the point where it makes sense to do a cash-out refi or a HELOC.

Personally I wouldn't partner on a SFR.  If you have enough cash to buy a residence, you have enough to by a rental.  If you own it yourself you have complete control and can sell or refi when it suits you.

Shannon Bunyard · Answer

Hi Samuel, If I am understanding correctly you are looking at a hard money loan to obtain your first rental property. I think what you are asking is what potential does the deal bring vs. the amount of cash that you have to put toward the deal. If that is the case, the potential of the deal, I believe is what the hard money lender will be the most interested.  They want to know that they will get paid, within the time frame that is agreed upon, and that they will get the interest payment that was contracted.  Their money is their asset, it is their cashflow.  They will want to know that when they choose you to go into business with, their asset is secure. I would also say that having as much of your own cash as possible is a good strategy.  The reasoning behind this is that you will not have to pay that money back and will have 100% profit on the money that is put into the deal that is yours.  With an investor, paying them back is your #1 priority.  I think it depends on your goals- sounds like cashflow is a goal. If this is your top goal, then the less money you have to pay back to someone else the better. If your top goal is obtaining a partnership in investing-the potential of the deal is a very important aspect of the building of this relationship.

Cheers,

Shannon

Samuel McCart · Answer

@Salvatore Lentini your response essentially answers the question that a great deal is most important. I’ve also thought about wholesaling until I have enough cash for a down payment as well but I may end up doing that along with learning about the options you mentioned.

Samuel McCart · Answer

@Michael Dumler I am totally open to that but the Mrs. Is not unfortunately.

Samuel McCart · Answer

@Greg Scott what about a MF? Same concept?

Bob Stevens · Answer

Better the deal the easier it is to flip the contract which is what you should do until you learn. Then apply what you learn

What’s more important - deals or cash?

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