Why Paying Cash For Properties Will ALWAYS Make You More Money

As my investment property business continues to heat up, it seems like not a day passes that I don’t get asked: “Can I finance this property you have for sale?”. Part of me wants to eagerly say “Of course!”, as who in their right mind wants to turn down a sale? But then the other part of me, the part of me that has to deal with the aftermath of saying yes, has to say, “Well Mr. Investor, here’s what we are up against, and why it’s much better to come in with cash.”

Why Cash is King, and always will be….

Growing up, my Mother, the great mom she was and is to this day, taught me her version of the Golden Rule. You know this one? “Do unto others as you would have them do unto you.”

Then there was my wealthy Uncle, who ran 3 successful businesses, who taught me a different version. “He who has the Gold makes the Rules.” Since Nixon took the US off the Gold Standard back in 1972, the gold of today is – you guessed it – cash. And he who has the cash gets to make the rules.

This certainly applies to buying investment properties. When you have cash, you put yourself in a great position as a buyer.

4 reasons why you should pay cash purchases for your investment properties

Reason #1

You have negotiating power, which means discounts. Put yourself in the seller’s position. If you’re looking at 2 offers

1 - a nice asking price offer, contingent on financing

2 - a cash offer, say, $5,000 under asking price, but will close immediately

Which one would you take? Do you take the bird in the proverbial hand, or go for the 2 hanging out in the bush? Do you want to wait 2 months with the possibility that the deal gets delayed or even falls through (which happens quite a bit on finance deals we all know)? Or do you give a discount, have peace of mind that it’s over, take the cash offer and close up the books? I cannot speak for you, but I know without any doubt which option I’d rather have if I’m the seller. So – bottom line – cash offers give you a better price. And a better price gives you more equity and increases your ROI.

Reason #2

You have more options when not financing. Most lenders have criteria that a property must meet before accepting a loan against that property. First off, it has to be in good condition. In other words, you aren’t going to be able to buy a property that needs extensive repairs or rehab, unless you are getting a construction loan, which can be a much higher borrowing cost and much harder to get approved.

My friend Michelle owns a little single home, has been making payments for years, and the roof needs to be replaced. She’s short on cash to fix the roof, so the bank will not refinance the house until the roof is replaced. And she owns it, has been making steady payments for years! Your chance of purchasing a property that you don’t own that needs cash repairs is about slim to none.

Also, banks typically have a minimum property purchase price, minimum loan value, and minimum appraised values. Taking on a rehab project, where you buy a dilapidated property and put cash into rehabbing, gives you BY FAR the best deal. You are adding so much value to the property, so your equity position drastically increases, and again, back to the reason we buy property with the best price, you are maximizing your ROI.

Reason #3

You can cash out and refinance, and pull out ALL of your cash. Let’s say you purchase a property all in for $70,000. That includes the purchase price, rehab, closing costs, everything. You get the property leased up and performing, and then go back to the bank and request a “cash out refinance”. Basically, they are giving you cash back and using your property as collateral. It’s really the same thing as an upfront finance, but just on the back end, with one important distinction, which you can use to your advantage to increase your leverage and ROI. They will appraise the property, and you’ll be able to pull anywhere from 70-80% back out in cash. If the property in this example appraises for $100,000, then at 70% you will get $70,000 back out. Now, here’s where it gets exciting. Your ROI becomes INFINITE because after your refinance YOU HAVE NO CASH IN THE DEAL. Whatever excess cash flow comes in after paying the note, and the other expenses associated with the property is the highest possible ROI in the history of humankind. No investment can beat infinite.

Reason #4

You have no risk when market conditions drastically change. Built into most loans is fine print that says the bank can call your note due at any time. My Millionaire Mentor told me, “you’ll never hear from the bank if you are free and clear.” If your property goes vacant, yes you aren’t getting a return on your capital, but you also don’t have a loan payment you need to come out of pocket for. I am a fan of leverage, don’t get me wrong, but responsible leverage. I prefer about 50% personally, but I’m also more conservative too. Those who are in all cash, are completely protected should a given market conditions change.

Think about Detroit in 2008 when the auto industry was rocked on its heels, and it lost a huge percentage of its population. What do you think the highly leveraged real estate investors there could do? Probably in most cases, bankruptcy was the result, unless they had sufficient cash reserves to ride it out.

Last month, I got to attend Tony Robbin’s “Business Mastery” program. This is Tony’s highest level event, and it costs $10,000 per ticket for a 5 day intensive seminar. One of the things he said that still stands out to me was “There are no limits to resources, only resourcefulness.” In other words, cash is a resource, and there are no limits to cash, especially in America. There are only limits to your belief and ability to go GET the cash.

I had to get resourceful when I started my REI career too. I sold some stocks, took out a HELOC (Home Equity Line of Credit), sold an underperforming property, refinanced another property, moved some cash around, and converted my 401k into a self-directed 401k, so I could buy real estate instead of stocks, AND I pitched a local business owner on loaning me private money. I believe YOU are resourceful too - You can figure out how to get the cash.

If there’s anything we can do to help you be a smarter investor, please reach out to us!

To your resourcefulness.