Quote from @Joe Villeneuve:
Quote from @Michael Pence:
I potentially will be receiving a decent amount of money and I plan to use it to start investing in rentals. My question is, should I pay cash if I can. This will let me lower my mortgage expense allowing me to maximize cash flow and have decent equity from the get-go.
Part of me thinks that buying my first property with cash, then taking a cash-out refi to invest in the next property may be the way to go. I am just not sure.
What do you seasoned pros think?
No. Never.
The only cost to the REI is the cash that comes out of their pocket. That's it. The rest of the property cost is paid for by the tenant (rent), so don't help them. The more cash you use on a property, the more that property costs YOU. Don't confuse total cost with the cost to the REI. They should never be equal.
That higher CF you are talking about is an illusion. Add up the projected CF per year when you pay all cash, and divide the total cash you put in by that number. That's how many years it will take you to recover your cost and to start making a profit.
Now, do the same thing if you only put 20% down on that same property. Take that CF with the debt, and then the resulting CF per year, and divide that into the cash you put in...the DP. That's how long it will take you before you break even and the profit starts.
Question: If you start with the same total cash, and you are only paying 20% of the value of that property instead of 100%, how many of that same property can you buy?
Answer: 5...which means whatever the CF would be on 1, that same total cash you have available to spend buys you 5 properties instead of just 1, and 5 times the CF along with it.
Also, if you pay all cash, you are buying a property that is worth the cash you put into it. However, when you pay only the DP (20% of the cost), you are buying a property that's worth 5 times what you are paying for it. Take both property values, and multiply them each by 1.05. That means you are applying a 5% appreciation to both options. That's what the new property values are now worth.
The difference between the two is kind of mind boggling.
One more thing. If you need to pay all cash in order for the property to CF, that too is an illusion. All you would be doing is paying for all that negative CF upfront.
Really appreciate the insight and feedback. I haven't purchased a property yet as I'm a bit uncertain with the current prices and demand in my market, Kansas City, and surrounding communities. All I keep hearing from agents and brokers I have spoken to is that Cash is still King and conceding inspections, and appraisals are still happening, albeit less often.
With this input I will keep watching and waiting to find the right deal. While I am in a hurry to get going I will not rush.
Thanks again for the insight.
