When is wise and when is it unwise to use your own cash in a short turn (non-rental) RE investments? If cash is available, doesn’t it generally make sense to avoid the bank charges, interest, etc.?
I know you hear many people like Trump saying borrow all that you can… just curious what residential type investors have to say on the matter.
Always borrow as much as you can. Without leverage real estate is no better than any other investment. If you buy a house that is worth $100k and you pay cash for the house. If the house goes up 10% then it is now worth $110k and you make 10% on your $100k investment. But if you put $10k down and borrow $90k on that same house it would still have gone up that same 10% and be worth $110k. But since you only have $10k in the house you made $10k on an investment of $10k. That is 100% made on the money you have employed.
If you put no money down then you divide by zero and that gives you an infinite return.
Torxx,
If you are doing flips and have cash, I would use all cash. You would cut out all the bank fees, appraisal fee, etc and therefore make more money on each flip. It is true that you’re return percentage will be lower, but you will make more money. I’ll take the money every time!
Mike
As with most things in life, the answer is, “It depends.”
Sure, you can chop out a lot of expense in your flips if you pay with your own cash. As a percentage of your total margin, the fees and interest are considerable.
BUT…it all depends on how much cash you have and how many deals you’re trying to do.
If you have enough cash on hand and you’re only doing the one deal, it probably makes sense not to borrow any money. Just make sure that you are 100% NOT going to run out of money in the middle of the project, and make sure you can cover your living expenses, etc.
For me, the big negative of paying cash is that I like to be liquid; you never know when the next deal will come along that needs to be closed ASAP or you’re going to lose it.
If I save $10,000 in bank fees and interest on Deal A because I use all cash, but then I lose $35,000 in potential profit on Deal B because I can’t actually close on it because I don’t have the money, then my bank deal is starting to look less expensive.
Perhaps the way to go, if possible, is to get a HELOC or other line of credit. This would allow you to use cash when you have it while still giving you access to debt on a moment’s notice.
for flips/buying at very deep discount, cash works very well puts you in the driver seat since the seller are usually eager and cash send that “I can close this deal” signal. With that said I usually only like to have one of those in progress and don’t like to have all my cash tied up in one deal (in case something really nice comes along right behind it).
Anything I intend to hold, I borrow as much as possible. I know some folks that like to buy with cash and then do a cash-out refi to realize the gain from rehabbing and/or the deep discount buy.
I’ve done seller financing where they just wanted me to put enough down to cover the Realtors. So I put $3,000 down and did seller financing for the rest. Then when you sell it at least you avoided wasting money on closing costs, while at the same time not having to use very much of your own money.
Seller financing closing costs are around $250.
That’s good stuff… Thanks.
Is it safe to assume that all of the bandit signs and car magnets that I see, that claim to pay cash your house, do not necessarily have the cash if the equity was large? How do they deal with situations like that?
That sign is a red herring. Everybody pays cash for your house. What do you think they pay with, beanie babies? The only difference is where the cash comes from. The cash I pay for house with comes from the bank (or the hard money lenders). These guys don’t have stack of 20 dollar bills they are going to give you for your house. It is like a deluxe hotel room. What the heck does deluxe mean anyway. It is a word to make you think that my room is somehow better than the average room. Putting cash for houses on a sign makes a person think about money, nothing more nothing less.
Never use your own cash unless you have no other options, just my opinion.
Closing costs run around 3%, that’s a lot if you are buying a $200,000 property. So if you can avoid paying closing costs you can save yourself thousands in wasted money. An investor should avoid using their own money when they are buy and holding, but for flipping I think there is some real benefits to avoiding closing costs by not using a lender. Plus you can close in under a week when you use cash, but with a lender it can take a month to close. Having that cash can buy you a couple of thousand off the what a person without cash would pay for the property.
The answer for me depends upon how long my cash will be tied up. The more of my own cash I have in a deal, the quicker I want to get it back out.
If I flip quickly, I get all my cash back quickly. If I buy and hold for rental use, then I want financing in place so my own money is not tied up in the equity.
Even if you use your own cash to purchase a rental free and clear, there is nothing preventing you from doing a cash out refinance to get your money back out.
If you’re doing a flip and you’ve got the $$$ to close the deal, why not get the both of best worlds (cash/finance)?
Buy with cash, then get a line of credit against the property. You may want to have a bank already lined up so that you can make a smooth, quick closing on it (and know that they’ll actually do it).
If you don’t need the line, great. If you do, it’s there until the prop sells.
Raj
If you are going to do a refy then I saw a TV commercial today from Countrywide that has no closing costs, no points, and no application fees for refys. I did one refy with no closing costs, unfortunitely I can’t remember who it was through, but it worked out good for me.
Does anyone know any potential down sides to doing a Countrywide no closing costs, no application fee refinance?
Well, first, you’d want to know the rate/term of the deal. I’d assume a fixed rate, but I don’t think that they say on the commerical.
But the biggest possible downside to a Countrywide loan at this time (any loan) is the fact they are still in a world of hurt from this subprime mess and are on the verge of BK. If they would go under, chances are real good that you won’t be dealing with CW for long as they would sell off their loans. Whoa is anyone who gets stuck dealing with OCWEN as their lender.
Raj
That sign is a red herring. Everybody pays cash for your house. What do you think they pay with, beanie babies? The only difference is where the cash comes from. The cash I pay for house with comes from the bank (or the hard money lenders). These guys don’t have stack of 20 dollar bills they are going to give you for your house. It is like a deluxe hotel room. What the heck does deluxe mean anyway. It is a word to make you think that my room is somehow better than the average room. Putting cash for houses on a sign makes a person think about money, nothing more nothing less.
“Everybody” does not pay cash for houses they buy…. If you find a pre-foreclosure deal that will be up for auction in a couple of days you better have access to a “stack of twenties”… or be prepared to pay exorbitant rates to hard money lenders, that is if you can put that deal together fast enough. I do understand most people that post the signs do not have the cash, but, that does not mean CASH is not a viable strategy.
No disrespect bluemoon, but, your post comes across a bit portentous
Make sure you consider the risk involved with having your money tied into a flip. The market is in a volatile position and everyone getting started needs to prepare for the worst case scenario, the house not selling. Consider a medical emergency arising while all of your money is tied up in a house.
You can consider a mortgage somewhat of an insurance policy. If tough times arise, they can only foreclose…it’s only money. I’d rather be healthy and bankrupt than dead with $100k.
If you’re established and could get by then use the cash.
The only time I will ever use my own money for anything is fixed costs:
marketing
phone
gas
etc etc
Everything else I use private lenders for flips.
Everything from buying the property, staging it, prepping it, advertising to sell it is done with private money.
There are tons of people out there with lots of money sitting in the bank getting low returns that would gladly lend you money.
Torxx,
You misunderstood what bluemoon said.
I always bring cash to the settlement table when purchasing a property. I never pay retail, so I never ask the seller to carry back financing. The seller is always paid the purchase price in cash, in full.
It is irrelevant to the seller that I got the cash by selling/exchanging/refinancing one of my properties, borrowing from family, by taking a cash advance on my credit card, by pulling cash out of my money market account, by selling some of my stocks, by tapping my equity credit line, by getting a personal loan at my bank, or by some combination of the above.
Most of the time, I bring a lender’s money to the settlement table in exchange for a mortgage on the property I am purchasing.
No matter how I got the money, the seller is always paid in cash.
Dave T. Thanks for the response……my point was not about what the seller would think, but, more along the lines of trying to put more profit in the investors pocket and/or being able to act very quickly by eliminating lenders turnaround time altogether. Also, my assumption is that cash is available to the investor (me) if need be, regardless of other real estate endeavors. Obviously, most investors’ would not use their own available cash for an income producing purchase, but, for a quick turnaround deal it seems to make good sense.
Let’s say you have $250k in cash available to invest in whatever… Let’s also say you area at the level of doing one R.E. flip deal every two or three months because of time constraints….Dosn’t it makes sense to use your own cash (not the banks cash, which is not actually considered cash ) on the deals. That is unless you have an investment vehicle that will beat the rate of return you hope to realize with RE deals in the same period, i.e stocks, bonds, futures, horses, poker, etc.