We have a guest post this week from our friend Rich from Rich on Money. Richelle met Rich while we were at FINCON16.
Rich’s blog is about how he got to financial independence on a military salary with a stay-at-home wife, and how it’s possible for almost anyone to do the same (or better). He did it mostly through investing in rental properties with cash.
We hope you enjoy his candid perspective on buying investment property with cash.
Here’s my background. I paid off my $280k mortgage in six years. $32k of student loan debt in a year. I’ve purchased several rental properties with cash while serving overseas in the military.
Why don’t I use financing? Why cash? How do I afford that? (Rich Uncle? No.)
Real estate is a powerful way to make money. Debt can be a powerful tool. With a chunk of money, let’s say $200,000, you could buy one property with cash.
You could also, with that same money, buy five houses worth $200k each with mortgages and 20% down.
Leverage gets you 4 extra houses!!
Some people find ways to use no money down and buy properties. Some even find a way to take cash out of these deals. These are obviously riskier than cash or 20% down.
Everyone makes the decision to invest in real estate somewhere along this spectrum of risk. There are pros and cons at both ends.
I want to share with you why I’m at one extreme end of the spectrum, and how it’s worked for me.
It’s worked despite the fact that I’ve been serving in the military over the last 16 years, moving every few years, and mostly living overseas (including currently).
I own fourteen rental properties mortgage-free, and there isn’t a dollar of debt to my name.
I guess this is unusual for a real estate investor. And no, I’m not a multimillionaire. (yet)
I’m a one-income family with two kids and a government paycheck.
The houses that I own were purchased with cash for prices that varied between $25-$59k, with the average being around $45k. This is the price of a down payment in many cities!
I know what you’re thinking!
This doesn’t apply to my situation! This is impossible in the area I live!!
I agree, it wouldn’t be possible for me here in Stuttgart, Germany. It also wasn’t possible when I was living in Monterey, California or Washington, D.C.
But I still did it.
I don’t always buy in the area I currently live. I buy in a city where I can make the numbers work, and I use a management company.
Let’s way the Pro’s and Con’s of buying in cash:
I only sign once!
Maybe most people wouldn’t consider this important enough to list a pro, but I think it’s AWESOME!
Have you ever bought a house or a car with a loan? How many documents do you end up signing? I’m not sure. More than 30?, Maybe 50? It’s a lot!!! It gets old.
When you buy a house with cash you sign ONE DOCUMENT, the HUD-1!!!
My ability to bargain
Money talks when it comes to buying houses. I offer cash and ten-day closings.
Sellers love it.
Did you know it was possible to close in 10 days?
I was surprised the first time I did it.
It’s possible with cash. It can actually be done faster.
Sometimes, a seller would rather take my offer of $40,000 cash over a higher offer of $45,000 financed through a bank.
A loan usually takes at least 30 days to close.
Also, here is the story on the financed offer from the seller’s perspective.
Sometimes, at the end of the 30 days, a day or two before closing, your buyer will withdrawal their offer because they couldn’t qualify for a loan. Guess what, they’ll probably get their deposit back if they had a financing contingency!
You’ve lost more than a month of time and money, your property is less attractive because it’s been on the market longer, and you’ve got to start from scratch finding another buyer!
In fact, I’ve bought more than one house from people this has happened to. I call it “buying on the rebound.” I make a lowball offer on a house, somebody else makes a higher offer and beats me out. But it’s a loan.
That offer falls through six weeks later because the applicant ultimately didn’t get the loan. My real estate agent tells me it’s back on the market. I swoop in with a lower cash offer, and they take it because they are fed up with buyers using financing!
No mortgage payments!!!
It’s part of the magic of buying with cash.
The rent check that you get every month is pure profit. Almost.
You don’t have to pay your mortgage out of your monthly rent check. You keep that money!!
If your rental is financed, the money that’s left over as “cash flow” after you pay the mortgage isn’t always pure profit.
Expenses such as maintenance, repairs, and future vacancies still have to be paid out of that.
Many people use the 50% rule to make this estimate. Approximately 50% of your rent amount will go to expenses. This should be factored in when calculating cash flow on a mortgage.
With a cash purchase, there is no mortgage to pay, just expenses. The cash flow is higher!
Vacancies are not so bad!
I’ve noticed something while having several rentals over the last few years. Sometimes prolonged vacancies happen for no discernible reason. Your best property won’t rent out, your worst rents out on the first day. There is no rhyme or reason to it.
If you have a mortgage check to write, that vacancy is painful. You are digging 100% into your own money to pay that bill. This may last two or three months. Ouch. Hopefully, you have that money laying around. Not everybody does.
But with a mortgage-free rental, it’s different. You don’t reach into your own pocket when there’s no rent.
You might get Richer with leverage!!!!!!
The CONS of all cash are pretty straightforward.
- Even though cash flow isn’t as high, you build up equity slowly as the renter pays your mortgage off.
- You buy houses sooner. You don’t have to wait until you’ve saved enough to pay cash.
- You buy more often. You can buy that second and third house sooner.
- You control more houses with less (or no) money.
- You can get rich faster.
The opposite can also be true. You could get poor faster.
That’s because there is increased risk with increased debt.
I don’t have a high tolerance for risk. I’m going to retire early and live comfortably without taking on much risk at all.
As I said at the beginning. Debt can be a powerful tool. But so can cash!!
If you are interested in learning more about debt-free real estate investing, read my first post ever. Rockstar Finance featured it. It’s a good read, even if I am a little biased.
Did I give you a new perspective on buying with cash? Disagree with me???
Rich on Money