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in Real Estate Investing · April 22, 2021

Is buying a rental property cash a good idea?

Buying property cash may or may not make sense in certain situations. If you ask Dave Ramsey, the answer is yes, but if you ask me, the answer is… Depends.

If you have read any of my real estate investing blog posts, you know I am a big fan of using debt to buy real estate investments. However, this is because of my circumstances and goals.

When it comes to personal finances, everyone’s journey is different. I can only provide insights into why I do what I do and my perspective on buying rental properties cash.

In this blog post, I am going to walk you through an example scenario that illustrates why I prefer to have a mortgage rather than buying rental property cash.

Why I don’t buy investment properties with my own cash

Note that I am emphasizing “my own money”. The truth is that I don’t have cash of my own. At the time of this post, I am in the baby phase of my real estate investing business and I still working out my personal finance situation.

Assuming that I did have cash available, would I then buy an investment property cash? Yes, but I would most likely turn around and get a mortgage.

This is actually what we do. We buy properties in cash (not our own) to secure more advantageous pricing and then turn around and get a mortgage after the purchase. Purchase-> Finance. If you want to learn more about how we do this, be sure to check out our Here is the Deal Series of posts. In these posts, I walk you through how I do this.

My hubby and I are working towards building a solid real estate portfolio that will provide an income sufficient to cover our living expenses. Buying real estate using debt allows you to grow a portfolio faster. This is the #1 reason that I prefer to use debt rather than locking down my available cash.

What if growing a portfolio is not your goal? Is buying a property cash a good idea then?

Not everyone wants to have multiple investment properties.

I know plenty of people who just want one rental paid off and provide supplementary income. Your goal might just be to diversify your investments and sources of income.

In this case, would it make sense to buy cash? Depends.

Ask yourself,  is there a better use of the cash you would have otherwise borrowed?

Mortgage rates are usually lower than many investment returns.  What if you could invest the money you borrowed into an investment vehicle that gives you 6% returns and your mortgage interest rate is 4%? Wouldn’t that be a better option?

Let’s test this out together:

I am going to use a very simple scenario and use a few online calculators to better illustrate the example.

Let’s say you had $100,000 cash and there was a rental property available for purchase for $100,000

Property Details

Monthly Rent $1,000
Monthly Taxes and Insurance ($200)
Monthly Reserves for Vacancies, Repairs & Improvements ($200)
Property Cash Flow (No Mortgage) – Scenario 1 $6000
Mortgage Payment @4% interest (rounded) ($400)
Property Cash Flow (with Mortgage)- Scenario 2 $200
Cash needed for purchase (no mortgage) – Scenario 1 $100,000
Cash needed for purchase (mortgage plus loan costs) – Scenario 2 $23,000

I used www.mortgagecalculator.org to calculate the mortgage payment as shown below.

A couple of things to note. Rent prices will go up over time, but this doesn’t impact the example above because we assume that you would be contributing the net property cash flow in both scenarios.

Next, let’s look at the hypothetical investing scenarios.

Scenario 1

Use $100,000 to buy the property cash and invest the $600 monthly cash flow into an index fund like the S&P 500 earning an 8% annual return.

Scenario 2

Use $23,000 for a down payment and invest the remaining $77,000 plus the $200 monthly cash flow into the same index fund portfolio earning an 8% annual return.

Note that research has shown that the average annualized return for the S&P 500 has been 10%, but let’s just be a bit more conservative.

I used the calculator in investor.gov for the calculations below. Click here to do your own calculations.

Which scenario is best?

There is no right or wrong answer to whether buying a property cash or financing it is a good idea. There are various reasons why financing a property may not make sense or is not even possible.

  • The property may not cash flow much if you had a mortgage, or perhaps you don’t qualify for a mortgage.
  • You don’t qualify for a loan
  • Perhaps you don’t like the volatility of the stock market. My dad, for example, will not invest in the stock market even if I paid him to.

Please keep in mind that the above scenarios were simplified for illustration purposes. I just wanted to present a scenario where you can mix and match to maximize your returns. As you can see, scenario no. 1 will yield the highest return after 30 years.

Quick Note

In both scenarios, the property value will be the same. The purchase price is the same whether you buy cash or finance.

I used an online home appreciation calculator to help me with this example.

At a 2% house value appreciation rate, the property value will be $181,000 in 30 years.

To try it out yourself, click here

Wrapping It Up

Buying a property cash is not always a bad idea. Using debt is not a bad idea either. It all depends on your goals and circumstances.

Thanks for reading!

If you liked my content, don’t forget to press like below. It means the world to me!

This post may contain affiliate links. I may get commissions for purchases made through links in this blog.

Previous Post: « Do You Need a LLC Buy a Rental Property?
Next Post: How to Use Creative Financing to Buy Rental Properties When You Don’t Have Money »

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New Blog Post 🚨 In this week’s blog post I am New Blog Post 🚨 In this week’s blog post I am going over why we bought a short-term rental, our experience so far. Plus what we did prior, during and after purchasing our first short-term rental in March 2022, a Cabin in Blue Ridge, GA.

Check it out at www.beyondjustnumbers.com or link in bio @beyondjustnumbers
I can’t stress this enough. Some investors are l I can’t stress this enough. Some investors are looking to make money from day one, but that’s not always the case. It wasn’t for us and I’ve talked to a lot of rookie investors who have told me “Thank God I have my personal finance situation together.” 

This is just my opinion. Do you agree? Let me know in the comments!

Want to join a free community of like-minded individuals? Join our REI Coffee Chat Community where we talk real estate investing, personal finance and financial freedom, and much more! Link in bio @beyondjustnumbers

Want to learn more about investing in real estate? Read my blog www.beyondjustnumbers.com

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I used to think that investing in real estate was I used to think that investing in real estate was for the rich. I became in love with real estate while working for a real estate investment company that owned hundreds of units. This was back in 2011 and I was 20 years old at the time. I had less than 5 years permanently living the US, so I had no idea about anything. I grew up in Colombia and the only talk of money we ever had was the lack of it. 

The investors I worked for were a wealthy family, so naturally, I thought… Real Estate requires wealth. I don’t have wealth. Therefore, I cannot invest. 

I figured… well shit, I need become wealthy so I can invest in real estate. Eventually, after educating myself I realized how wrong I had it. You can build wealth BY INVESTING in real estate.

Took me a couple of years to figure it all out. Hence, why I didn’t start investing until 2019. I wish I had figured out earlier, but it is what it is. In just 3 years of investing in real estate, I was able to accumulate more wealth than I ever thought possible. 

Just to give you an idea…Did you know you could invest in real estate with as little at 3.5% of the purchase price? For a $150,000, that’s only $5,750. Buy a duplex that needs a little bit of work, fix it up, rent one side and live in the other. This will reduce your monthly expenses significantly, save the money and do it all over again.*

Of course it’s not that simple, but it’s also not that difficult. There are some particular steps and considerations which is  why I recommend doing further reading on the subject. 

Book Recommendation:
✅“The House Hacking Strategy” by Craig Curelop and ✅“Investing in Real Estate with No (and Low) Money Down” by Brandon Turner. 

#realestate #realestateinvesting
🚨 New Blog Post! Continuing the “Getting Star 🚨 New Blog Post! Continuing the “Getting Started in Real Estate Series” 

You’ve found a property either on your own or through a realtor, you’ve run your numbers, you’ve got a lender and now you are ready to make an offer. What’s next?

In this post I want to discuss a few items:

✅Key components of a real estate contract
✅How do you make a compelling offer to ensure you get the property you want
✅The main contract contingencies and how they work
✅Communicating with your realtor

I also provide real examples of what we have done personally. 

Check it out at www.beyondjustnumbers.com

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If I listed all of the hats, I’d never end 😂. If I listed all of the hats, I’d never end 😂. Anyone else? Show me the multiple hats you wear and tag me. Let’s have fun with some reels.

Trying to get good at the real game like @investinginyourwealth. How did I do?
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#mindset #realestate #firemovement #realestateinvesting #realestateinvestor #rentalpropertyinvestor #rentalproperty #cashflow #motivation #financialfreedom #financialindependence #financialindependenceretireearly
We see a lot of advice around hiring a real estate We see a lot of advice around hiring a real estate friendly CPA. However, when you look up  CPAs that specialize in real estate, they can be pricey.  However, that doesn’t mean that other CPAs or tax professionals aren’t good. They might not be particularly aware of certain items, but they can research and collaborate with theirs peers. Perhaps it may require you to do a little of work to compensate. Things you can do:
✅ listen to The Real Estate CPA podcast or join the Facebook group
✅follow social media accounts of the pricey Real Estate CPA and take notes of what they are saying
✅attend free educational events 
✅read BiggerPocket book on Real Estate taxes 
✅if you know anyone working with a really good Real Estate CPA firm, ask them what they are doing

Then use that to go your CPA or tax professional and be like “Hey, is this something we can do for me?” They’ll probably say, “Let me look into it”. 

If they are good, they are going to research it and/or ask their CPA peer group. (CPAs and tax preparers also have Facebook groups where they collaborate with each other).

Here is a piece of advice, if they tell you “No, we can’t use this loophole or no, you don’t qualify to use this strategy” —> Ask WHY and “How can I qualify in the future?.” This way you confirm they did their homework and aren’t just being lazy. Don’t just take no for an answer. You can then get a second opinion by asking a question in a forum or to your peers.

So don’t panic if you don’t have a real estate CPA or tax professional. 

Next video I’ll be answering the question… “Can I skip the tax professional altogether and do my own taxes?”

#realestate
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