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July 5, 2011 / C. King

Investors: Cash vs. Financing

Right now we’re working with some clients that are investors.  Some flip homes and others purchase an entire rental portfolio for consistent income and tax shelter.  Regardless of why you’re investing, one of the first questions you should ask is “Should I pay cash or should I finance?”  There are pro’s and con’s to both.

Cash
Purchasing a home with cash means that you own it free and clear.  If you decide to rent it out your only expenses (after repairs or make-ready costs, of course) would be taxes and insurance.  The benefits of a cash purchase are that you avoid paying any interest and the investment is less risky and more liquid. If you’re flipping a house one at a time, this may be your best bet.  However, you may have more power if you leverage your cash through financing.

Financing
Most investors can obtain financing with 20% down and a low interest rate.  One must also keep in mind that you may or may not be required to show the bank that even if these properties were  vacant (worst case scenario), that you would still be able to cover the mortgage.  If you can meet those guidelines you may be able to leverage your money.  What do I mean by leverage? 

 Let’s say you have $100,000 to invest in real estate.  With the cash option you can buy one house for $80,000 and use $20,000 to renovate and later sell it for a profit.  With the financing option, however, you may buy two properties for a total of $100,000 with only $20,000 down and still have up to $80,000 for repairs/renovation.  You can flip the property, however, you could potentially earn more profit, if you repair the home to make it rent-ready (this does not involve minor repairs) and lease it.  Not only would you cover the mortgage/taxes with the rent earned per month, but you could likely make a total of $1,000+ per month depending on the house/market/repairs needed.  Let’s say you after you pay the mortgage/taxes you make $1,000 per month.  After one year you would rate of return would be about 60% (That rate of return may vary depending on the amount of repairs).  That’s leveraging your money (making it work for you!)!

We meet with our clients to cover every possible scenario to make sure they get the most of their investment.  Visit http://kingrealtyandmanagement.com/realestateinvestors.html for more information on how we help investors.

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