One question you will face in your real estate investing career is whether or not to spend all your cash on one deal or to use the large sum in order to take out loans and fund multiple deals.
There are pros and cons to both methods. Paying all cash guarantees that you won’t have a mortgage, therefore you won’t pay any interest. Using the cash for several down payments guarantees that you are able to invest in multiple properties. Having your home paid free and clear means more cash flow every month. Having multiple properties diversifies your portfolio.
Your decision will depend on the current investing climate. If interest rates are low, it probably makes more sense to take out loans. At the time of this writing, interest rates not too long ago fell below 3%. Given inflation over the course of 30 years, this essentially means free money. It would make sense to take up the banks on their offer and purchase multiple properties at the lowest rates possible. On the other hand, if interest rates are high, it would make more sense to try and take out as little debt as possible.
If you’re sitting on a large chunk of cash, first off, I would like to say congratulations. Second, I would like to inform you that you have a big decision to make on how you should use that money.
Because you’re reading this, and probably browsing the other articles in the blog, then you’re probably interested in or are considering putting your money in real estate.
There are many hidden benefits to investing in real estate aside from appreciation and cash flow. There are tax incentives as well, the ability to leverage your property to fund a better lifestyle or to continue investing, and the possibility of passing the investment on to future generations of family.
In this article, I will focus on the pros and cons of investing all your cash into one property or using your cash as leverage to fund multiple properties.
Buying a single property with all cash:
Pros:
- You don’t have to worry about paying a mortgage
- You can negotiate a better price when paying all cash
- You have the ability to buy distressed properties and therefore cheaper properties
- You do not need the approval of a lender (and therefore no need for an appraisal or inspection)
- You will be able to close much faster
Cons:
- You will be using all your funds and purchasing only one property
- You will not have money left over for unforeseen circumstances
- You won’t have the diversification that comes with owning multiple properties
- Liability and a higher chance of lawsuits (more on this below)
Taking out loans to buy multiple properties:
Pros:
- As the title suggests—you are able to own multiple properties
- Diversification in multiple markets
- The potential for higher cash flows
- Multiple income streams (if one tenant moves out, you still have the other properties producing cash flow)
- More protection against market downturns
- You pay back the loan in future dollars, which are worth less
Cons:
- You increase your liabilities
- Higher chance of foreclosure if you are unable to pay your mortgage
- Longer buying process (appraisal and inspection necessary)
- Not much negotiating power
- Limited to deals that only lenders will approve of
- Higher fees and closing costs included with mortgages
The pros and cons of either method you are willing to tolerate, or which ones you prefer, will depend on your personality, your current situation, and the state of the market at the time. Sometimes it makes sense to pay all cash for the right property, other times you might find yourself leaning more towards taking out loans to close on your deals.
When you own a property free and clear, you are at a higher risk of losing that property if a lawsuit ever comes your way. If a tenant is injured, or worse, and the lawyer knows that the property is fully paid off, there is a higher incentive for them to come after your assets. If the property is funded 80% with debt, there is much less incentive as there will be a much smaller reward even if the case is won.
If you want to be a landlord with multiple properties then the loan route is for you. Some people don’t want to be bothered with having so many tenants. They just want one rental property paid free and clear and only one tenant (or family) to manage. Depending on the current mortgage rates, it might make financial sense to just have one home that is fully paid off and rented than to have multiple properties that require mortgages that eat into your cash flow.
Given that inflation eats through the value of future money, the amount that you will pay the bank back in 15-30 years will be worth less than the amount that they would have loaned you for the property in the beginning. Factor in appreciation and all the cash flow that you would receive in those 15-30 years of your loan term, and the benefits far outweigh the costs of having a mortgage payment.
The method you will use to invest will largely depend on the circumstances of the time you are investing in. Consider both, and really understand the pros and cons of both methods before you jump into a deal. Consider your goals as an investor and landlord.
