After paying off our mortgage in 2017, we have a lot more cash available to us as a family. We've used that extra dough to save up for our first rental property and we're pumped to make it a reality this fall!
A big question that we've been struggling with is whether we should buy in cash or take out another mortgage. After much debate, we've decided it makes the most sense for us to go all cash.
Honestly, I’m still learning so we could be dead wrong in our approach. I’ve never been a real estate investor before. All of my knowledge comes from things I’ve read, listened to or conversations I’ve had with other real estate investors.
On the podcast, I’ve interviewed around a dozen real estate investors over the past couple of years. I love those conversations because it’s like I’m a sponge soaking up knowledge from super smart real estate gurus.
I’ve probably read a half dozen books on real estate. We now have tons of motivating stories, examples and tactics to safely plan our first purchase.
With all the folks I’ve talked to and the books I’ve read, I still REALLY like buying all in cash … Here's 7 reasons why:
1. No Closing Costs
With a typical mortgage process, you’re paying lender fees, appraisal fees and sometimes points on your loan. With no loan, there are no loan fees.
We'll also have no bank to deal with and no application process.
2. No Mortgage Payments
With no mortgage process, there’s also no mortgage! I will never have to pay interest payments to the bank. There will be no principal I’m working hard to pay down.
Zero payments whatsoever.
3. Helps in a Competitive Market
The housing market where I live (and probably in a vast majority of the country) is HOT right now. People are putting in offers way above the asking price and getting in some cases less house for their money.
I want to have an advantage in the process. If I’m an all-cash buyer, I’ll be considered more favorably by the seller. They’ll be able to close faster. And they won’t have to worry about me getting approved by the bank.
I might even get a deal because I’m buying in cash. Who knows!?
4. More Cash Flow
Without a mortgage, more of the rent is going directly in our pockets.
Let’s say for example, we get a $80,000 house and we put $20,000 in it to make it nice and livable for our new tenants.
We’re able to get $1,000 per month or $12,000 per year.
Using the quick and dirty 50 percent rule, I can assume that we’ll have to shell out around $500 per month for expenses like property management, taxes, insurance, maintenance, vacancies, etc.
That takes our profit to $500 per month or $6,000 per year.
Now if we had a mortgage on the property, that might just wipe out most of our annual profits.
But lucky for “future us”, no mortgage, more cash flow.
5. Less Stress
I don’t want another mortgage. I’m done with them. They make me stressed. One of my goals in life is to continue to decrease the stress in my life.
Without a mortgage, I’ll be able to rest easy if we don’t have a tenant for a few months. I’ll be able to feel confident knowing that I’ve purchased an investment that will more than rise in value by around 3% per year or more.
6. My Mortgage-Free Rental Property Will Pay Dividends
No metaphorically … literally.
Each month, we’ll receive a consistent payment on our property. We can choose to reinvest the dividends or use them to fund our lifestyle.
In the first few years, we'll more than likely save this money to buy the next rental property in cash. So if we're able to stock away the $6,000 per year from our example above, that'll get us to rental property #2 in a much shorter period of time.
7. My Wife and I Are on the Same Page About It
This may be the most important one of all. Nicole REALLY enjoys the completely debt free lifestyle.
Since paying our primary home mortgage off in 2017, she’s gotten used to have more cash and zero payments. And I LOVE making my wife happy. She’s my partner and the love of my life.
We’re on this crazy ride together.
Admittedly, we're newbies. We're not sure if what we’re doing is smart, but it feels right for us. And at the end of the day, that’s really all that matters.
What do you think about buying your first rental property in cash?
Please let me know in the comments below!
These are great points, thank for sharing.
No problem Kevin! Glad you liked the post.
You are way off on your assessment. Paying cash, since you’re a novice investor, will likely lead to you buying cash flow at a rate of return equal to the interest rate or below. The power of real estate is that you can leverage such a large, valuable asset with little money. There are many, many examples out there to show how taking $100K and spreading it over say 5 properties putting down 20% each will make you significantly more money than buying 1 house in cash. Look at Biggerpockets for more info.
To summarize, by paying cash you’re getting smaller returns. You are missing two of the biggest advantages of REI, depreciation write-offs and the fact the tenant pays for the property for you. That is rule no.1 in fact and why real estate works. The renters pay for the property for you, you get paid to own it while they pay it off for you. If you pay cash you’re doing their job for them!
Great feedback! Thanks Bule.
I’ve had a chance to chat with a few of the BiggerPockets team (Scott, David and Mindy). I love their show(s), community, books and blog. Super inspiring and informative.
After all that, I still feel like cash only purchases feel right for me and my family. I agree that the mathematics are in the favor of what you’re describing but … emotionally and mentally, cash only sounds and feels better.
Less homes equals less stress for me and my family. When you describe owning 5 homes with our $100k, that doesn’t sound exciting to me. It sounds like A LOT more work. Something that our young family doesn’t have time for right now.
It sounds like you have a great background in REI so I definitely appreciate your wisdom and experience. We’ll see how it all goes in the end. We’re still saving up.
It sounds like you have a good plan! My concern with this approach is the time lost in #1. Paying off your mortgage and #2. Saving cash for the real estate investment. I’d be curious in how a risk analysis vs time would play into the two options.
However, this does seem like it is the option that has the less risk. If you take on a mortgage for a rental property, you need to be confident in how much you can bring in from rent, and also that you will have low a low vacancy rate. It would also be interesting to look at how this would work if you put in 50% cash and took the rest with a mortgage loan.
I enjoyed the article and am excited about listening to your podcast!
Thanks for sharing your thoughts Chris!
The 50% approach also is appealing to us. We did this with our current home together. We put about 45% down and then tried to pay the house off as soon as possible.
I’d love to hear your feedback on the podcast. 2 years in and I’m still learning!
I’m conservative when it comes to debt (currently paying down our mortgage) and considering rental properties in the future. You’re a few years ahead of me, so I am excited to follow along.
The main thing that trips me up about imagining a cash purchase is how long it would take to recoup that initial investment. If we pay $100k for a property and bring in $1,000 in rent each month, it will take, like, 10 years just to start making money on the investment.
I have a lot to learn, and I appreciate you sharing your perspective on rental properties.
I understand your concern, but in your example, wouldn’t you be make money right away?
The asset is yours ($100k home) and with that investment, you pull in $12k per year … that’s a pretty good return on investment.
I’m also a newbie too so …
Well, it’s obvious when you put it like that. ? In my head, I think I was viewing rental properties like house hacking (with the goal of renters essentially paying for the property).
With the market so hot right now, are you willing to wait months/years for a deal, or do you just want to get the rental income started?
From what I’ve heard, there’s always a deal to be found as long as you’re willing to put in the time to find it.
So, when we get to $100k, we’re going to analyze one property per day until we find the one we’re looking for. We’ll also do some “Driving for Dollars” to make offers as well.
It could still take months/a year, but we’re in no rush.
If I were going to have a rental property (and had the cash to pay) I would definitely buy all in cash. Why pay interest to the bank? It just doesn’t make sense. And yeah, then you can make sure you’re turning a profit immediately from the property. And fewer issues if something like job loss happens. You’re not stuck with a monthly payment draining your e-fund.
That’s what I’m talking about 🙂 it’s going to take us a lot longer, but worth it in the long run.
I’d say that last point – being on the same page – trumps all the rest.
And oh to live in an area where we could pick up a house for $80k… ?
Yes, two points for metro Detroit real estate!
I think you know we’re in a similar situation as your family and are saving for our first rental after becoming completely debt free.
I go back and forth almost daily on if we want to save up and buy with cash or put 20% down and take out a loan. Eventually we want to pay them all down but taking out loans initially would allow for a head start.
Your episode with DocG was really convincing for the all cash strategy. It also got me thinking about purchasing condos or appartments.
We still have some time to think about what we want to do while saving money. However, your case for the all cash route has me leaning that direction (today at least, lol).
I’m glad the Doc G episode resonated with you! He’s got a very inspiring story.
Honestly, I don’t think there’s anything wrong with either approach. I see positives to both sides.
I’m shooting for as little stress as possible.