Paying Cash vs Using Leverage to Purchase Investments


Should you use cash to buy a
rental property or leverage in the form of a mortgage? That’s today’s video. Let’s dive in. Hey, there, I’m Clayton Morris. I’m the founder
of Morris Invest. I’m a longtime real
estate investor. And today, we’re going to
talk about whether or not you should buy a rental property
using cash, or whether you should leverage it
with a mortgage, or private financing
of some kind, or traditional
financing of some kind. Now, let me first
say that it is truly a personal preference,
what you do and how you go about your
rental property strategy. And again, it all comes down
to knowing what your goals are and then reverse-engineering
your goals, and mapping it out between
you and your wife, you and your husband, or, if
you’re on your own, great. But you need to have
those goals figured out and how much cash you have on
hand in order to make it work. So let’s start out by saying, if
you don’t have any cash at all, then you don’t have
cash to work with. You’re going to need to
use some sort of financing, whether it’s traditional
or private financing. Now, if you’re using
traditional financing, you’re going to have to
come up with about 25% down for a rental
property investment. Banks simply won’t loan– They won’t do the 80% where
you have to come with 20% down. No, they’re pushed up
to about the 25% down. Why? For some reason, they consider
it a riskier investment than the home you
live in, which, we can get into other arguments
about why I think that’s crazy, but, for now, that’s
how they do it. So a traditional bank, a
Wells Fargo, Bank of America, your local bank down
the street, 25% down, and they’re also going to have
you hit a minimum threshold. So the property probably can’t
be worth under about $50,000. So, during an
appraisal, you’re going to have to probably
be over that number. Some banks might
go down to $45,000, some might be at
$60,000, but just know that if you are
really going be targeting those $35,000 homes
like I like to buy, or $40,000 homes
that I like to buy, traditional financing
is out the window. You can’t use it. So know that going into it. So if you don’t have cash,
using a traditional bank, those are going to be the terms. And, of course, it’s going to
rely heavily on your credit score, your credit history. If you have a
foreclosure in the past, or a bankruptcy in your past,
or you have a lower credit score below that 680
credit score, you’re probably not going to
be in luck for getting traditional financing. Some banks may go
down to about 660, but 680 is really going
to be your cut off. And you want to have
a good credit score. You need to have a
good credit history. You don’t need to have any
blemishes, like a short sale, or a foreclosure, or any
of those other things in your past. Now, you then can only buy a
certain number of properties under your own personal name
using traditional financing, which is also a big limitation. So you can buy– I think, you know, they
switch these rules around. But you can buy, basically, on
one hand or maybe two hands– you can buy that
amount of properties under your own personal
name before the bank says, nope, you own too many
rental properties, you’re not allowed
to do it anymore. Sorry, move on. Find some other way
of buying properties. So that’s traditional financing. Now what about
private financing? Well, private
financing is fantastic. And this is something
that we’ve definitely used to acquire rental
properties, my wife and I, and many of our investors
that we work with, use. Now, private financing can
come in any form, right? It could be your
Aunt Mildred who’s got $200,000 laying around. Or it could be a private,
institutional lender, which is just basically a
fund, a group of people that got together and pooled
their money into a fund and then are lending it
out with certain terms. Now, again, there might be terms
where you have to hold the loan for five years minimum, and you
cannot pay it back before five years, so you’ve got to hold it
for a certain amount of time. And you might be able to
get a 30 year note on that– 30 year mortgage–
but you’re still going to have to hold
it for five years. There’s prepayment penalties. You cannot pay it
back in large numbers. But if you work with
your Aunt Mildred, you could construct
it any way you want. So private financing
is powerful, and it’s certainly a way to
acquire a lot of properties in a short amount of time. Now, again, in
private financing, you typically will probably
have to come with some money down on the table. Private financiers
like to see that you’ve got cash in the game. Skin in the game,
as they call it. Right? So, again, they may
want you to put down 20%, 25%, even 30% down
on a private finance deal. If traditional financing
is out, and you can’t do it because maybe you have a
foreclosure in your past, private financiers
are more concerned with the properties
you are purchasing. They’re going to look
at those properties. They’re going to have
an appraiser come out and check it out. You’re going to get
an inspection done. All of those things. And they want to know
that what they are putting their money behind is a
solid investment, that it’s going to cash flow a
certain amount of money. So private financing
can be powerful. It’s not as stringent. You don’t have to worry about
those blemishes in your past. Again, if you had a short
sale, or you had a foreclosure, it’s much more forgiving. Where do you find
private financiers, you may be saying to yourself. Well, we’ve linked up a few
in the show notes below. You can check out
some of the ones that are some of the larger,
institutional financiers. But, honestly, going to your
local real estate meet-up group– Just go to meetup.com and do
a search for local real estate clubs in your area. Chances are there are private
financiers hanging out at those monthly meetings. Go there. Have a coffee and a
beer with those people. That’s how I’ve made some
of the best connections I have in real estate investing. I loved going to my local
REA meetings once a month and meeting with my friends,
Kyle, John, Dave, and all of those guys, and seeing them. Everyone is a
different guy, right? One guy’s in mortgages, one
guy does private financing, one guy is a flipper. And you have beers, and you talk
about real estate investing. It’s a great way to
find private financiers. And, of course, the
other way is cash. Now, this is my favorite way
of acquiring rental properties. Why? Well, because you get
immediate cash flow. You’re immediately at the end of
at the end of the goal, right? You’ve hit that– gone
over the touchdown, you’ve scored a touchdown,
you’ve hit a home run, all of those pieces
come together, and you’ve immediately
created cash flow, and you’re seeing the
benefits of owning that property free and clear. You’re not having to carry
a mortgage on the property. If it’s not rented for a few
months, which doesn’t really happen to me but, if you
had a tenant that was out, and you didn’t get
them in quickly enough, it was a hard winter
month, something like that, you’ve got
it free and clear. So you don’t have to worry
about those problems. Also, you have immediate
equity in the property, and one thing I
want to talk to you about is the ability
to take that equity and turn it into leverage. So right off the
top of this video, I talked about cash
versus leverage. And you hear from
people that say, never use your own money
to buy real estate, use leverage, use
private financing. And that is a very powerful tool
if you know what you are doing. You know that your
property is going to cash flow beyond all of
your expenses, and taxes, and insurance, great. If you can count on that, great. Cash gives you immediate
equity, and, of course, all the cash flow from your
tenant is coming right to you. But what about owning that
property free and clear and then cashing
out of it and doing a refinance on the property? So that’s what I like to do. I like to pay cash up
front for my properties. So $35,000, $40,000, $45,000– those are the types of
properties that I buy. And then I will bundle
maybe eight or 10 of them that I own together,
and I’ll do a cash out refinance with a bank. Now they’re going
to give me about 75% of the value of that property. So if it’s worth
$100,000, they’re going to give me $75,000. And they’ll just
cut you a check. So they’ll bundle the
properties together. It’s called a commercial
portfolio loan. So we’ll do a cash
out refinance, and I’ll take those
properties, bundle them up, and then I’ll take the
cash right back out of those properties and buy– you guessed it–
more properties. And you keep that
snowball effect going. It was a simple
trick taught to me many years ago by an
investor who I know locally here in New Jersey, who
owns about 2,000 properties. That’s how he did it. I took him out to lunch, and
I said, how did you do it? You started with nothing. He said, well, I had enough
for my first property. I bought it, for, like, $60. And I rehabbed it a
little bit and then it was appraised at like $80 or $90. I went to the bank, and they cut
me a check for 75% or 80% loan to value. He said, so, basically,
I got the money back. The full amount
that I put into it. And then I went and
bought another one. And now that one
was cash flowing. And he rinsed and repeated. So now he owned the
second one free and clear, and he paid back the first loan. And then he owned the
second one free and clear, and he paid back
the second loan. You see how the
snowball effect happens? So that’s why I like paying
cash for properties up front and then leveraging them
after I’ve cash flowed and I’ve rehabbed them. Why is this also powerful? It’s powerful because banks
look upon a property that’s rehabbed, and it
has a tenant in it, and is already proving the
income that you’re receiving. So it’s not speculation. The bank isn’t looking
at that and saying, well, the potential rent
is $750 a month. No, you can say to them,
the actual rent is $750 and the house is now appraising
at a much higher rate than what I bought it. It’s appraising higher,
it’s cash flowing more, and that money is
coming into my pocket. It’s a performing asset. So, bank, would you like to
refinance this property for me, and put a mortgage
note on the property, and give me cash for it? Yes, they will. They much prefer to do
that than they prefer to do step 1 and just
writing you a mortgage note on a property that they
don’t know how exactly it’s going to perform. So that’s my ninja trick. Cash, turning it into leverage. That’s the way that I have
had success in real estate investing, and I know a lot
of high level real estate investors have as well. Look, again, that’s
the way I do it. You don’t have to
follow that strategy, but it is a killer
strategy for you to snowball your investments. I’m Clayton Morris. I would love to
hear your thoughts, so go to the comment
threads below this video. We have some great
resources down there, some other playlists. Please leave your
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here, everyone, next time on another video. Go out there and become
a successful real estate investor. Take action.

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