Latest / Own More Doors / #60 Cash vs. Financing: What’s Smarter When Buying Real Estate?

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#60 Cash vs. Financing: What’s Smarter When Buying Real Estate? · Own More Doors

• 0:00
  SPEAKER_00: What's up, everyone?
• 0:01
  SPEAKER_00: Another Own More Doors podcast.
• 0:03
  SPEAKER_00: Today I'm going to talk about a topic.
• 0:05
  SPEAKER_00: When you're buying multifamily property, are you better off buying cash or financing the property?
• 0:10
  SPEAKER_00: Okay.
• 0:11
  SPEAKER_00: Cash or financing a property?
• 0:13
  SPEAKER_00: I'm here with Cody Chardonnell, broker here at Sage Real Estate.
• 0:16
  SPEAKER_00: Cody, how do you answer that question?
• 0:19
  SPEAKER_01: I mean, if you're in the privileged position to be able to buy cash or finance a property, I think you're doing pretty good.
• 0:26
  SPEAKER_01: So the way I would look at it is what's the goal?
• 0:30
  SPEAKER_01: You know, is your goal to cash flow as much as possible?
• 0:32
  SPEAKER_01: Is your goal to build equity as quickly as possible?
• 0:35
  SPEAKER_01: And I would work backwards from there.
• 0:38
  SPEAKER_00: You know, um I did a uh a YouTube video short about this.
• 0:44
  SPEAKER_00: And there are tons of comments, and and and so here's the thing, and I think Cody said it right.
• 0:49
  SPEAKER_00: Are you in a position that you have cash that you could buy a fourplex, an eight, like an eight unit?
• 0:55
  SPEAKER_00: Like if you're in a position to buy something cash, there's not many people that are like percentage-wise of buyers, you know, a lot of times people will say, Hey, um, with today's interest rates, Cody, I mean, everyone's buying cash, right?
• 1:08
  SPEAKER_00: I'm like, no, no, people aren't always buying cash.
• 1:12
  SPEAKER_00: Um, Cody and I, with the buildings that we both own independently, we have loans on every single one of them.
• 1:21
  SPEAKER_00: And the only time I bought something cash was a commercial building, which is a laundromat.
• 1:26
  SPEAKER_00: It's the only way they would select us as the buyer is that we had a uh buy a cash.
• 1:31
  SPEAKER_00: So I was forced to buy a cash, but that's not what I wanted to do.
• 1:35
  SPEAKER_00: Cody, what are the benefits of putting a loan on a property outside of just not having the money?
• 1:41
  SPEAKER_01: Um, the big benefit is leverage, right?
• 1:45
  SPEAKER_01: And when you're using the bank's money on an investment property, we're not talking about a house, right?
• 1:50
  SPEAKER_01: We're talking about something that's going to generate cash flow and cover that loan.
• 1:54
  SPEAKER_01: Um, you get leverage, right?
• 1:57
  SPEAKER_01: So the way that I would explain it to somebody who maybe isn't familiar with how leverage works is you are putting us a portion of money down, borrowing money from a bank, and you're able to control an asset, right?
• 2:11
  SPEAKER_01: That maybe bigger than you could buy with the cash that you have.
• 2:15
  SPEAKER_01: Okay.
• 2:16
  SPEAKER_01: So an example I always use is let's say we're looking at a million dollar four unit.
• 2:21
  SPEAKER_01: Okay.
• 2:22
  SPEAKER_01: If you had a million dollars, you could buy it all cash.
• 2:25
  SPEAKER_01: If that property would were to appreciate five percent, right, in the first year, that means the value of the property goes from a million to a million fifty, you made fifty thousand dollars on paper, right, from appreciation on your million dollar investment.
• 2:40
  SPEAKER_01: So you made a five percent return.
• 2:42
  SPEAKER_01: If you were instead to put 25% down, um, borrow 750 from the bank, and you controlled that million dollar four unit, if it appreciated at 5%, property goes up$50,000, you've now made$50,000 with your$250,000 investment.
• 3:01
  SPEAKER_01: So it's a 20% return versus a 5% return.
• 3:04
  SPEAKER_01: So there's this multiple effect on whatever appreciation rate, you know, we're seeing in the market.
• 3:09
  SPEAKER_01: So um for somebody who's maybe earlier in their investment journey, who's looking to grow, I think leverage is very, very powerful.
• 3:18
  SPEAKER_01: It can work both directions, right?
• 3:19
  SPEAKER_01: If the market goes down, um, you know, there's there's leverage in that direction too.
• 3:24
  SPEAKER_01: But uh what we advise clients is you really want to only use leverage when um the rents coming in are going to cover those loan payments, right?
• 3:33
  SPEAKER_01: So we're not coming out of pocket.
• 3:34
  SPEAKER_01: There are there are times when at least at the beginning of an investment, when a property would be negative and that's okay.
• 3:40
  SPEAKER_01: But long term we want it to be able to cover and pay for that financing.
• 3:44
  SPEAKER_00: Cody, so I'm I'm glad you touched on that.
• 3:47
  SPEAKER_00: So the best way that I could describe it is if you're an investor, are you on the offensive or are you playing defense?
• 3:56
  SPEAKER_00: And the people that are playing defenses they've already made it, they've achieved their goals.
• 4:01
  SPEAKER_00: And this will be the example that I'm gonna give you.
• 4:04
  SPEAKER_00: Because a lot of our clients have achieved their goals, they they own um on paper millions of dollars of real estate, and now they have passive income.
• 4:14
  SPEAKER_00: So they've checked off the two requirements, right?
• 4:16
  SPEAKER_00: They have lots of write-offs and all kinds of great things.
• 4:18
  SPEAKER_00: So the the so they've made it, and a lot of them don't have to work anymore, and a lot of them do this as a game now because they're bored at home.
• 4:27
  SPEAKER_00: Now, this is long, you know, like I've said before, it's not get rich quick, it's get rich guaranteed, but it's guaranteed over a long period of time, consistency, uh, staying in the game.
• 4:38
  SPEAKER_00: And so I have clients that now will say, uh, in fact, my mentor, Mark Milan, will say, now that I'm at this point in life, and you know, he's you know, older, and he says, I want to pay everything off at least 50%.
• 4:53
  SPEAKER_00: So I don't want leverage.
• 4:54
  SPEAKER_00: But when I knew him 20 years ago, man, if he could buy something like an eight-unit building with 100% financing, he would leverage himself because why?
• 5:03
  SPEAKER_00: He was playing offense.
• 5:04
  SPEAKER_00: So it kind of depends on where you're at.
• 5:07
  SPEAKER_00: It's you're in growth mode, Cody.
• 5:10
  SPEAKER_00: I'm in growth mode.
• 5:11
  SPEAKER_00: And I I think we would say we will borrow as much as we could borrow to be able to acquire properties, right?
• 5:18
  SPEAKER_00: And that we're gonna do everything we can to improve the income, to improve the asset, to provide um a better building for our tenants, be a good housing provider, but it's all with the mission of we're trying to increase the income because we have all this debt to satisfy.
• 5:34
  SPEAKER_00: And so let me share with you something.
• 5:36
  SPEAKER_00: So back in the day when I was getting my my CCIM designation, certified commercial investment member, it took me like, I don't know, close to four years to go through all of their um uh all their courses and they were expensive courses, but this was um, you know, if anyone wants to look up CCIM uh.com, this is where a lot of my, I well, I would say all of my confidence on investing came from them because they, you know, I learned time, value of money, internal rate of return, a lot of these things.
• 6:04
  SPEAKER_00: And a lot of the things I learned were super sophisticated.
• 6:07
  SPEAKER_00: Uh, no one that I work with is talking about internal rate of return.
• 6:10
  SPEAKER_00: They just, it's just not something they talk about.
• 6:12
  SPEAKER_00: But they talk about cash on cash, and so that's something that I learned through CCIM.
• 6:17
  SPEAKER_00: When I took the national test, um, so I flew to Hawaii.
• 6:21
  SPEAKER_00: So there were two options.
• 6:22
  SPEAKER_00: You could fly to Chicago, you could fly to Hawaii, and and then I was ready to take the national exam.
• 6:26
  SPEAKER_00: And it was super hard.
• 6:27
  SPEAKER_00: It was like they gave us six hours to do it, five or six hours, and the entire room was still there, including myself.
• 6:34
  SPEAKER_00: And here was my biggest takeaway and questions where I didn't know the answer, every time.
• 6:40
  SPEAKER_00: So here's what I figured out every single time where the question was, which one has a greater return?
• 6:46
  SPEAKER_00: Anything that had leverage, meaning, meaning anything that someone got a loan on had a bet a better return.
• 6:51
  SPEAKER_00: Like that was always the answer.
• 6:52
  SPEAKER_00: So even if I didn't know the answer, I'm like, okay, well, that one has a loan.
• 6:55
  SPEAKER_00: This one, someone's buying cash.
• 6:57
  SPEAKER_00: So naturally, this one's gonna be the answer.
• 7:00
  SPEAKER_00: Not because I knew the answer, but just because I knew that anytime, most times, I don't want to say, you know, people are gonna call, you know what?
• 7:07
  SPEAKER_00: Comment below if you agree with us or not.
• 7:09
  SPEAKER_00: But like because Cody and I are on the offensive, we're gonna put loan.
• 7:15
  SPEAKER_00: Like, listen, if if we go to a bank and they're gonna say, hey, uh, you need 25% down, we'll put 25% down.
• 7:20
  SPEAKER_00: But if they say, hey, we'll give you the loan with 10% down, we're gonna take the that loan.
• 7:25
  SPEAKER_00: Like, we're not even gonna think twice about it.
• 7:27
  SPEAKER_00: Yeah, we'll run our numbers to make sure that that the income that's coming in, but for the most part, in most cases, um, we're gonna want to bring in as much debt as possible.
• 7:36
  SPEAKER_00: I know someone's listening to this and be like, that's horrible advice.
• 7:39
  SPEAKER_00: Why are you telling people to take debt?
• 7:41
  SPEAKER_00: It's because we're trying to grow.
• 7:43
  SPEAKER_00: And um, kind of what Cody said is is if an asset goes up by 5%, because here's the other thing, too, is in most cases, if you have$100,000 in the scenario or yeah, in in the scenario that Cody gave, or this is the one that I'll that I'll give.
• 8:01
  SPEAKER_00: If you have$250,000 down and you wanted to go to the stock market, you're you're just gonna buy$250,000 worth of stock.
• 8:09
  SPEAKER_00: It's it's very rare uh to be able to to borrow on stock, but on real estate's very common.
• 8:16
  SPEAKER_00: That's what we call leverage, is that that$250,000 could control a million dollars.
• 8:21
  SPEAKER_00: I don't know.
• 8:22
  SPEAKER_00: Like if you buy crypto, you're not putting$250,000 down and controlling a million dollars of crypto.
• 8:27
  SPEAKER_00: That's not the way it works.
• 8:28
  SPEAKER_00: You're only getting$250,000 down.
• 8:31
  SPEAKER_00: So it's almost like you're buying a cash.
• 8:32
  SPEAKER_00: And so that's why we're telling people um this is not like there's a right answer, there's a wrong answer.
• 8:38
  SPEAKER_00: It's do you have the cash?
• 8:41
  SPEAKER_00: And if you do, then you have a decision to make.
• 8:44
  SPEAKER_00: Where are you in your investment career and what are your goals?
• 8:48
  SPEAKER_00: Because I I'm pretty sure, Coat Cody, if someone came to you and they said, Well, here, let me ask you.
• 8:53
  SPEAKER_00: Pretend I'm your client.
• 8:54
  SPEAKER_00: Hey, Cody, um, found you online, watched some of your videos, heard you on the podcast.
• 8:59
  SPEAKER_00: I want to work with you.
• 9:00
  SPEAKER_00: I have a million dollars.
• 9:02
  SPEAKER_00: Should I A buy one building for a million dollars, or do you recommend that I split that apart and buy more than one building?
• 9:08
  SPEAKER_01: The answer 90% of the time is going to be to split it apart and buy more real estate, right?
• 9:16
  SPEAKER_01: Um, and it's just like I explained, you know, uh most people who are coming to us are in that growth mode.
• 9:22
  SPEAKER_01: So um it makes sense for them to use leverage and get a higher return on equity.
• 9:27
  SPEAKER_01: And um, you know, as long as you as long as you can cover those payments with rental income, you're in a relatively safe place.
• 9:36
  SPEAKER_01: So um, yeah, that's that's typically how the conversation goes with clients.
• 9:42
  SPEAKER_01: And you know, it's it's not always like that.
• 9:44
  SPEAKER_01: Some people who come to us are older and they just want security, they want to be able to sleep at night, and having debt um gets to them, like it it gives them anxiety.
• 9:53
  SPEAKER_01: So we don't go that route.
• 9:55
  SPEAKER_01: But but yeah, 90 90% of the time people are using financing.
• 10:00
  SPEAKER_01: And um another thing to think about is just you can use leverage in different assets, like you can leverage stocks, right?
• 10:10
  SPEAKER_01: Um, it's typically shorter term leverage than real estate.
• 10:13
  SPEAKER_01: Uh, real estate, I mean, we have the ability to use 50 or sorry, 30-year fixed financing on residential properties, you know, uh one to four units.
• 10:25
  SPEAKER_01: And we're buying in you know, coastal real estate in California, where it's very difficult to add additional supply.
• 10:31
  SPEAKER_01: We have a huge economy here.
• 10:33
  SPEAKER_01: A lot of people rent here, like there's there's no issue finding tenants.
• 10:37
  SPEAKER_01: So um, from just a safety perspective, you know, I feel really confident taking out debt on something where I'm I feel confident I could I can rent it out and generate that income.
• 10:48
  SPEAKER_01: So um if you had any anxiety about it, just make sure to that you're analyzing the underlying asset and the economics of that area.
• 10:59
  SPEAKER_01: Like if you're buying in a small town in the Midwest where maybe there's one company that employs everybody in the town, um the advice would be different, right?
• 11:10
  SPEAKER_01: Because that employer goes away, now you have a ton of vacancy, you can't support the debt.
• 11:15
  SPEAKER_01: Uh, we'd want to be defensive in that scenario.
• 11:18
  SPEAKER_01: But um, but yeah.
• 11:19
  SPEAKER_00: Got it.
• 11:20
  SPEAKER_00: No, thanks for covering that, Cody.
• 11:21
  SPEAKER_00: Um, so again, if you're someone who's in a position to buy cash and you're curious on what you should do, you could certainly reach out to us.
• 11:29
  SPEAKER_00: And Cody's right.
• 11:30
  SPEAKER_00: Most times we're gonna give you, hey, leverage that, use that to your benefit, make money on the bank's money is what I'm gonna tell you.
• 11:38
  SPEAKER_00: Um, but that's not always gonna be the case.
• 11:39
  SPEAKER_00: It's it we will always ask, hey, why are you doing this?
• 11:43
  SPEAKER_00: What's your motivation?
• 11:44
  SPEAKER_00: And if someone says, I want cash flow, um, I don't really care of appreciate, you know, I don't need to be making the highest return.
• 11:53
  SPEAKER_00: Okay.
• 11:54
  SPEAKER_00: They've told us what their motivation is.
• 11:55
  SPEAKER_00: And so, anyhow, um, that's all we have for now.
• 11:58
  SPEAKER_00: Make sure to like, comment, and subscribe.
• 12:00
  SPEAKER_00: Until next time.