Should I use only cash to purchase my properties or should I take out a loan and incur debt?

Real estate investors face this debt vs all-cash question all too often. Before you immediately answer with “of course I don’t want debt,” it is important to consider what it means when you choose to invest in properties with just your own cash and no outside financing.

What’s The Difference?

Cash is exactly what it sounds like. You are using your own money to finance your investment.

Debt provides you with the opportunity to limit your personal cash investment by leveraging your borrowing power to get external funding for your projects.

So… Why Choose Debt?

Getting a loan (aka using debt) to fund your real estate investments gives you the opportunity to earn a higher rate of return on your investments and to grow your business at a faster rate. As an investor, you are likely looking into more than just one property to fix and flip or buy and hold, so using debt, could help you tremendously.

Not All Debt Is Created Equal

Most people think of banks when they think of obtaining loans, and this can steer them away from considering debt.  Banks are certainly not known for being fast or flexible when it comes to extending credit. However, the new, and arguably better, way of financing real estate investments is through direct private lenders, such as LendingOne.  Direct private lenders are typically faster and more flexible than banks.  If you find the right one, you can get quick, reliable access to funds to grow your business without having to use all cash to fund each deal –and best of all, you can get a higher return on the cash you do invest.

So, you can use a little of your own money, more of someone else’s, have access to funds when you need them, and get a higher return on your investment when you work with a direct private lender such as LendingOne.  What’s not to like?

How Does It Work?

Consider Investor Ryan. He has amassed a fair amount of wealth over his time in the real estate investing business and plans to use cash to purchase a property for $100,000 and repair it for $30,000, bringing his total investment to $130,000. He can complete the project in 6 months and sell the property for $160,000, providing him a $30,000 profit. That is a 23% return on his money ($30K/$130K) for half a year and a 46% annualized return.

However, as he invests in this property, another house comes on the market that he also wants to buy and he doesn’t have enough money for both. What should he do? All his cash is tied up in the first property. He now has to wait until his rehab is complete and the property sells. This could take months depending on the market and how quickly his project takes to finish. While he is busy with the first property, he lets this other one slip by, losing the investment opportunity because he can’t afford to fund it himself.

What if, instead of using all cash, he had used some debt?

Let’s look at Investor William who has also purchased a property for $100,000 with a $30,000 rehab budget. Because he has good credit and experience from his time as a real estate investor, by choosing to finance his deal with a loan from a direct private lender, like LendingOne, he can receive a $104,000 loan (80% of the total $130K investment) at an 11% annualized interest rate. Now, he only needs to come up with $26,000 to cover the cost of the property. He sells the house for $160,000 just as Investor Ryan did.  His total profit is a little lower because he paid interest and closing costs; he earns $20,380 in net profit.

Here’s the big difference.  William has only invested $26K of his own money.   This means that William’s return on his investment is 78% ($20.38K/$26K) for six months and 156% when annualized.  That does not include any interest he may have earned on the $104,000 of cash he didn’t have to use for this investment.  Plus, by saving more of his own cash, he now has it available to invest in another property, where Investor Ryan was unable to do this because all of his money was tied up in that one investment.

Get the Best Leverage from LendingOne

Clearly the numbers here reveal that debt can have a significantly positive impact on how you profit from your investments, so applying for a loan and incurring some debt through a direct private lender like LendingOne is a great method of financing. By using debt, you can now invest in more properties instead of waiting for that first one to bring in a profit.

  • Faster…
    LendingOne offers a streamlined application so you can apply entirely online faster and easier. You can also get an instant rate quote for a Fix-And-Flip Loan in two minutes or less. With closings in as little as 10 business days, LendingOne offers reliable and quick financing, so you can grow your business without the constraints that all-cash or bank-debt financing create.
  • More Flexible…
    LendingOne offers up to 90% of the purchase and rehab costs on fix and flip properties and up to 75% LTV for rentals.
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