Pay for house in cash, or put 50% down?

[jschmidt]

We are looking into purchasing an investment home for rental income. We have already paid off our home, have 215k in the bank and are looking to get the investment home for 105k. Eventually, we may get 1 or 2 other homes to rent out, but right now, we are just looking at this one.

What would you do?

Pay all cash for it, or put 55k down and finance the rest?

If financing, we will probably be hit with about $1,500 more in closing costs apparently, and it will be at a 4% interest rate which equals out to be $16,000+ in interest that we would pay over the life of the 15 year loan.

Several real estate folks have said to only put half down, but we hate debt, and can't stand that a few hundred dollars a month would be going to the bank just for the privilege of borrowing their money. Any people weighing in would be greatly appreciated!

[iris lilies]

We are looking into purchasing an investment home for rental income. We have already paid off our home, have 215k in the bank and are looking to get the investment home for 105k. Eventually, we may get 1 or 2 other homes to rent out, but right now, we are just looking at this one.

What would you do?

Pay all cash for it, or put 55k down and finance the rest?

If financing, we will probably be hit with about $1,500 more in closing costs apparently, and it will be at a 4% interest rate which equals out to be $16,000+ in interest that we would pay over the life of the 15 year loan.

Several real estate folks have said to only put half down, but we hate debt, and can't stand that a few hundred dollars a month would be going to the bank just for the privilege of borrowing their money. Any people weighing in would be greatly appreciated!

If you put half down and invest half, what percentage would you earn on the invested half? The stock market has been crazy good in the past year, but I'm not sure it's a good time to buy in since things are high. But if you can earn more than 4% sure, invest it.

Ther other factor is: do you have adequate living expenses for a year or so, and/or do both of you have stable jobs?

Personally, I always make the irrational decision here and pay off the debt, it's the emotional decision. I hate debt, too.

[spirit]

Debt-free is simplest.

[Float On]

Dave Ramsey just yesterday told someone to never mortgage rental property. One or two bad tenants (for example taking 6-9 mts to evict someone not paying their rent or tearing up your property) and you are losing money.

[Gardenarian]

If you can pay cash, do it.

[oldhat]

Pay cash. Even though interest rates are near historic lows, if you invest the money in the hope of beating the interest rate, you might win and you might lose. (I personally think the stock market right now is overdue for a correction.)

Besides, think of the satisfaction of knowing that you own that house--outright.

[awakenedsoul]

Do you have an eight month emergency fund? Have you saved what you need for retirement? I know you said you have $215k in the bank. How old are you? I would also pay cash. (As long as I had my emergency fund and retirement funded. Oh, and my deductible funds for health insurance and auto insurance...)

It sounds like you want to pay cash for the home. You already own your house outright, so you know what repairs and property taxes cost. I budget about $3,000. a year for maintenance on my cottage. Property taxes run me another $1,400. a year.

Could you still afford the second home if one of you were to lose your job or have an accident? At one point in my life I owned my home outright, but had a cash flow problem, that's why I'm asking.

[catherine]

Dave Ramsey just yesterday told someone to never mortgage rental property. One or two bad tenants (for example taking 6-9 mts to evict someone not paying their rent or tearing up your property) and you are losing money.

+1

We've had rental property (not by choice) and that situation Float On talks about mirrored what happened to us. We had a drug-dealing squatter, and we lost probably 9 months rent due to that totally unforeseen circumstance.

[jschmidt]

Do you have an eight month emergency fund? Have you saved what you need for retirement? I know you said you have $215k in the bank. How old are you? I would also pay cash. (As long as I had my emergency fund and retirement funded. Oh, and my deductible funds for health insurance and auto insurance...)

It sounds like you want to pay cash for the home. You already own your house outright, so you know what repairs and property taxes cost. I budget about $3,000. a year for maintenance on my cottage. Property taxes run me another $1,400. a year.

Could you still afford the second home if one of you were to lose your job or have an accident? At one point in my life I owned my home outright, but had a cash flow problem, that's why I'm asking.

I'm 34, and I think it takes perhaps $40k a year for us to live on, so we would probably be set for 2-3 years if nothing catastrophic happened, and never drew a dime of income from anywhere else if we bought the house outright. I put this thread on a real estate investing forum as well, and everyone is basically saying borrow like there is no tomorrow so you can free up cash to buy more property. This is all so very confusing!

[catherine]

I'm 34, and I think it takes perhaps $40k a year for us to live on, so we would probably be set for 2-3 years if nothing catastrophic happened, and never drew a dime of income from anywhere else if we bought the house outright. I put this thread on a real estate investing forum as well, and everyone is basically saying borrow like there is no tomorrow so you can free up cash to buy more property. This is all so very confusing!

I guess it depends on how risk-averse you are. If you are happy living simply and are just doing this for another stream of income, I'd just pay cash. If you're trying to be some real estate mogul and won't mind having to potentially claim bankruptcy or go to foreclosure when things go bust, then borrow.

I've been burned in real estate, so I'm listening to DR, who has also been burned in real estate.

[jschmidt]

hmm very good points, thank you.


I guess it depends on how risk-averse you are. If you are happy living simply and are just doing this for another stream of income, I'd just pay cash. If you're trying to be some real estate mogul and won't mind having to potentially claim bankruptcy or go to foreclosure when things go bust, then borrow.

I've been burned in real estate, so I'm listening to DR, who has also been burned in real estate.

[iris lilies]

But doesn't this entire scenario depend on if you are going to go full bore into real estate as an investment? I think you have to answer that before you decide where to park all of your assets.

I personally dislike intensely real estate as investment, but that's me, and I didn't breathe easily until it became a smaller percentage of our assets. Currently, 19% of our assets are in 4 real estate pieces including the one we live in, that's not much. None of them produce income, but that is ok with me. I dislike tenants and dealing with them.

I think I would pay 100% for this house and then see how you like being a landlord. Will that be a major part of your investment activity, landlording? I'm sure you've run the numbers to see if this specific parcel is a money maker. The real estate investors on Mr. Money Mustache website are very picky about the deals they get into and have clear formulas to predict success.

How much rent will you get on this $100,000 property? Several of the The MMM guys say 1% is minimum, so if they couldn't get $1,000 monthly, they would walk away from the deal.

[razz]

I just bought my new home and paid cash for my peace of mind. I can control other expenses by careful choices but to be mortgage-free leaves me less vulnerable to the craziness of the world events which will impact the events in my world. We are subject to a world economy now.

[awakenedsoul]

I remember Suze Orman saying that she doesn't like real estate as an investment. She was saying with stocks, you can sell them. Real estate is so much more involved. I tried to sell my house when the economy tanked, and I didn't get any offers. My brother had the same problem. After that, I became cash heavy. I like having plenty of extra padding in case I get in an accident, can't find work, or something else unexpected happens.

David Bach told the audience on Oprah, "Don't confuse home equity with wealth." This really resonated with me. Where I live, my home's value has fluxuated between $65,000. and $330,000. in the past 16 years. Fortunately, I've never touched my home equity. I've seen people lose their homes because they took out the equity on one to buy another.

[RosieTR]

+1

We've had rental property (not by choice) and that situation Float On talks about mirrored what happened to us. We had a drug-dealing squatter, and we lost probably 9 months rent due to that totally unforeseen circumstance.

Similar situation with the reluctant landlord, but in our case the drug dealers were our best renters. Paid on time, kept a low profile, were great til the PD kicked in the door. But heroin is a totally different animal than someone cooking meth (which gets in the walls and could cost the entire amount of equity to clean up, plus having to disclose that for as long as you own the place). Some people do make money and have better luck. If you have cash you can call the shots more easily, the closing costs can be a little different and you have one thing to focus on. OTOH, a very large chunk of money is tied up, and if you went the 50% (or less) route you could pay it off at once if you thought this was a "go". You would spend some extra money on the interest, but that sort of functions as a fee to be more flexible in case this sounds better than it winds up. Personally, I'd get a mortgage that had no prepayment penalty, and put down no more than 30%, with the plan that after 1-2 years I'd re-evaluate and make a big payment though not necessarily all of it at that time, then do another eval in another couple years.

[eleighj]

Pay cash; ultimately your value in this type of transaction is created at the purchase point; not at later date. I would be looking at a lot of properties; in order to buy one.

Ed

[ToomuchStuff]

1. You have the cash
2. Your looking at one property (don't fall in love with it, you need to get a cash deal)
3. You state you hate debt
Not sure why there is a question on it.
Some people look at rentals as "investments", I look at it as a business. With the 40K you say you make a year, and the roughly 100K you would have left after buying the house, you have a decent sized emergency fund, plus some "we need a new roof on both places" money.
If you invested on part and financed the rest, to buy more houses, that means more work, at less pay (your a middleman paying the banks), at a higher risk (bad tenants in both houses, months no income, then redo trashed houses when you get them back, while dealing with the tax implications (rental house is different from a normal house last I knew/I don't have any).

[SteveinMN]

OTOH, a very large chunk of money is tied up, and if you went the 50% (or less) route you could pay it off at once if you thought this was a "go". You would spend some extra money on the interest, but that sort of functions as a fee to be more flexible in case this sounds better than it winds up.
This would be my advice. Real estate is not a very liquid investment; even less so after The Great Recession. Might make sense to not tie up so much money in one asset -- wait and see how it goes, knowing you could pay off the mortgage with money in the bank if it is financially advisable to do so.

One thing I have not seen anyone mention are the tax implications of rental property where you live. Has the OP discussed this with a financial adviser/accountant? There will be deductions and depreciation; mortgage interest certainly will affect the numbers. Not to say you should mortgage up. But it would be interesting to run the numbers on being a landlord with mortgage interest and being a landlord without.

[rodeosweetheart]

So funny you wrote about this OP as I was facing same decision (pretty much exactly the same) yesterday, and ended up deciding to go with all cash offer, and not to take a mortgage. I just highlighted Catherine's quote to highlight its importance and then saw you had highlighted EXACTLY the same part of her quote as I did:
"guess it depends on how risk-averse you are. If you are happy living simply and are just doing this for another stream of income, I'd just pay cash. If you're trying to be some real estate mogul and won't mind having to potentially claim bankruptcy or go to foreclosure when things go bust, then borrow."

Since I am most happy living simply and wanted the house to be another stream of income or else my permanent retirement home, I went with Catherine's advice. I also remembered Dave Ramsey saying he likes rental real estate as investment but only if you can pay cash for it.

I also thought about fact that last 3 houses I have bid on have been either foreclosure or short sale, a result of someone getting a mortgage and then having difficulties. If I get this house I bid on, I am going to view myself as my own banker, and borrow from myself to buy the house!

So that's what I decided under what looks like a very similar situation.

Oh, and Catherine, thank you for the 1% rule, the house I bid on squeaks in right around there, if you count the gross rental, not the 1/2 figure I have seen to use.

Using the figure of 50% of your rental income, the one I bid on would bring a return on the investment of 6%, which does not include any appreciation on the property.

What can you rent the house for a month?

[Yossarian]

If you don't have enough cash or savings that you have to ask this question, buy it with a HELOC and pay it off the next week. No interest payments and you have access to cash if you need it.