Buying Properties with Cash vs. Borrowing Money to Buy Properties
Does anyone have any experience investing in real estate with cash?

There are obvious benefits of doing this. However, from the outside looking in, when you are able to borrow money (which can be covered by rent) it seems that buying a piece of real estate for cash is really not worth it. 

I guess what I am trying to ask here is...

Why would you buy a piece of property for 100% cash when you could buy a property that is twice as good with borrowing a small amount of money? Is the cash flow advantage of buying with cash so good it outweighs ever borrowing money?
[{"id": "gv3e5z1", "text": "Usually buying with all cash gives me a better negotiating position.  Usually you pull your cash back out of the property.", "replies": [{"id": "gv42ogf", "text": "This actually makes a ton of sense. Having the cash for the property will get you the best deal on it, while having full intentions on refi asap. Best of both worlds.", "replies": [], "depth": 2}, {"id": "gv47ua4", "text": "This is what I typically do. I get very stressed dealing with financing on a deadline and dislike having to go back to the seller for extensions. So much of it is out of your control. I'd rather just close with the diligence I need and come back around to finance after with no time pressure. Title &amp; closing might be a touch higher than if it'd been at time of purchase but I'm ok with that for lower stress.", "replies": [{"id": "gv4j618", "text": "I have clients that do the same thing the seller feels very confident when the buyer is buying it cash because there\u2019s no way the deals going to fall through because of financing and closing that me is a lot faster the seller does not have to Waite months because of financing to.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gv3hch6", "text": "Cash is a great way to win a bid process as you can eliminate your financing contingency, often the longest and most burdensome part of a transaction.  You lose the benefits of levered returns though, especially when debt is at historically low levels. \n\nPros: \n\n* Lower closing costs\n* Maximized cash flow (no debt/interest payments)\n* Quicker closing time\n* More appealing to sellers\n* 100% equity at closing \n\nCons: \n\n* Lower returns (your cash on cash return lowers when your down payment lowers)\n* Diversification risk.  You have significantly more cash parked in one asset as opposed to several\n* No deductible interest come tax season\n\nI typically only see later stage investors (ie. retired and risk averse, only looking to park money), 1031 buyers, and occasionally REPE funds go all-cash, and even then it's common to see them refi shortly thereafter and pull cash back out.   Money is so cheap right now it's hard to justify buying a building all cash when you could get something 3 or 4x bigger with more cash flow for the same $ down.", "replies": [{"id": "gv3oeyy", "text": "All great points. One quick question, though. \n\nYour statement is that cash on cash returns lower when your down payment is reduced. I believe that I\u2019m either reading this wrong, or your statement is in error. \n\nWhen you leverage a property, with rates as low as they are, you should see a positive leverage relationship. Specifically, if you bought a property that\u2019s an 8% cap (for sake of discussion, don\u2019t crucify me), and you buy in all cash, your cash on cash return is 8%. Now, I\u2019m not talking about introducing a delta (raise rents, lower operating costs, etc.), I\u2019m talking about buying a coupon clipper. \n\nNow, if I buy that same asset and I put 25% down, I get 20 year debt at 4%, what happens to my cash on cash return? Let\u2019s assume in this instance we\u2019re talking about a $100k deal, which translates into a $75k loan. Our NOI is $8,000. Our down payment is $25k. Our debt service is approximately $5,500 per year. Our cash flow is $2,500. So, our cash on cash return is 10% because of our positive leverage. \n\nAm I looking at this incorrectly?", "replies": [{"id": "gv3t6d1", "text": "This is how it works and why you would partly mortgage a property", "replies": [{"id": "gv43j1q", "text": "This is a fairly complicated question. Here\u2019s the quick answer...\n\nLenders won\u2019t (typically) exceed a leverage level of 80% LTV, barring a few circumstances. And, this is further complicated by a need to cover a required Debt Service Coverage Ratio (DSCR) of 1.20-1.30x. This is most simply defined by taking the Net Operating Income (NOI: the gross revenues less the operating expenses) divided by the annual debt service. You should come out with a number greater than or equal to the DSCR. \n\nSimply put, the lender wants to know that the property will cover debt service with a 20% cushion, or greater.", "replies": [], "depth": 4}], "depth": 3}, {"id": "gv6lfdg", "text": "Add to that the mortgage payments help pay down the debt over time, thus recapturing equity, and the tax advantage of deducting the interest.", "replies": [{"id": "gv76e82", "text": "Exactly! It\u2019s a savings account being funded by other people!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gv3tki2", "text": "Don\u2019t expect people to bend over backwards on asking price just because you\u2019re offering a cash close. No one is going to take $25-50k less because they can\u2019t wait 2-3 weeks longer.", "replies": [{"id": "gv44smg", "text": "That\u2019s not really true. I\u2019m liquidating stuff and would def take 25-50g less with a cash offer. It truly depends on every situation.", "replies": [], "depth": 2}, {"id": "gv488tq", "text": "Your very very wrong.\n\nI lower the prices on homes all the time before 2020 . Cash means guaranteed closing and when your dealing with a distressed seller thats what they want. Waitingna few more weeks makes sense on a normal sale though.", "replies": [{"id": "gv4m3ho", "text": "This is commercial real estate not residential lol", "replies": [{"id": "gv4mzwv", "text": "Are we going to pretend there are no distressed sellers in the commercial market?", "replies": [{"id": "gv4nxyx", "text": "I mean no but, I have worked in retail and multi family development, and for our retail NNN developments we typically pay all cash. Never ever had a price reduction because we pay all cash. Done over 100+ single tenant deals.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "gv49r0q", "text": "Working with a lender may take several additional months not 2-3 weeks.  There is also no guarantee the lender will approve the loan.\n\nCommercial and Residential are two different industries.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gv3v85t", "text": "It happens in West Coast fairly often. With even new construction the builders are accepting multiple offers and only accept those who can close and willing to pay highest prices. Sellers including commercial properties are getting offers with all cash no loan.  My latest was all cash, 100% down(emd), 2 day closing. CA Purchase Contract has a clause, no loan contingency. About 1/3 buyers click that clause to have an edge.\n\nPeople are not crazy. By waiting another 1 year, one has to pay another +25% more. If sellers have all cash, quick closing clause will they consider a mortgage buyer?", "replies": [{"id": "gv48ct4", "text": "How would title be ready in 2 days?", "replies": [{"id": "gv49nso", "text": "It will not be ready needing to seek an extension.  It merely shows the buyers are dead serious.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gv41fh7", "text": "One way, a hybrid method, gives you the best of both worlds. \n\nBuy the property with cash to give yourself the greatest position to negotiate from. Then once you purchase it, make any necessary repairs that will increase the value. Then have banks and credit unions compete to give you the best refinance terms as possible. Unlike using financing to buy, you won\u2019t be under pressure that you might lose a deal while you search for the best terms. You may not get all your money back, but you will get most and in terms that maximize your monthly cashflow.", "replies": [], "depth": 1}, {"id": "gv47zw8", "text": "Buying cash is all about cashing out a week or 2 later. I dont keep my cash in the property because I'm not dumb and I love leverage.\n\nYou offer cash because its a guaranteed closing instead of a mortgage which might not fund. I also offer cash with mortgage which is basically the same.", "replies": [], "depth": 1}, {"id": "gv49kh6", "text": "I have acquired commercial properties with cash and with a lender.  Both have advantages.\n\n1. Certain properties, such as auctions, only accept cash.\n2. If you qualify, using a loan allows you to acquire additional properties versus using all your capital on one property.\n3. Depending on the property you may not want to go through a lender due to their requirements.\n4. If you have the capital it yields more ROI than sitting in the bank at X percent.\n\nFour years ago I acquired a 3000sqft daycare building for 1.2m.  I paid cash.  It was located next to an Exxon station.  If I financed the acquisition there would have been a phase one (and perhaps phase two) study required by the lender.  This is one example of where cash has an advantage over lenders.  The Seller, in that situation, was willing to negotiate with an all cash Buyer versus a Buyer who had finance contingencies.  Lenders are not always easy to work with.\n\nSix years ago I acquired a 4000sqft turnkey restaurant for $600k.  I used a lender.  It was leased within six months.  Due to the low loan amount interest is minimal, the lease covers operating expenses, and it allowed me to maintain a relationship with a local bank.", "replies": [], "depth": 1}, {"id": "gv4kino", "text": "Other commenters have listed some pros and cons.  A couple I didn't see mentioned are the risks of being over-leveraged and the liberating feeling of having no debt.\n\nCommercial real estate is cyclical and some years your vacancy rate may be 10%-15%.  Take this into account when you're calculating cash flow.  Can you still pay your mortgage in a worst case scenario?\n\nWhen three of our buildings were uninhabitable for months after a Cat 5 hurricane, we survived because we didn't have any mortgage payments. We had over $200,000 in damages not covered by insurance.\n\nWhen the pandemic hit, about a third of our tenants needed at least partial forbearance.  Most of our tenants have been with us for over 5 years.  We weren't going to evict them just to sit on an empty space for who knows how long.  And it just seemed like the right thing to do.  Our tenants are now paying full rent and we have 0% vacancy.\n\nOur last three buildings were bought with cash, but when you're just starting out it's hard to have enough money for that. My partner and I started out 20 years ago buying commercial buildings that needed work.  Banks often won't underwrite such buildings and we bought them with seller-financed 5-year balloon mortgages with 25-30% down.  \n\nWe used our savings and income to renovate them and to pay the mortgage during the renovations. I scoured EBay, Craigslist and Habitat ReStore for building materials.  We often did simple things like painting and landscaping ourselves.\n\nWe lived off the money from our \"real jobs\" and used the cash flow to pay off the loans by the time the balloons were due.\n\nWe now have seven buildings with 30 tenants. Small potatoes to a lot of people.\n\nOne of our all-cash purchases was a turn-key historic building the owner had done a beautiful renovation on.  He was over-leveraged and had to do a short sale for less than half of what he put into it.\n\n\"You make your money when you buy.\"  \"Location, location, location.\" We haven't always batted a thousand, but we aim for at least a 10% CAP rate. We try to find diamonds in the rough on corners with high traffic counts.\n\nWe like to buy on corners and get large buildings that can be divided into multiple units.  It's hard to find tenants for a 6,000-7,000SF space and much easier to find tenants for 1,000-1,500SF. You lower your risk by having only part of the building vacant at any one time.\n\nI probably would have been willing to borrow a bit, but my partner has been adamant about not having debt.  In retrospect it's worked very well for us.", "replies": [], "depth": 1}, {"id": "gwbzwno", "text": "I wouldn't buy a property with cash....certainly not right now with the interested rates where they are.", "replies": [], "depth": 1}]