A very frequent question investors are asking is, “do you buy with cash or leverage for cash flow by investing with borrowed money”. For many years you have heard you should use O.P.M. (other people’s money) O.P.M. is a wonderful thing. The answer whether you should buy with cash or with borrowed money has many variables and is different for every person.
Your accountant may be the best person to answer these questions. There are many factors to consider, and your personal financial portfolio is the best place to get the answers. You want to consider many things including:
1. Your current assets along with your current debt
2. Your long term goals and objectives
3. Your experience level with investing
4. The current market conditions within the area you intend to invest in
5. Possibly even your age
When the market is strong and rising and the appreciation levels are on the upswing, then leverage can indeed be a very good thing. When the market is flat or declining, leverage is a bad thing.
Consider also the ability and ease of getting financing. A very large and overlooked factor is the price of property versus the ease of financing. Consider the supply and demand. In hard to obtain financing times, the price of property is much less. This is where cash investors win big. As fewer people have the ability to pay cash, they can acquire properties for much less money. In this case, buying with cash is the answer.
As finances free up, the supply of buyers increases, reducing inventory levels. As inventory levels are higher and money is more available there are more buyers. This is a swing in the supply and demand and prices are higher. So while you now have the ability to get leverage, you also paid much more money for the property. With a higher price point on the purchase, your ability to get a high cash flow diminishes as well as the ability to gain capital growth in the property. However, if you need to use leverage to buy properties, this is the time.
This is simple stuff that we tend to make more complex than it is. When looking to get best returns, we have to (S.I.B.K.I.S) see it big, keep it simple. Look at the overall picture. When you can buy with cash and get the best price, you obtain the opportunity to benefit from super capital gains. As finances free up, you can put a mortgage on and benefit from higher cash flows.
With a rising market the objective is to acquire as much property as possible (it is however to do this safely and objectively). Financing property with today’s low interest rate is a great hedge against inflation. Financing can be a great tool and like any tool if it is not used properly, can do a serious kick back and hurt you bad.
You always want to look at the big picture, consider talking with your tax advisor for all aspects of your portfolio to be considered. Whether you should be buying with cash or using leverage to get cash flow is a question you need to look at seriously before making your plans to achieve your goals in real estate investing.