Paying Cash vs Using Leverage to Purchase Investments


Should you use cash to buy a
rental property or leverage in the form of a mortgage? That’s today’s video. Let’s dive in. Hey, there, I’m Clayton Morris. I’m the founder
of Morris Invest. I’m a longtime real
estate investor. And today, we’re going to
talk about whether or not you should buy a rental property
using cash, or whether you should leverage it
with a mortgage, or private financing
of some kind, or traditional
financing of some kind. Now, let me first
say that it is truly a personal preference,
what you do and how you go about your
rental property strategy. And again, it all comes down
to knowing what your goals are and then reverse-engineering
your goals, and mapping it out between
you and your wife, you and your husband, or, if
you’re on your own, great. But you need to have
those goals figured out and how much cash you have on
hand in order to make it work. So let’s start out by saying, if
you don’t have any cash at all, then you don’t have
cash to work with. You’re going to need to
use some sort of financing, whether it’s traditional
or private financing. Now, if you’re using
traditional financing, you’re going to have to
come up with about 25% down for a rental
property investment. Banks simply won’t loan– They won’t do the 80% where
you have to come with 20% down. No, they’re pushed up
to about the 25% down. Why? For some reason, they consider
it a riskier investment than the home you
live in, which, we can get into other arguments
about why I think that’s crazy, but, for now, that’s
how they do it. So a traditional bank, a
Wells Fargo, Bank of America, your local bank down
the street, 25% down, and they’re also going to have
you hit a minimum threshold. So the property probably can’t
be worth under about $50,000. So, during an
appraisal, you’re going to have to probably
be over that number. Some banks might
go down to $45,000, some might be at
$60,000, but just know that if you are
really going be targeting those $35,000 homes
like I like to buy, or $40,000 homes
that I like to buy, traditional financing
is out the window. You can’t use it. So know that going into it. So if you don’t have cash,
using a traditional bank, those are going to be the terms. And, of course, it’s going to
rely heavily on your credit score, your credit history. If you have a
foreclosure in the past, or a bankruptcy in your past,
or you have a lower credit score below that 680
credit score, you’re probably not going to
be in luck for getting traditional financing. Some banks may go
down to about 660, but 680 is really going
to be your cut off. And you want to have
a good credit score. You need to have a
good credit history. You don’t need to have any
blemishes, like a short sale, or a foreclosure, or any
of those other things in your past. Now, you then can only buy a
certain number of properties under your own personal name
using traditional financing, which is also a big limitation. So you can buy– I think, you know, they
switch these rules around. But you can buy, basically, on
one hand or maybe two hands– you can buy that
amount of properties under your own personal
name before the bank says, nope, you own too many
rental properties, you’re not allowed
to do it anymore. Sorry, move on. Find some other way
of buying properties. So that’s traditional financing. Now what about
private financing? Well, private
financing is fantastic. And this is something
that we’ve definitely used to acquire rental
properties, my wife and I, and many of our investors
that we work with, use. Now, private financing can
come in any form, right? It could be your
Aunt Mildred who’s got $200,000 laying around. Or it could be a private,
institutional lender, which is just basically a
fund, a group of people that got together and pooled
their money into a fund and then are lending it
out with certain terms. Now, again, there might be terms
where you have to hold the loan for five years minimum, and you
cannot pay it back before five years, so you’ve got to hold it
for a certain amount of time. And you might be able to
get a 30 year note on that– 30 year mortgage–
but you’re still going to have to hold
it for five years. There’s prepayment penalties. You cannot pay it
back in large numbers. But if you work with
your Aunt Mildred, you could construct
it any way you want. So private financing
is powerful, and it’s certainly a way to
acquire a lot of properties in a short amount of time. Now, again, in
private financing, you typically will probably
have to come with some money down on the table. Private financiers
like to see that you’ve got cash in the game. Skin in the game,
as they call it. Right? So, again, they may
want you to put down 20%, 25%, even 30% down
on a private finance deal. If traditional financing
is out, and you can’t do it because maybe you have a
foreclosure in your past, private financiers
are more concerned with the properties
you are purchasing. They’re going to look
at those properties. They’re going to have
an appraiser come out and check it out. You’re going to get
an inspection done. All of those things. And they want to know
that what they are putting their money behind is a
solid investment, that it’s going to cash flow a
certain amount of money. So private financing
can be powerful. It’s not as stringent. You don’t have to worry about
those blemishes in your past. Again, if you had a short
sale, or you had a foreclosure, it’s much more forgiving. Where do you find
private financiers, you may be saying to yourself. Well, we’ve linked up a few
in the show notes below. You can check out
some of the ones that are some of the larger,
institutional financiers. But, honestly, going to your
local real estate meet-up group– Just go to meetup.com and do
a search for local real estate clubs in your area. Chances are there are private
financiers hanging out at those monthly meetings. Go there. Have a coffee and a
beer with those people. That’s how I’ve made some
of the best connections I have in real estate investing. I loved going to my local
REA meetings once a month and meeting with my friends,
Kyle, John, Dave, and all of those guys, and seeing them. Everyone is a
different guy, right? One guy’s in mortgages, one
guy does private financing, one guy is a flipper. And you have beers, and you talk
about real estate investing. It’s a great way to
find private financiers. And, of course, the
other way is cash. Now, this is my favorite way
of acquiring rental properties. Why? Well, because you get
immediate cash flow. You’re immediately at the end of
at the end of the goal, right? You’ve hit that– gone
over the touchdown, you’ve scored a touchdown,
you’ve hit a home run, all of those pieces
come together, and you’ve immediately
created cash flow, and you’re seeing the
benefits of owning that property free and clear. You’re not having to carry
a mortgage on the property. If it’s not rented for a few
months, which doesn’t really happen to me but, if you
had a tenant that was out, and you didn’t get
them in quickly enough, it was a hard winter
month, something like that, you’ve got
it free and clear. So you don’t have to worry
about those problems. Also, you have immediate
equity in the property, and one thing I
want to talk to you about is the ability
to take that equity and turn it into leverage. So right off the
top of this video, I talked about cash
versus leverage. And you hear from
people that say, never use your own money
to buy real estate, use leverage, use
private financing. And that is a very powerful tool
if you know what you are doing. You know that your
property is going to cash flow beyond all of
your expenses, and taxes, and insurance, great. If you can count on that, great. Cash gives you immediate
equity, and, of course, all the cash flow from your
tenant is coming right to you. But what about owning that
property free and clear and then cashing
out of it and doing a refinance on the property? So that’s what I like to do. I like to pay cash up
front for my properties. So $35,000, $40,000, $45,000– those are the types of
properties that I buy. And then I will bundle
maybe eight or 10 of them that I own together,
and I’ll do a cash out refinance with a bank. Now they’re going
to give me about 75% of the value of that property. So if it’s worth
$100,000, they’re going to give me $75,000. And they’ll just
cut you a check. So they’ll bundle the
properties together. It’s called a commercial
portfolio loan. So we’ll do a cash
out refinance, and I’ll take those
properties, bundle them up, and then I’ll take the
cash right back out of those properties and buy– you guessed it–
more properties. And you keep that
snowball effect going. It was a simple
trick taught to me many years ago by an
investor who I know locally here in New Jersey, who
owns about 2,000 properties. That’s how he did it. I took him out to lunch, and
I said, how did you do it? You started with nothing. He said, well, I had enough
for my first property. I bought it, for, like, $60. And I rehabbed it a
little bit and then it was appraised at like $80 or $90. I went to the bank, and they cut
me a check for 75% or 80% loan to value. He said, so, basically,
I got the money back. The full amount
that I put into it. And then I went and
bought another one. And now that one
was cash flowing. And he rinsed and repeated. So now he owned the
second one free and clear, and he paid back the first loan. And then he owned the
second one free and clear, and he paid back
the second loan. You see how the
snowball effect happens? So that’s why I like paying
cash for properties up front and then leveraging them
after I’ve cash flowed and I’ve rehabbed them. Why is this also powerful? It’s powerful because banks
look upon a property that’s rehabbed, and it
has a tenant in it, and is already proving the
income that you’re receiving. So it’s not speculation. The bank isn’t looking
at that and saying, well, the potential rent
is $750 a month. No, you can say to them,
the actual rent is $750 and the house is now appraising
at a much higher rate than what I bought it. It’s appraising higher,
it’s cash flowing more, and that money is
coming into my pocket. It’s a performing asset. So, bank, would you like to
refinance this property for me, and put a mortgage
note on the property, and give me cash for it? Yes, they will. They much prefer to do
that than they prefer to do step 1 and just
writing you a mortgage note on a property that they
don’t know how exactly it’s going to perform. So that’s my ninja trick. Cash, turning it into leverage. That’s the way that I have
had success in real estate investing, and I know a lot
of high level real estate investors have as well. Look, again, that’s
the way I do it. You don’t have to
follow that strategy, but it is a killer
strategy for you to snowball your investments. I’m Clayton Morris. I would love to
hear your thoughts, so go to the comment
threads below this video. We have some great
resources down there, some other playlists. Please leave your
comments here as well as subscribe to the channel. There’s the big subscribe
button right over there, just go ahead and subscribe. We publish videos weekly here
on the Morris Invest YouTube channel. We’ll see you back
here, everyone, next time on another video. Go out there and become
a successful real estate investor. Take action.

100 comments on “Paying Cash vs Using Leverage to Purchase Investments

  1. Clayton, is this the BRRR method that you do, except with cash? It seems simple, I'm just confused for some reason. After closing my first duplex, I want to save and start this method, but I'm kind of at a loss.

  2. HI Clayton. Awesome video! Thank you for the support. With the bundle refinance, do you put money down with the bank? Do you then use the two rentals to cash flow paying the refinance back quickly?

  3. Hi
    Regarding the last point of 1st property cash and then take finance to purchase second one , the following purchases would be 1 cash and 1 finance or it could be only the first one cash and all the the followings finance?

    Thank you

  4. if you keep refinancing them then you don't own them, the bank does. Why leverage, just buy them if you can and hold. Nobody needs 2000 properties that's just greedy.

  5. This guy is amazing, his attitude, his strategies. I listen every day. Huge fan. I would love a mentor like this

  6. That is exactly my plan. Thanks for letting me know it is going to work! I guess I owe you a lunch now!

  7. Thank you Mr. Morris for your teachings. Is it possible to use a personal loan from a credit union for financing a rental property?

  8. "he had nothing" "he said well i had enough for my first property"…… if you have enough CASH for your first property then you dont "have nothing"…. lmao give me a break…. try it with $50 to your name..

  9. Great perpetual leveraging strategy. How are the mortgages structured? How quickly do/can you satisfy the individual mortgages? Are there early payment penalties? Could this process work on an monthly basis, meaning one purchase and one refinance per month? Following this logic, is it reasonable that 10-12 properties could be aggregated into a portfolio loan each year. How would you use/reinvest that large cash out?

  10. I spoke with someone from your team, and I like the concept. I was told that currently most properties will have to be rehab (approx. 90 days to complete), but I have to purchased first at Acquisition price (which includes the rehab). 3 months without any rents won't kill me, but will there actually be enough equity in the property to do a refi at the 75% to 80% range?

  11. It's all nice until the tenants don't pay everythin breaks down or be trashed your house can evict them 4 months recipe for disaster

  12. Hey Morris. Should i keep the properties under my name or incorporate a company? What is the best way? Can you illustrate pros and cons please?

  13. Wow, here in Canada the average home cost is ~$500,000 so paying for your first in cash is a lifelong savings endeavour. Guess this strategy only works where housing costs the same as a car.

  14. Question. Does Morris Invest sell turnkey properties via seller financing? i.e. If someone has say $50k, can they buy one of your full LLC vehicles that ownes 3-5 houses at seller financing. Instead of purchasing one house for cash at $50k, then getting a 80-20 loan with a bank to then purchase a $40k cash house from your company.

  15. You explain everything so well, everyone else on YouTube is like pulling teeth getting information out of them like this

  16. I'm VERY new to R.E. investing. I've been studying it for awhile, however I have not pulled the trigger on buying a property yet. Something Clayton said at 4:54 appealed to me. He said "private lenders would evaluate the property to make sure the numbers add up. For a newbie, that would be a great way to " check your math", as it were, and make sure you were not buying a lemon.

  17. so you are using the rent on the second property you buy to pay off the note on the first property you had bought cash and refinanced to buy the second property? Then you refinance that second property to buy a third property and use the rent from the third property to pay off the note for the second property and so on…ah ha so that's how it works. I guess if you pay cash for a house, the bank does not care how quickly you refinance it. But you have to wait a while or do repairs for it to appreciate so you can get enough money out of the refinance. Makes sense now!

  18. With Leverage you are able to increase your ROI exponentially!
    (Of course you can also have a Negative ROI and those returns can be Negative Exponentially!)

  19. best times to use ALL CASH:
    1.auctions/foreclosure
    2. improving your debt to income ratio
    3. when you plan to pull out cash from that property after to buy another property
    4. when you have a gambling or drinking problem.

    Other than that, definitely leverage. Acquiring more assets is the name of the game.

  20. I spent 3 months in Spain studying abroad recenlty and was not able to work as I was out of the country so I decided to learn
    everything I could about real estate. I have watched thousands of youtubers skirting around and around the questions I had.
    I get people want to market themselves, and to create another cashflow, but why spend hours of endless garbage smokescreen crap buy my ebook wait I have the answer junk when you could just be honest. 3 video's in and you are the most normal down to earth real person that answers realistic questions. Wish I found you before Grand Cordone 10xt me into stupidity.

  21. ON THEORIES… LEVERAGE IS FOR THE GREEDY… WHILE CASH IS FOR RISK AVERSE (SAFETY PLAYER)…. WHEN SUNNY DAYS, THE LEVERAGE IS LAUGHING HARDER COZ ON PAPER THEY GENERATE MORE PROFIT… BUT WHEN IT COMES TO NATURAL DISASTER OR WINTER BLIZZARD… THE ALL CASH PLAYERS CAN HIBERNATE PEACEFULLY WHILE THE LEVETAGE PLAYERS MUST DIG ALL THE SHIT OUT JUST TO STAY WARM.

  22. I new to this I hope to one day do this, I fear more the tenets not paying and legal stuff behind that. My uncle made money this way I'm gonna try same thing

  23. How do the fees/costs and rates on a cash compare to an investment property mortgage up front with the usual 20-25% down?

  24. Thank you so much more making these videos.  Pairing these with the books I read, and lessons from my friend that is already in real estate have boosted my knowledge ten fold.  You explain everything clear and simple, but you never hype it up like we are all going to be millionaires in six months.  Again, Thank you!

  25. Mr. Morris; do you have any experience in South Florida? 40 k looks impossible in this area. My grandfather was an invester of properties on Louisville ky in 1960s. I'm retired and need something to do.

  26. What if you live in a state like NJ or NY where the average property is 200,000 and above. I dont think I've ever seen a 40 thousand dollar home.

    Beginner here

  27. When the bank “cuts you a check” that means your putting yourself into debt, so technically that doesn’t give you cash into your pocket, it’s debt.. so how are you making money if your just putting yourself into more debt? What happens when your market goes down or crashes? Your stuck with debt instead of equity

  28. I'm taking your advice on going to the Reia meeting from the meet up my first one is the 14th next month I'm hoping to meet some one for private money and I'm going to get my general contractor license too I want to flip and buy rentals thanks for the advice maybe some day will do a deal together have a bless day

  29. Great Information. I did have one question. How long do you have to own the cash paid for property before you can leverage it with a loan?

  30. is it better to refi a property or get a heloc on it? on a heloc the bank wants me to take property out of my llc and put my name on deed, then after i get heloc to re-deed it back into my llc. this is because they dont give heloc's on income properties. i have 8 properties paid in full. thanks

  31. Thanks so much for all the insight you provide into real estate investment. Everything you teach here is valuable and certainly help first time investors. I had this in mind since day one to invest in first rental property using all cash option (potentially partnering with friends via LLC). It will be helpful if you can answer below question:

    Can LLC obtain LOC on a rental property or the property needs to be under an individual investor name in order to leverage the line of equity option? Thanks much!

  32. Mite be purchasing my first property cash soon. A forcloser! Scary! Buying it before the auction date right under there noses good locations strong working class area and plenty of bars, shops and entertainment nearby. With a large commercial slot of land included to boot!

  33. Buying a rental with cash just doesn't add up to me because let's say you buy a 32k house and rent it for 720 a month and then it will take 45 years to get back your 32k. Maybe I'm thinking about it wrong but I just don't see the benefit. I guess if it was flipping then it would make more sense but not for a rental

  34. Will short sale 7 years ago hurt me even though i had nothing negative prior to that and had a 820 score at that time and had nothing negative since then with 790 score now? Will i get a good interest rate on investment property in my case even with that 7 yr old short salem

  35. If banks will only refinance a percentage (say 75%) of the value of the properties you own, am I right to think that this process of snowballing will only be sustainable if the appraised value of the properties is more than the original money you put in to buy those properties?

    Otherwise, after a number of refinancing, the amount the bank will be providing would become very small amount e.g. if you try to refinance 3 times and banks give 75% every time, you'll be getting 75% of 75% of 75% of the original money you put in or 42.1875%. Sure you got more money, but there's still a limit. The only way this can be "infinitely" done is if the appraised value during refinancing is higher than the original money you put in.

    Is this accurate or am I missing something?

    PS: Love the videos, binging right now

  36. Easy question! If I keep using the bank to buy another rental property, mostly less than 70k properties, does it negatively affect my credit?

  37. Okay, but what happens to the loan that’s pulled from the first property? I’m sure the banks want that money back. For example you can use the first properties rent to payoff the 75% loan. But until the loan is cleared, you basically stop making money on the first property… so this process only adds a very small amount of value for a high risk of loosing your tenants and going to foreclosure on a property that was already paid for….?

  38. So pay cash on first property. Rehab. Than do a cash out refinance of 75% loan to value. Get back money you initially spent. Roll that new money into another deal. Rehab again. Then do the same cash out refinance and use that cash to pay off first loan. Now at this point, you'll still be left with a mortgage on the second deal, right? So does this mean you'll have to save up and pay all cash for a 3rd deal so you can cash out refinance and pay off the 2nd loan? I'm confused. Won't you still be stuck with a mortgage?

  39. Hi,

    I live in Toronto, Canada and here rental properties are ranging from 200k to 700k ranges at given places.

    I do have about 200k in equity that I can use. My goal is a cash flow to cover expenses for at least $3000/month. Can you recommend any possible solutions for the situation in Toronto market. I know you are based in US markets and may not apply the strategy in Canada. BTW – I love your strategies for cash flow for buying homes for 40k and I wish I can apply that here!

    Mahbor.
    Oakville, Ontario
    Canada.

  40. Good afternoon I have a multi family house with 1 house 3 bedrooms and 2 apartments of 2 bedrooms and 1 apartments of 1 bedroom I own in my mortgage 20 years for a total of $124,000 what you recommend me to start doing to continue buying more rentals properties ? I buy this property 16 years ago and until now I just stayed in the comfort zone and didn’t move to the next level until I see your videos . Please advise

  41. Is there a limit to how many commercial portfolio loans you can have going at once? If you snowball it you’re adding one each time, can you keep going indefinitely?

  42. I'm catching up on your videos from the last couple of years. Very clearly stated for someone like me that is trying to figure all of this out. It seems as though you've done a lot of work in the Detroit area and many others. Do you have an established team there that you could recommend to other potential investors? I've also been looking in the Indianapolis area. What are your thoughts on Indy? Thanks for the videos. Keep up the good work.

  43. Bought my first one free and clear but was worried about if i was able to use the heloc on a different property. I didnt think banks let you do that unless you were using the money on the current dwelling

  44. Just bought my first rental for 60k hopefully after i put 15k in it it should approve for 100k hopefully all goes well and i can repeat… i will be our the rat race soon !!!!!

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