So, is it better for a real estate investor to purchase a property with cash or with a loan?
Teresa typically recommends that clients review their options. A lender should be able to put something together that will show them the benefits of either utilizing a loan so they’re not depleting all of their liquidity, or buying with cash.
She uses a program that allows investors to clearly see the benefits of purchasing investment properties by using leveraging with a loan versus depleting all of their liquidity to buy a property. This tool can also show people their projected liquid net worth and total net worth over certain periods of time. It can look forward five, 10, or 15 years, and allows you to view a comprehensive analysis of how much better off you would have been if you’d purchased with a loan or with cash. It can also show you whether, if you leave your funds invested as they are, you’ll grow using that vehicle.
A house is going to appreciate at the same rate, regardless of whether it’s fully leveraged or whether it’s fully owned outright. Homes don’t appreciate any faster than what the market dictates. When an investor makes a cash-only purchase, they’re missing out on the opportunity to place those funds in an interest-bearing account, where they’ll grow.
So what are the biggest challenges Teresa faces when working with investors?
One of the issues Teresa has frequently seen, especially with newer investors, is their tendency to convince themselves that they can’t qualify to buy an investment property. While they make a very good income, have sufficient funds to support the down payment, and have the desire to become an investor, they just feel like they can’t qualify.
However, the lender should be able to show the investors ways that they can qualify for buying an investment property, as well as how to utilize and leverage some of the potential rents on the particular property they’re buying. That also helps them with their debt-to-income ratio. Is it better for an investor to purchase a property as an individual, an LLC, or a corporation?
Clients that Teresa works with are buying homes in their own names, whether that be a single-family, duplex, triplex, or quadruplex. Clients that buy using their own name will get regular preferred loan interest rates. If you buy an investment property in the name of an LLC, the loan will be in the name of the LLC. In that case, you’ll be looking for a commercial loan, which have different terms and rates associated with them. In a future video, we’ll address what happens when you buy a property individually and then want to assign it to a corporation.
If you’d like to contact Teresa for questions or information, she can be reached at (919) 697-2598 or at [email protected].
For my team’s part, we would love to know what kinds of questions you have for us. Reach out and let us know, and we’ll be sure to address them in future videos. We hope to hear from you soon!