Cash vs Credit-Based Real Estate Investment | Lee Chandler

Many first-time investors interested in real estate ask the following question: Should I
make my first rental building purchase using all cash or should I utilize a loan? This is a very
important decision so it is understandable that the first-time investor would be concerned.
There are some pros and cons of each, so let us consider them before we make any final
Cash purchases have a few advantages. Sellers like being paid in cash, you are able to
obtain 100% equity, and you have no interest payments. On the other hand, using only cash to
make real estate investments will quickly consume liquid assets and you will not be able to
make use of the tax benefits interests payments avail to you.
Using credit also has some advantages, in particular you gain the aforementioned tax
benefits and it also allows you to obtain investments with far less funds. The cons to consider
include the risk of foreclosure and vacancy, in addition to the additional complexity of obtaining
a mortgage.
As we have seen both options have risks and benefits, and some advisors may consider
these two options to be equally likely. In practice however, the majority of real estate
purchases are credit financed, specifically 76% of homes purchased in 2020 were bought using
credit according to Redfin (Aurellano, 2020) . Why is credit financing so prevalent? Because it
lets you drastically increase you financial resources. Say you have $200,000 in cash you want to

invest. You could purchase perhaps one duplex property in cash with that money, which will
likely net you perhaps $2,000 in rent a month. If you utilize credit financing on the other hand,
you could purchase five $200,000 duplexes, making $40,000 down payments for each. You now
have 5 duplexes netting you $2,000 a month each, for a total of $10,000. Taking into account a
mortgage payments of $3,000-4,000 per month, you can net as much as say $7,000 a month
after interest payments.
From this example, it becomes obvious how credit financing can drastically increase
your financial resources and your possible returns. As the loans are paid off, your returns
continue to increase, and your growing equity can help finance more investments. It should be
noted that there is risk in any investment and careful consideration must be made to ensure
that each real estate investment is likely to offer good returns and cashflow. If you take these
considerations into account, credit financing can be relatively low risk and offer significant

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