Never Buy a Property In CASH | HOW I LOST $157,000 | Real Estate Investing
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- Опубліковано 26 чер 2024
- This video explains why you should never buy a rental property in cash. Chandler explains the how using leverage can maximize your return and help you accelerate the way that you build your wealth.
When Chandler bought his first-ever property for $72,000 he bought it completely in cash without any loans.That decision cost Chandler over $157,000! In this video, Chandler breaks down when he bought this condo, the price he sold it for, and what he would have done different along the way. He shares his exact cashflow and appreciation throughout the five years he owned this property. He then explains why he did it all wrong.
Most would say the 94% ROI he received over the 5 years was a great return on this investment. However, looking back at this deal, Chandler realized the power of using leverage when buying properties. Had he only put 25% down, and put the same amount of money on 3 other similar condos that were being sold at the time, he would have earned $45,000 every year in cash flow, putting him at $225,000 return. This would have given Chandler a 308% return compared to the 92% return that he received. because of this learning experience, Chandler no longer purchases property with cash. He now purchases all his investment properties with a 20%-30% down payment and borrows the remaining 70%-80% from a bank. This gives him the ability to maximize his return through greater cash flow, principle pay down, and appreciation. The goal of this video is to help all real estate investors understand the power of leverage. As you use the principles taught in this video you will be able to maximize your real estate investing returns and build you net worth much more quickly.
#dontbuywithcash #usedebt #useleverage #realestateinvesting
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What do you think? Will you buy in cash or with leverage?
I'm in NY also I'm already looking out of state for First investment.... But I will be using LEVERAGE... Thank you Chandler for thoughts and direction...
Definitely with credit as I am age 64 and bought many assets in Turkey with 10 year loans. But here your cash on cash is not existing as monthly payments are above rent from tenants BUT very good positive side is in the sixth year you almost have peanuts to pay for mortgage as fixed TL loan depreciates without a parachute due to %20-%10 inflation ... although cash flow does not correct for you, your loan pays for itself much earlier compared to US. So I sell the house on the 6 th year as there is no longer income tax on gains from the sale and buy 3 new houses with the money by using it as down payment .. I add to my income the rents, to meet income required by banks to qualify for the loans.
Buy in cash to get a steeper discount and dominant offer. Then refi out at a higher ARV after forcing appreciation through rehab.
The thesis of your video is to always use leverage, which is sound. But saying "never buy with cash" is clickbatey and outright incorrect.
@@druid-alpha when you buy through a bank buyer still gets cash payment here.. does it take too long in US ? here in 3 days you get a mortgage loan
this video is spot on 🔥
I plan on buying my first house in Cash in full because I don't want to pay a monthly mortgage payment.
Yeah just do it. Mortgage ain't worth it. The bank owns it until you paid for all of it. The only thing different between mortgage and rent is you pay the property tax when you're on a mortgage. So basically you owe both the bank and state property tax on a mortgage. Just rent something cheap until you have the money to buy a house out right and you'll only have to pay the state property tax and besides that it's fully yours.
That’s the beauty of buying a duplex! Rent out the other side and have them pay the mortgage for you ;) that’s the beauty of using leverage to get a return on your investment!
absolutely nothing wrong with that and i will be doing the same
@@nathanmoser1649 but what if you buy a duplex with cash and its a 2 unit GOLDMINE - obvious expenses and taxes etc.
This in turn will give a guarenteed profit and the cashflow is even bigger than subtracting the mortgage payments
Y
Yeah ok, leverage your heart out, then when the market turns on you, you can’t afford the property(s) that you have and go bankrupt. People who pay cash take away, or at least, mitigate risk, and thats worth it to them. Especially in times like we are living right now. Moral of the story: be patient, save your money, live below your means, buy in cash and don’t worry about things you can’t control like the market. It’ll take longer to own a lot of properties and you might not make as much on your return at first, but that’s still if everything goes right with the market, which we know from the past (2008) is not always the case. I would rather be safe than sorry. My opinion.
I agree. Over leverage can really screw you if you aren’t careful.
Jerrod Christmas maybe I’m just dumb but how would the housing market dropping affect your cash flow on a mortgaged property? Do rents tend to go down during housing crashes or something? I would appreciate it if someone could enlighten me a little on the risks of leveraging.
Jacc Business interested in a response on this as well.
@@JesusCastaneda Yes rents drop because landlords are more desperate to rent out their place. The landlords that inherited a paid off property can go very low and get the better renters with higher credit scores. Also in my market back in 2008-ish the rents got to a point where it would be cheaper to purchase a home because the mortgages were lower than rent. So naturally rent had to go down. I remember a 1 bedroom apartment at a big complex was renting for $350/mo in 2009, in 2006 they were going for $550/mo now they are around $1300/mo. I guess my point is rents go up and down with the market.
@@JesusCastaneda "leverage can really screw you" - I'm assuming he's referring to the risk of a market crash. Worst case scenario, a tenant may lose their job and unable to pay rent which means you're left with the bill to pay the mortgage out of pocket. If you're unable to pay the mortgage then expect a bank foreclosure. Just imagine if you own 10 mortgage properties and every tenant bailed due to the financial crisis - But if you bought the house "cash" the only bill left is property tax, insurance, and HOA (if included).
Dave Ramsey has entered the chat
👀
You’re not taking risk into account. This is a massive factor. I feel so sorry for people that believe this works.
This is how every commercial and institutional investor operates. It absolutely works.
As for risk, if you're risk adverse, just use 50% ltv instead of 70%. If you don't want to use any leverage, you're better off investing in stocks and bonds.
@@kungfoochicken08 bingo. Glad there is one other sane person out there
In my market, if I purchase with cash I will be getting around 10% to 15% return with a really good property. But if I leverage my money I can get 30 to sometimes 40% returns. NOT COUNTING princable and equity pay down. Why would you do cash? Better off buying Microsoft stock
@@kungfoochicken08 and we all know what happened to the banks and big institutions in 2008. No it doesn't work. They needed to get bailed out to stay in business. If you can rely on a bailout, sure go for it
@@keokio7 The banks needed bailed out because they got greedy with their loans. Investors didn't need bailed out.
If you're investing in real estate without using loans, you're wasting your money and time. You're better off buying index funds and muni bonds.
Leverage for growth, then start paying it all off as you start meeting your goals.
I was able to increase the speed of this vid 1.25x and receive a 25% return on my time! 😜 Great info, Chandler, thanks! 😊
Not a bad idea! Thanks!
Lolzz. I also had it at 1.25 and wanted to go even on 1.5x 😀😀
1.25x 👌🏾
@@ChandlerDavidSmith man u deserv sub keep up l learn alot l hope You Do interview with BiggerPockets one Day
he does talk kinda slow :|
Let’s be honest this is a shot at the boomer that commented, “You should purchase all investment homes in cash”.
Better than I deserve
No. It's not. Using leverage is a double edge sword. In good times, it works for you. In bad times, it kills you. He has calculated returns with adjusting for risk
I lost you when you said your only investment is $18,000.... no thanks. Paying cash is best way.
😂😂But thats the What Donald Trump and rich people do You Will learn No problem love from Sweden
no its not
Just say you’re stupid and move on
Thank you for all the valuable information that you provide
Love the video! This is completely random, but where did you get your bookshelf! Haha my wife and I are looking for one similar!
Amazing video. Thank you for great content.
Thank you!
I love how people do these mental gymnastics. No, it costed you $73,000 to purchase the condo. Thats it. I can easily use the argument "since it's increasing in value every year, i only paid $47k for it"
I can use ridiculous arguments as well. Id rather tie all my cash up if it means i dont have to pull out a calculator to justify any returns in investment. The borrower is always slave to the lender.
First! Love the vids man, keep them coming! Looking for our second rental property!
That's awesome! I'm currently on my second, but I'm partnering with 2 other people right now that are ready to buy 2 more properties! I'm sharing the experience, and my knowledge of real estate on my UA-cam channel as well!
Very awesome breakdown. Thanks Chandler!
That was so helpful Thank you.
thank you for this video, this is one of the biggest tips ever
Excellent video mister. I learned a lot.
Good breakdown man, going to use this strategy for my next properties 👌
Leverage Power! 💪🏻 ROI % goes up leveraging correctly and you can take advantage of more opportunities and build that Real Estate portfolio! Great break down! Thanks for sharing!
RAM Real Estate Investing thank you, glad you enjoyed it
This channel is a gold mine. I am taking notes during the pandemic and watching your videos!
Great video!
Interesting concept Chandler. Using leverage debt is the key. Lots of numbers thrown but I got it. Well done! I hope you close on the 30 unit! Best to you!
Your videos are consistently great in content and your presentation skills are top notch!
Right? I'm trying to live up to him by providing great content. I love Chandler!
Great video bud
Please asterisk this video and say "Use Leverage Wisely!!" Don't just go out there willy nilly racking up debt folks! I love ya Chandler but you gotta be careful. With great power comes great responsibility 👍
I think this video covers that point clearly
@@ChandlerDavidSmith It does to people with common sense but you im sure you know common sense isn't so common these days 🤷♂️
When UA-cam teaches more than school 👍
Great discussion of the benefits of leverage. Now if you're really big time theoretically one can buy properties with cash to get the deal. Then get the house refinanced to leverage leverage benefits and free up that money again for more purchases.
Phillip Tweedy True, condos are weird for refinance though. That’s why I sold
My jaw still hurts from hitting the floor... FOR UNDERSTANDING LEVERAGE...I was just going to purchase my first investment property in cash 😱😱😱😨😰... What you just did for me in my family is s Game changer... Thank you!!! If only I could MASTER the NUMBERS GAME...
I just found this video, oh well, I just bought two properties, one is a one bedroom garage conversion house, bought the entire lot for $7500 flat, it's in pretty good shape, the second I bought for $1500 cash, 4 bedroom house, I dumped about $5000 into fixing the roof issues and will repaint clean and fix up a bit on a deal with a contractor who needs a place for some of his workers to live for a year. Insane luck. After that year, I can rent for $800 a month.
Is it a good idea to add a co-signer to get a mortgage If my current income is not good enough?
Chandler, the risk increases with leverage as your control within negative outcomes diminishes as your debt load increases. The only guaranteed winner in your always use leverage example is the mortgage company. A balance between debt load and risk tolerance is a better option than an all-in scenario between either cash or mortgage.
Did you factor in interest you have to pay the banks ? Thanks might make the devt option less profitable
Your not coining the interest you paid on that loan over 5yrs
Did you create the appreciation or did the market do it?
Hey Chandler great video. I do have a question though. I'm having a little trouble understanding those numbers. If you have a monthly payment for the 75% loan wouldn't most of it go for the interest, taxes and insurance instead of your equity? After 5 years wouldn't you still owe most of the asset because of that? That certainly has to affect your returns no? Maybe I'm missing an important step at the time of selling?
Great video and you kept it short. With more time, I would have talked about the option to refi after 5 years instead of sell. You mentioned 1031 to avoid capital gains tax, but you can also pull out most of your equity and appreciation using a refi which is tax-free cash flow. Then take that refi money an reinvest.
100% agree! HELOCs are amazing :)
Question : Do you recommend paying cash, closing and then doing a refinance? OR do you prefer to make your offer with the 25% down and maybe no loan contingency with a quick close? Sometimes I feel cash gets the discounts so I felt I should ask you.
Ryan Conrad at the moment im paying cash for my home to purchase and to renovate & after i am finished i will refinance with the new arv
Why do you call a mortgage PAYMENT a return? It's not a return. It's an expense. It's part of your down payment.
Great explanations! I own 3 properties, two of them are renting out well , so the renter are the one paying my morgage, but i have one condo unit is not renting well, so i have to pay the morgage from my own pocket, is there any advice what should i do with that property, sell it?? Or can i return it to the bank?? Any idea??
you can't count paying down your principal as return..... by that standard, if you pay cash, you get 100% return immediately. Its funny how quickly people forget where leverage got us in 2008....
Thankyou for explaining debt leverage better than my college professors and saving me from the Dave Ramsey idea of how to buy a house
Best video ever, I buy and hold and I’ve always made above 300% return on my investment in around a couple of years. I’ve always know this, but never really understood it till you came along, if someone still wants to argue with you about this, trust me I wouldn’t know what to tell them, you are right on point Chandler.
I'm going to pay cash because Dave Ramsey told me to
i like your video thx
if my annually income 50-70k and my brother income 35k
and we want to buy house worth 200k
we sold our family land back home overseas and we can receive the money here so we can buy the house all cash
what you think in this case how IRS would do since it showed only we making around 100k annually income
we still can purchase the house without issues with IRS?
Very very true!! If you decide to invest in rental properties find your nitch and area. Then acquire as many as you possibly can, even if it's just 1 or 2 properties a year...
NoEightToSix love it
1-2 a year will get you financial free in no time!
Great video I agree if you are up for a high risk hi return investment but low risk low return buying cash sounds good too depends on what the individual wants thanks man I learned something from your video
wait im confused lol did you took the loan of 18000 for the down?
Chandler, where do you find banks that will give you fixed rate mortgages? In my local area, all of our credit unions and banks will only allow a rental home to be purchased on a commercial loan (since my property is purchased by my business) and the commercial loans are all 10 year balloons on a 20 year amortized schedule. Do you use a specific big chain bank, quicken loans, or something local? I own 3 single family homes and a duplex all purchased on these commercial loans and would love to have a 30 year fixed as the 10 year balloon eats up all my passive income.
Same. My bank only allowed a commercial loan with a ballon at 5 years.
Another advantage of using leverage in the first place would have been able to spread your risk on 4 to 5 condos instead of having all of your money into just one condo.
What do you think about saving a large enough down payment to get a good cashflow even if your Cash On Cash Return is low? My goal is to be able to obtain financial freedom therefore I would need good cashflow. Thanks !
angel arzate I personally think you should buy with a good cash on cash return. I would not buy a property like this one ever again because the cash on cash return was so low
that is exactly what he explains only save as much as down payments and if you saved more.. instead buy 2 houses not to loose future cash on cash and equity gains on the second house .. system you ask will only receive one higher cash flow but will not build fast enough for future multiplier effect of more than one house ..
What about buying in cash in order to get the deal and then cash out refi after the first year?
Why are you misleading people, you are not talking about the interest on the loan or the close out fees.
Great example of leverage!
JW JW thanks!
OMG, You're a generous. You're the only video that I actually understood. Thank you
I meant to say Genius this auto correct crap lol
Can someone recommend a mortgage company to use to buy a rental property...Commercial Loan in PA?
I try to pay cash, make improvements, then have it financed. I have been able to do this and at times get 100% of what I spent financed and still get a good monthly cash flow.
Great video! I now feel even better about my choice to pay cash for my last 3 homes. Your a risk taker, I am not....in will also not lose my home in any economic down turn. Good luck!
Yes but with more properties comes more headaches. If you can get the same cashflow from one property now and enjoy it now, that's better then having more properties for the same cashflow but more problems.
Hi. I just subscribed to your channel because in the several videos I have watched, you don't waste my time. You get right to the point. You speak in a concise and easy to follow manner. I really appreciate how you just explain your experiences and leave out all the fluff. Thanks a lot. Keep up the good work.
Thank you!
He forgot to take into account that he probably got a good deal because he paid all cash and by having seller to wait a couple of months for his mortgage he most likely had to pay a lot more than 73k.
You make an excellent point by using this example, but I would suggest that the kind of appreciation you saw in your property in five years is not common in many markets. Your lesson is still a good one, but I expect that most of us would not see the kind of returns you are showing here.
Hoskin Family I wouldn’t disagree with you. I got lucky on appreciation and that’s why now that I buy with leverage I buy properties that have substantially larger cash flow.
All about leveraging with Real Estate...
Love it!
What about you having to pay interest and what if the property depreciated?
What about purchasing cash to close the deal quicker and beat out non cash buyers then finance after you get the property?
Someone please reply if possible. Figuratively speaking, Lets say I got 72K in 1 property paid in cash vs 72K in 4 properties paid with leverage. Wouldn't I pay more in the end with loan interest, 4 morgage payments, and other hidden fees in the latter example? Or does the principle paydown and appreciation of the 4 properties more than make up for the morgage, interest, and other hidden fees. Please help me out, I'm confused. THANKS!!
Hello fan1008. Sorry I'm late to the party. To answer your question; no mathematically it would not "cost" more. Each home would come with its own tenants who would theoretically be paying those costs for you. This is not always the case; but mathematically, in a perfect scenario you will actually make more on your money. Having said that, one home is much harder to manage than four...so there is added headaches...and you have to find four good deals, etc. You are also taking on far more risk. Fortunately, the added risk means that when things go well you are rewarded. But no...having four mortgage, etc. will not end up costing you more UNLESS they are not leased...if they are vacant you are absolutely right...four vacant properties leveraged to 80% is a nightmare...one property you bought with cash is fine. This is why Chandler is very wise to tell those following his method to have 6 months in reserves. While this effectively "acts" somewhat like an additional "down payment" up front (not 100% one-for-one; but still is cash that is "invested" and not performing); in my opinion it is 100% worth it (and something I think is extremely thoughtful that Chandler promotes). I hope this helps!
The math make sense but risk don’t make sense. Depending how much risk of the property and not knowing the variables can make people broke. Yes you can make money.
leverage works both ways if you take an L on the property it is also multiplied 3.25X
aznmaven you’re not wrong, but historically property values have always gone up in value. Never take an L! Make sure that you have enough reserves and strong enough cash flow that you can ride through any downturn
Too much leverage can lead to bankruptcy.
But I get your point🔥👏🏽
All depends on strategy, loan is way to go if property qualifies, but BRRRR works best for rehab properties that wouldn't qualify
Leverage by itself I wouldn't be comfortable with. I would need additional streams of income to alter the whole system to my favor to quickly lower the debt, vs the extended leverage amortization scheme (which I guess works for some people).
how about if you bought today and the property depriciated in 5 years?..which is very possible in todays market. plus doesnt a 30 year loan pay next to nothing in principle the first five years?
One question, did you factor in the cost of the money you loaned? Meaning did you factor in the interest payment?
He didn't and his math is BS
What if it went down? Can you figure these numbers also?
Great video and explanation. You're on your way to being the next Graham Stephan.
Completely agree! I'm trying to get on Chandlers level LOL
Another thing he got in common with Graham is they both bought their first rental cash;) think about that. If they didnt they wouldnt have had that head start.. starting with one payed off property is the best way to launch yourself into succes when it comes to real estate. Banks love when you already have a payed off property it gives them more security!
Yes I would agree if the economy wasn't in the shape it is in!
You need to pay intention to what the Fed is doing the bubble is going to pop!
Leverage will always win with appreciation.. but it’s not easy to get a bunch of loans for rentals a lot of banks will stop at 4-5 and if your market doesn’t appreciate the numbers will be way off. Im looking to get into subject to buys..
Who do you get loans from? I will love to work with them for rental loans..
Since your properties are under LLC’s do you close in the name of the LLC with no personal guarantee as long as he cashflow is strong enough and the NOI exceeds the debt?
Most of them have just been quit claimed over
Chandler David Smith ?
You are assuming your tenants pay the rent. What if you had bad tenants in the properties you leveraged and they don’t pay rent at all or are paying late?
Dave Ramsey: Are you nuts?! That’s not what the data shows.
😂🤣😭
I understand what if you rather secure your family protection ? lets say you purchase a home cash, you dont have to worry about house payment of 1600 therefore your work income can go into investments etc, you make 8k a month no house payment . your net worth a month is 8k times that by 12 = 96k a year
Thank you for ALL of your videos.
I thought BRRR method typically requires to buy in cash...repair, then refinance with cash out? After buying 4 houses using leverage, you'd have to wait to save 20% on next property. Where's with BRRR, you have to wait to refinance and cash out.
Maybe, even with BRRR, you're always better off leveraging? Example... 100k house 20% down conventional vs BRRR, buy 50k house 30k repair, refinance 125k arv cash out 80k..repeat VS...
20% down on 50k house+30k for renovations X 5 such propperties.
Refinance @,125k for each of 5 houses...get more than 20% back out!
Am I wrong? Is this what you are inferring?
what about the interest you paid on the loan? you didn't cover that
Hindsight is 20/20. I should have bought Amazon stock in the 90's. You never know how your investments are going to do in the future.
What if we take appreciation out of the equation and only focus on cash flow, wouldn’t it still be a good deal to use debt since you could get more properties? Also, would that increase your cash flow at the end of the day?
I feel like your wrong and right at the same time. Case by case, limited by the persons knowledge, tools and fate. "It Depends"....
Dave Ramsey is triggered by this lol
What percentage did your property appreciate per year ???
I think to buy real state properties in cash is much better that loam money. No everyone qualified for a loam
You just speak from the financial aspect, but one needs to take into account that when bought with cash there is virtually zero risk vs leverage that has risk of vacancy and not being able to pay the loan payment. Also, if the property depreciates, your money gets wiped out !
Sure there is more risk which is directly proportionate to reward. Obviously anyone investing it RE should have cash reserves to pay for vacancy. There are many ways to safeguard your risk.
When buying with cash, you're more vulnerable to deflation. With the Fed pumping out so much money, I don't think deflation is going to be an issue.
Leverage actually decreases the risk of vacancy. A landlord with one property is much more vulnerable to a vacancy than a landlord that has 4 properties. When the landlord with four properties has a vacancy, he can use the cash flow from the other three to cover the shortfall.
If you to lookup the word greed and Capitalist in dictionary you would see a picture of Chandler David Smith.
The problem is if the back will not lend you the money. Then you would have to buy it cash.
Unless you’re already an Investor with banks and creditors lined up OR you already have a great credit score with the income to back it up, who’s going to loan you for four properties when all you had is $72,000? There’s a lot you’re not telling!!
Hypothetically Only if the bank would loan on 4 properties at one time it’s much tougher to take loans out on multiple properties so let’s say your money sat there as opposed to buying multiple units you earning 67,242 vs 56,262 your cash investment was a better choice, that being said how difficult do you think it would be to get the multiple loans?
My Father in law bought a house with a loan back in 2002 for 75k his interest rate was ridiculous he ended up playing 300k plus with interest and principal and barley paid it off this year. So its not always a good idea to just have a bank rob you from your money
But what about the interest you have to pay to the banks
Id rather buy and hold for cash flow and long-term equity
If you sell all 4 properties in five years, you still have to pay the bank the balance of what you owe to the bank, right? So your 225k in return is not accurate. Am I missing something?
I think this a lousy example of this first of: you could get your money immediately back with heloc. Second not all properties appreciate. Third you're dealing with 4x more headache having 4 tenants instead of 1. I personally know a lot of people that lost everything (millions) in real estate, using the exact method you are talking about. In 2008-2009.
Yea in 08 I collected more rent. Debt isn’t risky I have 30m of debt and have 10 mil of equity and make 12 percent coc and average total returns of 28 percent. Debt isn’t risky if you invest in C and B class properties.
Chandler, I didn't hear where the interest per year paid effected your % return as opposed to no interest and you also had the opportunity to take equity on that full price paid unit and purchase other units..so there are ways to acquire additional units without feeling as if your $ is completely "tied up" and missing out.
Frenchy Alicea The interest is part of the mortgage payment that was included in this explanation. You can take some equity but not nearly as much as I could’ve if I would’ve purchased it with a loan originally
I am thinking the remortgage on my cash buy