Today, we’re going to talk about the pros and cons of buying cash or buying with credit or using other people’s money. First, we need to clarify the concept of OPM or other people’s money.
In essence, it means to leverage credit because when you have a good credit, you can actually go to the bank and request a mortgage and that’s how you are able to buy with less of your own cash and finance the rest and have the possibility or the opportunity to own a home.
In essence, the way it works is that, depending on the type of mortgage that you’re working with, you are going to require to put somewhere between 0% all the way to 25% down. The %0 to 25% will be your cash or your own money. Your own cash and the bank it’s going to come in and it’s either going to finance all the way up to 100% or all the way to 75% and that is other people’s money.
Why is it called other people’s money?
Because it is the money from the bank or it’s the money from all those savings accounts that people decide to put in the bank, which in essence, it’s used as capital for your use through the creation of a mortgage.
Why is an OPM so important?
It’s important because we’re talking about time. If you were to save your own money, let’s say you found a nice house for $200,000, it’s going to take you quite some time to save up to get all of that in cash. You’re going to have to work multiple jobs. You’re just simply going to be extremely, extremely frugal.
You won’t be able to go out with your friends or go to the movies or go to restaurants that you will really, really have to live on a very tight budget. For some of you, that might be possible. That is definitely doable. However, you’re still dealing with the factor of time. You’re going to have to be able to save money for a long time.
The fact that you can implement the concept of other people’s money allows you to expand in the field of real estate in a very timely fashion. We’re talking about six months, one year, two, three years and you can wind up with a big, big portfolio if you know how to leverage the concept right.
Pros and Cons of buying a house with cash or credit
We have cash for those who are cash lovers.
- One of the biggest things when it comes to buying or investing in real estate with cash is that you can facilitate a fast closing. You don’t have to deal with bank requirements. You don’t have to deal with an appraisal nor an inspection.
You can request one if you like, but in essence, you’re not abiding by the bank anymore because it is your own money. It is cash and you don’t have to worry about it.
- In terms of closing, it is lower because there’s a lot more to do in terms of inspections, evaluations, appraisals, you name it. You have to meet the bank’s criteria and that takes time.
It takes a lot of people to go in and review the paperwork, review the installations, review the foundation, the structure of the house so that takes time. In terms of time, we’re talking fast closing one to two weeks, but if we’re talking with OPM or credit, it’s a slower closing and we’re talking somewhere at least 30 days.
- Whenever you’re buying cash, you don’t need your credit. No credit needed, which is excellent because sometimes it can definitely be a big hurdle, especially if you don’t have a clear understanding of how to manage your credit or maybe you made a poor decision in the past and now you learn your lesson and you’re trying to build it.
Building your credit can sometimes take at least a couple of months and maybe you’re seeing the property available today and you want to buy it today, but you can just because of that credit factor but if you have cash, then that’s something you don’t have to worry about.
With OPM, on the other hand, you do need credit. That’s why there’s a lot that goes around the topic of credit and why it’s important and why you need to maintain it.
- In order for you to invest in real estate cash, you will need a lot of cash. Assuming you found a house for $200,000, it can sometimes take you quite some time, at least 10 years, sometimes even 25 years, in order for you to be able to afford a house.
If you’re going to buy a house with cash, you’re going to need a lot of it. Meanwhile, when you’re using OPM money, you need less of it because of the same concept that we talked about right here. You put just this much of your money and then you let the bank take care of the rest.
- Whenever you buy a property with cash, you have a high acquisition power.However, you have fewer choices.
- Whenever you’re buying with OPM or with credit, you have a lower acquisition power, but you have more choices.
Dealing with the bank is just as equally painful for you as it is for the seller because if the bank doesn’t like something about the property, the seller will have to fix it or if not, then you’re going to have to move on and buy another property and that means that for the seller, there’s no sale. Every time a seller is seeing a cash offer, they will always go for the cash deal.
However, if you used up all of your cash to buy just that one property, you’re only limited to that one property, you cannot buy anymore because you used up all of your savings, all of your money and then you’re left with zero and you have to start from zero all over again.
Buying a house: Your Acquisition Power
With OPM or with credit you have a lower acquisition power. Why? Because of the example we just shared, cash versus credit, but let’s assume we remove the cash factor from the equation and you’re bidding against other offers, other 10 offers that are offering the same, closing what the bank and the whole credit ordeal and stuff like that.
Now it becomes a matter of money because all the factors are remaining the same. If your bank only approved you for $200,000 and all the people are coming in and say, “I got $300,000, $400,000.” They bid 205 and the next person gets 210. That means the seller will obviously go for the higher offer even though he or she may still have to wait six months because there’s no cash deal in the equation.
In this case, when you’re dealing with credit or OPM, you do lower your acquisition power because you can easily get outbid by other people. However, you do have more choices because, for example, if you have $200,000 available in cash, what you can do is you simply buy a bunch of houses by only putting down 20%.
In this case, 20% of $200,000 is the equivalent of $40,000, which means you will get to buy five beautiful houses and expand your portfolio a lot faster. Now you see what I mean by lower acquisition power. However, you do get more choices. It’s like a give or take right now.
- When you’re buying a property cash, you wind up with a higher cash flow. What is cash flow? It’s basically whatever you make after paying expenses.
If you’re making $1000 and you have to pay $100 in operating expenses for your property manager, maybe some utilities, then you’re left with $900. With OPM, you’re typically left with less cash flow. Why is that? Because now you have a mortgage to pay. Not only you have to pay utilities, not only you have to pay your property manager, if you choose to get one, do you also have to factor in the cost of a mortgage, which in essence, it reduces your cash flow.
Generally, people who prefer to buy cash are people reaching retirement. They only want to look for ways to create some income and they just want the most out of it. They don’t usually care about getting an expansion or a massive portfolio, because that will entail them having less money or less cash flow flowing in.
They will prefer less of a headache because they’re usually tired and they don’t want to deal with any problems. They will typically prefer one or two properties that they can buy cash, but they know that at the end of each month, they’re going to have a decent cash flow so they can actually live off of that in terms of income.
Buying a house with OPM
If you’re buying with OPM, then that means you are indeed looking for an expansion. What happens when you look for an expansion? You typically delay your gratification. You don’t care whether you’re making a lot of money on cash flow, you have to make some, but for the most part, you don’t mind because you know you have other sources of income.
Perhaps you have a job that is giving you just about enough and you just are looking for ways to park your money, to expand that portfolio and then eventually, hopefully in the future, have the ability to live off of it. In this case, expansion is the key but cash flow, not so much now.
That’s why it’s called a real estate business. You’re doing a business. You are leasing a property for a family, for a tenant to live and in exchange, you collect rent and with that rent, you pay the mortgage and you pay your team, your property manager, the utilities, everyone is enjoying a win-win situation. Your tenant is getting a home and you are investing in a business that is giving you a return.
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