Buying Real Estate With All Cash

THE ALL CASH PURCHASE

The all cash strategy in purchasing real estate is extremely simple and powerful. You can close quickly, you don’t have to qualify for bank financing. Seller’s respond to those advantages in a way that enables the all cash buyer to negotiate lower sales prices as well.

To me, there is also the aura with an all cash buyer that mimics the phrase, “those who want it least have the most power”. In my mind, as an all cash buyer, it doesn’t matter if I get the property, I still have my cash and can wait for another deal to come along. For the seller, he wants your cash and if you’re gone, in this market, he may not get another buyer for a long long time.

THE TARGET MARKET

The target market for the All Cash Buyer is the seller that needs to sell as they are either ‘underwater’ or ‘over their head’ in the investment. In the all cash strategy, you are not dealing with sellers who are looking to get the most from their property. You’re looking for value-added opportunities and sellers who need to sell.

ADVANTAGE NUMBER ONE - FINANCING

Once the property is acquired, the advantages of the all cash purchase stream forward. One main advantage is, no mortgage payment! Since we are looking for value-added opportunities, this usually means a property is in need of repair and re-positioning. The money spent on mortgage payments can go directly towards renovating and re-positioning the property.

Once the property is re-positioned and seasoned properly, financing the property with the ability to obtain all the discounts available in the commercial mortgage marketplace becomes much more achievable. Maximum discounts come when you are usually below 55% LTV and have a debt service ratio of 1.55 or greater.

ADVANTAGE NUMBER THREE - FINANCING

But, what if you want to sell the property after you re-position? Here’s another advantage; NO PREPAYMENT PENALTY! Most commercial real estate loans come with a prepayment penalty that mirrors the fixed rate period. For example a three year fixed rate penalty usually comes with a three year prepayment penalty. Typically the prepayment penalty in a three year fixed loan is 3% of the unpaid balance in the first year and declines 1% each subsequent year.

Let’s say you want to sell the property in less than one year. The prepayment penalty on a $500,000 loan is 3% or $15,000. That’s a lot of money to that you don’t get to enjoy.

ADVANTAGE NUMBER FOUR - RENOVATION

The next advantage is that renovation money is built into the existing cash flow. Without the stress of a mortgage payment on the cash flow of the property, this money can go directly to the renovation of the property.

Let’s say you buy an 8 unit apartment building with each unit bringing in $800 per month. The total cash flow is $6400 for all the unit. With this kind of cash you can paint the entire building in the first month. In the second month you can re-landscape and in the third month you can start taking care of the interiors of the units. Or, you can reverse the order. The choice is yours. The point is you have options.

ADVANTAGE NUMBER FIVE - THE REFINANCE

The property is renovated and properly seasoned for at least six months. Now you want to arrange financing on the property. My strategy is that we finance to no more than 50% of the value of the property. At 50% LTV you usually received the most discounts you can in the commercial mortgage marketplace. You should also make sure you have enough cash flow to properly service the property.

Underwriters and appraisers for commercial loans usually end up somewhere around 40% of the cash flow for expenses when they underwrite an apartments cash flow. So I would finance the property so you can at least achieve this expense ratio. Anything less and you can end up in trouble if the market turns and you can’t get the rent you used to or, end up with a couple extra vacancies.

The all cash purchase can provide powerful benefits for the real estate investor. If you are interested in participating in this investment strategy contact Craig Emerzian at (888) 882-5765, or email; craig@crowncommercialfinance.com.

Real Estate Investment Strategies