What is the Most Expensive Way to Finance Your Real Estate Deals?

I knew as soon as I started reading what the question and answer were going to be. As with most things in real estate and investing in general, the answer to almost all questions will be "it depends." And if you spin the circumstances in the right way, you can justify almost any answer.

In this case, the guy obviously wanted to be provocative and/or controversial, so he gave a question and some circumstances where the "right" answer would have that effect.

That said, for me and my situation, I agree with Jon. If I were to use loans for all my deals, my cost of capital would be much, much, much higher than what I was earning on my cash sitting in the bank. That doesn't make any sense unless there were some other advantages to holding that cash in the bank.

If the thought is that I'll want to do more deals than I have cash, then it makes sense for any successful investor to finance (your returns will generally be higher than your cost of capital), but it wouldn't be financially prudent to finance the first set of properties and then use your cash on the later ones -- it would make more fiscal sense to use your cash first and finance later. This reduces your overall cost of capital by ensuring your only paying for money when you absolutely need it.

Of course, there are situations where cash might be more "expensive" than financing. But, these are generally situations where there's an opportunity cost to using cash now versus later. The most common situation would be where you would finance a deal now in order to preserve cash for a later deal that couldn't be financed -- and if you didn't have the cash, you couldn't do the later deal.

But, my assessment above presumes that all deals are essentially the same, and any of them could be cash or could be financed, so this situation doesn't apply.

Again, everyone will be in a different situation, but for me, I prefer to use about 70% of my cash before I consider financing, saving the 30% in case any cash-only deals come along...

J Scott, Lish Properties, LLC
E-Mail: j@123flip.com
Telephone: 770-906-6358
Website: http://www.123flip.com

Source: http://www.biggerpockets.com/forums/67/topics/78556-what-is-the-most-expensive-way-to-finance-your-real-estate-deals

mario balotelli mario balotelli jenny mccarthy espn3 kevin youkilis Tropical Storm Debby legend of korra