Is Cash The King?
I used to think so. But after working at Best Buy, I realized that in the store’s mind — credit is better. They make more money off the transaction that way. So I became a bit jaded.
On March 21, CNBC aired a spot that highlighted the adage may be true in real estate — especially when it comes to investors.
What is Private Funding?
Tom Zeeb, president of Capital Area Real Estate Investment Association in Washington, D.C., points out that you need to have cash – or a cash equivalent – to make the majority of these purchases.
Okay, so cash is easy. But cash equivalent? This is where you work with “friends” and other “investors” to pool money together to purchase real estate. For example, you have $100,000 and find this great deal on a $300,000 apartment building that will net a 12% return on your investment annually. You work with your investors to secure the additional $200,000 in return for an ownership stake – which is entirely negotiated – in the building for a set period of time. Basically, it is a larger version of a bail bondsmen where you get a loan to make the deal, but you have to pay the deal off – plus interest – or else.
Sounds Great, But Can I Do It?
The easy answer is a resounding “yes.”
The better answer is a more reserved “probably.”
What makes the difference is basically how risk adverse are you?
If I told you that you had a chance to make 30% return on investment, but there was a 50% shot that the deal would fall apart and you’d lose your seed money. What would your response be? Doing “if-when” scenarios are always going to create an idea on how risk adverse you are in your investing.
Investing in real estate with cash is the safest way to enter the market. (paula navarro/sxu)
For example, I have a client that is looking for a 3-bedroom, 2-1/2 bathroom home with about 1,800 square feet, priced below market value in one of about four subdivisions. He sees that area’s value and is excited about buying rental properties in the area, but he’s not comfortable going outside that area – so he’s pretty risk adverse.
Every investor has a level of risk aversion, it is just a matter of determining where and what it is — and being consistent when it comes to investing at that point. If I offered you a 3% return on investment for a deal that you might lose $50,000 if it falls through and the chance is slim-to-none that it will succeed. Any investor is going to walk away from this, the return doesn’t justify the level of risk that it includes.
Can I Use My Retirement?
Of course you can, though I’m not sure that I would advise it. If you’d put the same money into the stock market, then maybe real estate would work for you. The thing to keep in mind is that real estate is NOT risk adverse, a thought that too many Americans forgot and had to relearn the hard-way during this recession.
If done well, investing in real estate with cold-hard cash can be a very-rewarding experience or if done half-go then it can be the worst thing you’ve ever attempted.
We are starting to see cash buyers in Bend Oregon. It looks like a good time to buy in your area.