Real Estate Modeling Course

  • Real-life RE Modeling Tests from actual Interviews
  • Various asset classes including multi-family, commercial and more
  • Huge discount - until more tests and cases added

Comments (24)

  • Summer Associate in IB - Cov
Nov 26, 2020 - 3:18pm

I wouldn't with rates this low. Leverage is what makes real estate investing so attractive. 

Nov 27, 2020 - 2:58pm

What's the famous "I want to buy a house" letter?

To answer your question, I suppose that if you have a lot of disposable income that would not be used for anything else and you're not looking for a huge return then paying with all cash is fine. Otherwise, I am not sure why anyone would do it. This is all assuming that interest rates stay somewhat low of course

I’m a fun guy. Obviously I love the game of basketball. I mean there’s more questions you have to ask me in order for me to tell you about myself. I'm not just gonna give you a whole spill... I mean, I don't even know where you're sitting at

Most Helpful
Nov 27, 2020 - 3:40pm

Buying a house - probably want leverage. But sure, totally can buy all cash. Everyone's reason for cash is different. Some don't care about the returns, some just need a spot to park their cash. 

Regarding commercial real estate - look at many of the life companies. They buy commercial real estate all cash all the time. Why? Because they need to put a ton of money to work, so buying a building with no leverage allows for that. On top of it, it creates lower volatility which is the goal for many of the insurance companies. Sure, your IRR is 6% instead of 9% over a ten year hold, but the volatility is much lower (as is the risk). And..that 6% IRR is on, for example, $100MM. If it were leveraged, it would have been 9% on $30MM. In the end of the day, it all depends on what you need to accomplish your goals. Basically, the 6% IRR is providing strong relative value compared to corporate bonds which the Life Company could have invested in. So it accomplishes the goals of the life co. 
 

On the other hand, the PE firms would have used leverage and looked to juice their returns, as their strategy is ten year hold maximum. Whereas the life co is probably a 20-50 year investment horizon. 

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Nov 27, 2020 - 7:44pm

To be clear, there are three potential options here (applicable for house or big commercial deals)

1. Offering "all cash" but meaning no financing contingency - i.e. you need a loan, but will risk your deposit if loan is denied

2. Offering to close all cash, but intend to get a loan shortly thereafter (or just may show at closing with one, but you actually could close cash)

3. Buying all cash with no intent of financing near or even long-term.

From a negotiating standpoint, all three up your leverage, the 2 and 3 can be killer (our firm uses this all the time to get deals on land). The idea is to separate from those requiring a loan or other financing to close (which can be a large segment of buyers for certain assets, like houses or development deals). The debate of to lever or not to lever is totally independent (assuming you have the cash or open line of credit or bridge equity needed to close all cash).

Some funds even make deals with private lenders to fund acquisitions with the intent of paying them back (usually a good interest rate plus points) within a few months. They then use those few months post closing to raise equity (sell shares in syndication possibly) and/or secure debt. The idea is to take the pressure off of the permanent financing deal(s) from the acquisition deal, it's a very smart way to run a real estate business. 

Nov 27, 2020 - 8:29pm

I thought it was quite common for firms in RE to win deals with cash offers and then leverage them later.

Nov 29, 2020 - 2:42pm

As someone with no professional background in Real Estate at all, I feel like 100% cash has really only two benefits. 

1. The purely psychological benefit of knowing you don't have "debt looming over your head"

2. As a cash-flow asset alternative to high-yield dividend bonds - probably lower volatility than bonds as well. (When used as a rental property)

Aside from these two, If you plan on owning a house to live in yourself or as a speculative investment, I feel like with a mortgage with anything less than 4.5% interest, you'd be way better off by just taking on a mortgage and investing the difference in an S&P 500 index or the like.

This doesn't even take into account the insane IRR that can be realized even from modest property value appreciation. E.G. a property value gain of 10% can be realized as a 50% if you put down a 20% down-payment (ignoring various fees and closing costs)

Anyone here who knows more about real estate, feel free to take me to school on this topic, but this is just my layman's intuition. 

Nov 29, 2020 - 4:10pm

What's with all the 0 to 3 banana people posting on the real estate forum recently?

Just had a retarded question come in my DM from someone who never used the website before. 

You buy cash because you have too much of it and don't know what the fuck to do with it. If you are asking this question, too much cash is not your problem. Similar to the Biden meme - if you are asking this question, you should not worry about Biden's tax plan. Or you close cash and lever later.

  • Analyst 2 in IB - Cov
Nov 30, 2020 - 11:23am

Memologist here, this is technically incorrect
 

The Biden Tax Plan Meme (BTPM for short) is formatted as "If XYZ thing is true about you, then you don't need to worry about Biden's tax plan". "XYZ" is typically an indication of being poor or not particularly well off

A person buying rental properties with all cash is exactly the type of person who should worry about Biden's tax plan, given he/she is likely a high earner

Source: https://www.distractify.com/p/biden-tax-hike-memes

Nov 30, 2020 - 4:45pm

Disjoint

What's with all the 0 to 3 banana people posting on the real estate forum recently?

Probably trolls moving over from the Off Topic Forum for fresh victims.  Teenagers sitting in their mom's basement have more time than they know what to do with.

Just had a retarded question come in my DM from someone who never used the website before. 

You buy cash because you have too much of it and don't know what the fuck to do with it. If you are asking this question, too much cash is not your problem. Similar to the Biden meme - if you are asking this question, you should not worry about Biden's tax plan. Or you close cash and lever later.

Nov 30, 2020 - 9:25am

I have enough cash in my investment accounts that I could pay off my mortgage tomorrow. Heck, my comp this year (pre-tax) was more than my mortgage balance. I have thought about wiping out my mortgage a couple times, but why would I sell shares that are (potentially) earning 7% - 10% or even bonds that are yielding 4%, when I'm borrowing at 2%?  

Only real argument would be security. Worst case scenario, markets crash and property value plummets. If the markets are bad enough that my company drops me, assume my investment accounts are toast, so I'd have no job and no cash to pay off a mortgage on a home that's declining in value.

Dec 1, 2020 - 2:24pm

Didn't you ever read Rich Dad Poor Dad?  100% Cash Offers is what poor dad did!

"A man can convince anyone he's somebody else, but never himself."
Dec 1, 2020 - 2:26pm

To be fair, rates were much higher when that book was written. 

Commercial Real Estate Developer

Dec 1, 2020 - 3:35pm

With rates this low, the only reason you'd go all cash on a property is if you know there are numerous bids for that same property and you really really want it. This means of course you dgaf bout returns, opp cost of the cash because you've got so much cash you couldn't give 2 fucks about an additional 100 basis points on return

If you aren't the above, no -- don't buy it all cash. Take the mortgage. it's deductible up to 750K for primary residence 

Dec 1, 2020 - 4:16pm

I think the answer is very simple. If you have say $500,000 cash. why buy one home and wait for appreciation? you can easily buy 5 homes and build equity in them, if you rent them (not saying you have to do this). if you put all the money in one home. then your money is tied to that property, unless you take out a mortgage. Essentially, don't put all your eggs in one basket, put down the 20% and use the other funds else where, maybe equities or other homes.

Dec 1, 2020 - 11:09pm

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