March 14, 2024

Everybody knows that real estate gets financed with debt, right? Not so fast.

Recently, Alliance has started using cash purchases to close better deals, faster. This creative use of capital helps us in several ways.

Before closing a deal, due diligence is essential. Our team at Alliance takes a deep dive into everything, from the history and condition of the building to the financials of tenants and more. The diligence phase can be tedious and time consuming, but it’s absolutely vital.

If we’re offering a cash purchase, that means the seller doesn’t need to wait for us to close our loan, or wonder if it’ll happen. When we’re happy, the deal gets done. This encourages sellers to give us more of their time and attention. When they’re eager to answer our questions, our due diligence is faster and easier.

In the case of a really desirable property, a cash purchase can also help our offers pass the “sniff test.” Sellers are often real estate professionals too, and if the cap rate on a property seems a little too good, the seller might doubt our seriousness.

But if we don’t have to pay interest on a loan, then that extra monthly cash goes straight to our bottom line. It makes our cap rates better and that makes our offer more plausible to sellers. This takes us back to the first point, where our cash offer encourages sellers to invest their time and effort in making us happy, so we’ll close the deal.

Why doesn’t everybody just buy real estate for cash? There are very good reasons why debt financing is well suited to commercial real estate investments. Even when we buy for cash, we plan to add debt to the capital structure of an investment later, when it’s strategically advantageous for us.

Right now, interest rates are up, and that is holding asset prices down. We can buy great properties for cash now, then finance them at better interest rates, later. When the moment is right, we’ll bring our strong banking relationships to the table, add some debt, and free up capital for our next purchase, or to return to our investors.

On the surface, this strategy seems to encourage speed. Without taking out loans, we can close a deal faster. But the real value here doesn’t come from speed, but from patience. By cutting the financing stage out of a deal, we actually shift time spent into more due diligence. We might be going faster, but we’re also going slower.

In business, slow can be good too, because it means no mistakes. We don’t rush or catch deal fever. Instead, we methodically vet deals to make sure they’re the right use of capital to deliver stellar returns to our investors.

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