If you’re thinking of purchasing a rental property, it’s a good move to weigh all your options. A friend or expert might suggest going one route, but that’s not necessarily going to be the best choice for your situation.
If you have the ability to pay cash for a rental property, you should definitely consider that option. But in order to ascertain whether paying in cash or taking on a mortgage would make more sense, you’ll have to do some analysis.
What works for one person may or may not work for you. Let’s take a look at some of the pros and cons of purchasing with cash to help you make a more informed decision.
The Advantages of Paying Cash
Having enough cash to buy real estate free and clear can be a terrific feeling. This kind of financial freedom is liberating, and there are several advantages that come with the ability to write a check from your personal bank account. Consider these five benefits.
Start with the most obvious. When you pay cash, you don’t require a mortgage. When you don’t have a mortgage, you won’t be paying interest on a loan.
Suppose you’re looking at a $200,000 house. If you were to get a conventional 30-year loan for that amount at a 3.8 percent interest rate, what would be the actual cost of the home by the time you pay it off?
The total would come in at more than $335,000. That’s $135,000 you’d save by paying in cash.
When you pay for a house in cash, you get instant equity. Essentially, you’re turning one asset into another. You’re taking cash and converting it into real estate, which should increase in value at a much better rate than inflation, CDs, or a savings account.
When you submit an offer on a property you like, the seller and his or her team are going to evaluate not only the amount you’ve proposed, but also the way in which you intend to pay. Most buyers are going to make offers that are contingent on the sale of their current property (or another extenuating circumstance).
By paying cash, you assure the seller there won’t be any issues to delay closing. Because you appear more reliable, you might be able to get the seller to accept a lower price as well.
Cash flow is a big deal with a rental. You wouldn’t be investing in a rental property if you didn’t believe it will generate steady money every month.
When you pay cash for a residence, you enjoy a lot more flexibility and room in your budget. You don’t have to set aside money for a mortgage payment and the other expenses that are involved with financing. Instead, you can count pretty much everything as profit.
Ultimately, a cash purchase is likely to be significantly less stressful on you and your family. Not only will you have less debt on your plate, but you also won’t have to worry as much about an extended vacancy or problems with a tenant.
You’ll never have a lender breathing down your neck. The fact that you own the house in cash provides more breathing room for unforeseeable issues.
The Disadvantages of Paying Cash
Believe it or not, paying cash for real estate isn’t always the smartest choice. There are issues that can make it less than ideal in certain circumstances. If you’re aware of the potential disadvantages, you should be able to see the full picture.
Here are three possible drawbacks to a cash purchase.
“It’s not wise to purchase a home with cash if you have just enough liquidity to pay for it,” real estate expert Devon Thorsby says. “Cash is important to have on hand for any number of things that might come up — from a new roof to losing your job to a medical emergency. You want to have enough money to sustain you for at least a few months if you were to lose your income, which varies based on your lifestyle but should be at least a few thousand dollars.”
If you’re going to pay in cash, you need to make sure you aren’t depleting your cash reserves. Putting everything you have into a piece of real estate will make you house poor. You’d be better off investing a substantial down payment and obtaining a mortgage on the balance.
When you have a bundle of cash tied up in a single rental property, you have less buying power for the purposes of expanding your real estate portfolio. For example, if you’ve tied up $400,000 in a single rental property and you see a $150,000 house that you like go on sale, you may not be in a position to move on it.
If you were to put down just $200,000 on that first house, you’d still have enough left to buy the second in cash and use the remaining funds for a down payment on a third house.
Third, when you pay in cash you don’t get the tax break a mortgage allows. Being able to deduct mortgage interest is one of the primary benefits of securing a home loan.
When you’re buying a rental property, you have a lot to think about. If you have the available funds to make a cash purchase, there are even more details to consider.
We’ve looked at some of the pros and cons associated with paying cash; you’ll have research the matter further to establish what will make the most sense in your situation.
At Green Residential, we have more than 30 years of experience helping real estate investors in and around Houston. If you’re looking for professional property management services, then please don’t hesitate to contact us today.
We take care of both the big and small details so you can focus on what truly matters: getting a solid return on your investment.
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