The real estate investing business is full of options. One of the things that make it so great is that you can invest almost any way you desire. There is no set template or blueprint you have to follow. At some point you may have to decide which the best financing option for you is. There are compelling arguments on both sides and really no right or wrong answer. What is universal is that you always want to explore all options that are available. There are times when paying cash for a property makes sense and other times you should take advantage of financing. If you have capital or access to funds here are some of the pros and cons of paying cash for your next property.
PROS:
- Increased cash flow. If you are purchasing a rental property with cash one of the most obvious benefits is the increased cash flow. On a rental property with no mortgage the only monthly housing payments are for the taxes and homeowners insurance. Of course there are utilities and other expenses but the bulk of the payment is wrapped up in these two areas. With a cash payment you will have a surplus of cash left over every month. This gives you a handful of options with the property or that you can use to grow other areas of your business.
- More offers accepted. It is no secret that cash offers have a greater chance of getting accepted. There are many sellers who still do not want to deal with a financed offer, such as a conventional mortgage loan. Between the excessive closing times and approval uncertainty a cash offer provides a sense of security. This security leads to more offers accepted on properties you are interested in. Closing just one or two extra deals a year can be a real boost to your bottom line.
- Instant equity. When you purchase property cash you take ownership with instant equity. This equity gives you a series of options you would not have had otherwise. You never know what changes your business will go through down the road. Instead of having to wait for appreciation you can make the best decision whatever the market brings. If you want to sell in a pinch you can do so at any time. If you want to explore the option of a second mortgage that is on the table as well. Instant equity equals instant options.
- Interest savings. When you finance a property the bulk of your monthly payment goes towards interest. On a 30 year mortgage the first ten years of payments are mostly allocated to the interest portion. Over the life of a loan you end up paying hundreds of thousands more than you finance. By paying cash your monthly cost basis is reduced giving you a huge savings on interest.
- Faster closings. One of the true benefits of paying with cash is the speed in which the transaction can close. It is not unrealistic to close anywhere from five to seven days after you submit an offer. This helps you get the process started much quicker which shortens the time you can see a return.
CONS:
- Opportunity lost. Most real estate investors do not have a limitless amount of capital behind them. In order to explore the next deal they need to pull cash out of an existing one. When you pay cash you are locked into the property until you can turn it over or until the value increases. You never know when a great opportunity will come your way. If a bulk of your funds is tied up in a deal with average returns you will be upset if a better one comes along. Before you make a cash offer you need to be comfortable with the fact that your funds will be tied up for the short term.
- Lack of leverage. There is something to be said in the ability to use other people’s money. When you pay cash for a property you lose that leverage. You no longer have the flexibility to act when you see fit. Leveraging a purchase means that you use the banks money to earn a return on your investment. You can put up 15-20% down payment and own the property. When you use cash you pay 100% of the purchase.
- Exposure. Depending on how you amassed your capital you may be exposed on the purchase. Getting money from a private or hard money lender is one thing. When you scrape together all of your savings you enter into an all or nothing proposition. In most cases the reward exceeds the risk but there will be plenty of sleepless nights. Even the slightest change can cause an impact on your bottom line. When you are all in there will be plenty of uncomfortable moments.
Even if you don’t currently use cash to fund your deals you never know when you may need to in the future. On the right property in the right situation a cash offer may make more sense than financing. You should begin exploring your options, including the use of a hard or private money lender in times when your business is slow. When things get going they can be a great resource to have in your back pocket. If you have your own capital you should always consider using it in the best possible scenarios. Having cash or access to it can be a great option in the right situation.
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