The primary determinants for investors when buying investment properties are often their financial condition and personal preference. Therefore, it is essential to investigate the rental market, real-estate values, and the economy before purchasing investment properties.
Some investors prefer to fund and leverage money for future use, such as additional financing properties, while others prefer cash transactions. However, there are numerous advantages to purchasing in cash if you have a stockpile of finances.
This article is for you if you’re an investor deliberating on ways to finance rental properties, join us below to discuss the pros and cons of buying an investment property with cash.
Pros of Buying an Investment Property with Cash
1. Greater Negotiating Power for a Lower Price
In real estate, there’s an ancient adage that cash is king. And that still holds, even in an era where cash purchases are uncommon. Sellers are looking for more than just the most incredible potential price. They, too, seek assurance. They despise accepting an offer, removing their house from the market, turning down other bids, and waiting a month for the contract to fall through due to financing issues.
Cash offers to reassure sellers that you will close, that you are not reliant on anybody else to do so, and that you will not have to wait for unpredictable underwriters’ permission. You can also settle much faster by removing the lender from the equation. Many sellers are eager to haggle on price in exchange for a quicker, more definite settlement, often taking significantly less than their earlier bids. However, working with a property management firm is essential to ensure your rental investment will be profitable.
2. 100% Equity
When you own a rental property outright, you have total autonomy over your investment. Without monthly mortgage payments, your rental revenue is recorded as profit, and fewer property expenditures, such as property taxes and insurance. In addition, controlling 100 percent of the rental property’s equity allows you to invest money in the property and raise its value. Profits from property appreciation are then entirely yours.
3. No Mortgage Payment
You don’t pay interest when you use cash for a rental property payment. Even though it is anticipated that mortgage interest fees will continue low for the foreseeable future, funding an investment property connotes you will ultimately pay more. This is partially caused by interest remitted throughout the origination and loan costs. Cash payments, therefore, do not incur such charges or interest.
4. Instant Cash Flow
It can be challenging to have impressive monthly finances in the rental industry. The owner loses money when the rental value comes under the financed mortgage payment—buying a rental property with cash results in instant cash flow.
When real estate investors utilize debt to fund rental properties, they may lose money if their rental income exceeds their mortgage payments. Although the contrary is possible, it is more plausible to suggest that mortgage financing can still provide a decent return on investment and increased cash flow.
5. Managing Fewer Properties
Cash purchases typically lead to investors buying fewer homes due to the required capital. As an illustration, if you had $200,000 to invest in rental properties, you may spend $200,000 on one property or put $40,000 down on five. However, having fewer properties to maintain also means dealing with lesser renters and spending less on upkeep and repairs. As a result, portfolio management is made simpler, particularly for DIY landlords.
6. Reduced Risk
When you use cash to purchase a rental property, you reduce your risk as a real estate investor. Having no strings attached to a lender is a tremendous comfort if your financial situation changes. Furthermore, if your rental property becomes vacant, you will not face a short sale or foreclosure because you cannot pay your mortgage.
Cons of Using Cash To Buy an Investment Property
1. Low Cash on Cash Return
A cash-on-cash return is a return on cash that investors receive. So, if you pay cash for a property, the cash-on-cash return is substantially smaller because you have put a significant amount of your money into the property. The same monthly cash flow you receive from your tenant will yield a better return if you first invest a portion of what the property would have cost to buy with cash.
2. Limited Tax Benefits
Regarding taxes, having a mortgage can work in your favor rather than paying cash for a home. Any interest paid by the owner on a financed rental property can be deducted from the property’s income. In other words, after all, deductions, investors may have little tax burden at the end of the year. Always seek a licensed tax professional’s guidance to comply with all tax rules.
3. Decreased Buying Power
Financing several rentals is advantageous. For example, landlords’ cash flow improves as they collect monthly rent payments from several tenants. As a result, equity payoff and tax benefits become more valuable because they apply to numerous properties rather than just one. Furthermore, purchasing below market value enhances your net worth, and diversity gives a safety net of income if something happens to one property.
4. Zero Leverage Power
Leverage refers to using other people’s money for investment. Although financing a purchase involves some risk, it allows investors to use their own money to buy other homes. Furthermore, owners can enhance their returns on funds spent considerably faster with a financed purchase. As a result, investors forgo the power to make other people’s money work for them by paying cash instead of leveraging.
As previously stated, both strategies offer advantages and disadvantages. When determining whether to buy a rental property with cash or with loans, you must consider your personal preferences and financial circumstances.
For example, purchasing a rental property with cash is a good investment if you have a lot of money. However, there are some drawbacks to this. On the other hand, funding a rental property with debt can be more advantageous and, if done correctly, a low-risk investment.