The Pros And Cons Of Paying Cash For Your Next Property
By JD Esajian on February 5, 2016
What are the advantages and disadvantages of paying cash for your next home, vacation condo, or investment property?
The paying all cash versus using leverage debate is one of the fiercest in the real estate world. Some adamantly swear by only paying cash for everything, including their real estate. Others would never dream of paying all cash, for real estate of all things, even if they had far more than enough. So what are the real factors involved here and is the right answer more dependent on fluid factors than absolutes, or not?
The Pros of Paying Cash for Real Estate
There are absolutely clear advantages of paying all cash for real estate if you can. The benefits run from shopping for property through acquisition and holding, to when you exit.
When it comes to shopping for property in the current market, there is unquestionably a large number of properties which are only open to cash buyers. Even among the rest of the inventory, cash buyers can have a serious advantage in bidding on properties. They are often able to negotiate lower prices and better terms. When it comes to the actual acquisition, cash buyers can typically close faster and it costs them less to close.
Holding property without having a mortgage is cheaper, less intensive for property management, and can significantly reduce risk. There are definitely increased dangers that come with mortgage loans. They may be slim; but there are risks of forced placed insurance fraud, and being thrust into delinquency or foreclosure, without actually defaulting on your responsibilities.
For those with excess capital, it can make a lot of sense to bury it in real estate in destinations, which offer superior asset protection, in order to preserve wealth.
The Cons of Paying Cash for Real Estate
There are potential cons of all paying cash for real estate too. That doesn’t mean you shouldn’t do it, but these cons are important to be aware of:
The first is a lack of a financing contingency in real estate purchase contracts. If you don’t have this clause in your contracts, it can be hard to get out and you could be sued to close.
Leverage is without a doubt the biggest argument against paying all cash. Using financial leverage can definitely help speed up wealth building, developing larger cash flow streams, and exponentially grow financial surplus.
However, hands down, the biggest con of paying all cash is the exposure to risk. Having all your eggs in one basket is just asking for trouble. If all of your money is in one property storms, manmade disasters, and paperwork blunders can put that nest egg in jeopardy. Believe it or not, you can still be foreclosed on, or have your home stolen, even if you don’t have a mortgage on it. Reduce these risks with a comprehensive range of insurance policies.
Balance, Timing & Hybrid Solutions
There are obviously both pros and cons to paying all cash for properties. Both strategies can work. However, deeper than being a right answer in general or even for each individual, others might argue it is a matter of balance and timing.
For those starting out in real estate – or life in general – there can absolutely be a time and need for no money down real estate deals. Even at the top, many of those that can afford to purchase enormous swathes of real estate often find it profitable to use other people’s money to invest or to creatively structure real estate deals.
In some cases, there is room for balance. For example meeting in the middle with 20 percent or 50 percent down on properties for minimizing risk, and maximizing upside, while optimizing the process of buying.
Broader market timing can play a role too. For example; right now, when it may be better to pull out of stocks, or when retirement may be looming and losses and volatility aren’t tolerable, it may make more sense to put that cash into real estate. Others would argue low interest rates make this the best time to leverage, while saving cash for later when rates are higher and mortgages may be harder to get.
Finally, note that not paying all cash isn’t the same debate as getting a mortgage or not. There are other options; for example partnering up and raising equity capital.
What will you do?