Buying A Property All In Cash: Benefits And Downsides.
There are different ways you can finance or pay for a property; using your own money is the simplest method. You find a property, agree to a purchase price with the seller. You have the money to pay for it outright, so you write a check and you own the property.
About one-third of all real estate transactions in the United States are purchased this way.
When we were flipping properties, usually this was how we purchased properties.
The benefits to this are:
- 1. Sellers are likely to favor buyers who can pay in cash.
- Cash buyers are more definite and can close much faster. Sellers prefer this.
- 2. The home price may be reduced for you if you pay in full up front.
- Buying in cash reduces a certain amount of uncertainty for a seller, so they often reduce the price for an all-cash buyer. You also have greater negotiating power regarding closing time, repairs, and more.
- 3. All-cash purchases streamline the home-buying process.
- If you don’t have to get a loan, that means less paperwork and no delays for mortgage approval.
- 4. You can can save a lot of money.
- Cash buyers usually save on closing costs, bank appraisals, mortgage applications and fees, title insurance, and so on.
- 5. You eliminate the risk of loan denial.
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Getting a mortgage can be a lengthy and cumbersome process and there are a lot of hurdles. My husband and I are self-employed. We had a lot of cash in the bank, but we had a hard time showing the income necessary to get a loan. It was much easier for us to pay all-cash for our flip properties. - 6. You can have more peace of mind.
You never have to worry about losing your property because you can’t afford to repay the mortgage loan. When you own the property 100%, you are not subject to any changes in interest rates and are not as susceptible to market fluctuations. Your property can never be foreclosed upon.
- 7. You gain full, immediate equity in the home.
- With an all-cash payment, you immediately own 100% of the home.
- 8. You pay much less for the property in the long run.
- No loans means no interest.
The Breakdown:
Let’s say you find a duplex for sale and negotiate the price to $177,000. You could get a mortgage at an interest rate of 4%. Here’s how much you would pay to own it outright in these 3 different scenarios:
- All-Cash Payment: There’s no math required on this one – you pay the sticker price of $177,000.
- 15-Year Fixed Rate Mortgage (20% Down): Including your 20% down payment, the total cost of a median priced $177,000 home, financed with a 15-year mortgage will have cost a total of $257,119 after 15 years of interest and principal payments.
- 30-Year Fixed Rate Mortgage (20% Down): Including your 20% down payment, the total cost of this $177,000 home, after 30 years of interest and principal payments will cost $375,425.
As you can see from the above scenario, over time you may end up paying more than double the price because you have been paying interest. - Related: Why Should You Invest Offshore? | Downsides and Benefits.
Downsides of Buying All Cash:
- 1. Loss of Liquidity
- Money put into a property is not liquid (i.e., it’s not easily accessible), and generally a property is a fairly expensive asset. If you pay that much money for anything upfront, it is going to cost you a lot of liquid assets in the form of cash. Cash tied up in real estate is not easily tapped in the case of financial troubles, except through a sale or cash-out refinance. So, you should only buy a home outright if you are still able to have a comfortable cushion of cash for emergencies.
- 2. Lack of Leverage
- Although most of us are in a hurry to pay off debt, having debt (i.e., being leveraged) in real estate can actually be one area where there is an upside. First, you can use buy many more properties with the same amount of cash. If you buy homes with 20% down, you can buy five $100,000 homes with a mortgage versus only one all cash. Also, if you get a very favorable interest rate, you may actually make money by having a mortgage due to the effects of inflation.
- 3. No Mortgage Interest Tax Advantage
- Under the American tax code, the tax treatment of mortgage interest is one of the biggest incentives for many property owners. Buying a property with cash will not provide any such tax deductions.
These are the benefits and downsides of all-cash investing. Do you purchase all cash? Why or why not? Respond in the comments.
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