​Cash or Financing? The Pros and Cons of Each

When you purchase an investment property, you’ve got two options: you can buy it outright with cash, or you can take out a mortgage and finance the property. The majority of investors opt to finance, preferring to leverage the home and enjoy certain benefits on someone else’s dime. However, there are also a few arguments to be made for buying properties all cash. So which is the better strategy?

Advantages of Buying Cash

When you choose to make your investment with an all-cash purchase, you’re setting yourself up for some unique benefits. For starters, you’ll save a boatload in interest. Even with the low interest rates we’ve seen, you’re still going to save yourself tens of thousands of dollars by purchasing your investment property with cash. Plus you don’t have to pay a monthly mortgage! Another advantage is that you’ll become more attractive to sellers. When you make an all-cash offer to a seller, you’re saving them time and money, so you may be able to negotiate a lower selling price or other favorable terms. Finally, you’ll have immediate and full equity in the property, which you can fall back on at a later date should the occasion arise.

Disadvantages of Buying Cash

Cash buying isn’t without its disadvantages though. One of these is that amassing enough capital to purchase a home can be a challenge for many people, especially those who are new to investing. Another is that any and all income you make off the property is taxable. Finally, when you buy with cash, your cash flow and ROI will most likely take a hit because you’ve got so much wrapped up in the property.

Advantages of Financing

Taking out a mortgage on an investment property is a great way to leverage your investment and get a great return. When you use the bank’s money to fund your purchase, you don’t have all your capital tied up in a property. Instead, you have more flexibility to make other investments, including the purchase of more properties. You’ll also get a better ROI and enjoy some major tax advantages and long term appreciation.

Disadvantages of Financing

In terms of disadvantages, financing does have a few. An obvious one is that you’re indebted to someone else, which is a position most people simply don’t want to be in. Second, most of your income will be going toward paying off a mortgage, instead of going into your pocket. You’ll also pay taxes on your income, pay interest on the property, and have less flexibility if you experience a vacancy (i.e., you’ll need to find a new tenant FAST).

So which is the better strategy - buying outright with cash or financing your investment properties through a mortgage? This is a question with no clear answer, unfortunately. You have to weigh the pros and cons and do what’s best for your unique situation...sometimes that might mean financing, and other times it will mean buying cash.