​Cash or Financing: What are the Benefits of Each?

With any new investment, there are two options for purchasing: paying all-cash or securing financing. There are plenty of arguments for each, so if you’re in the position to choose your method of purchase, you’ll have to consider the benefits of each carefully.

For many investors, however, there’s not an option. Unless you’ve got enough cash saved up to cover the entire cost of a new property, your only choice is to finance. And this certainly isn’t a bad thing.

Consider the advantages of financing:

The primary benefit associated with financing is leveraging. Leveraging is defined as using borrowed money to purchase an asset and increase returns and profit potential. Here’s an example: Let’s say an investor has $50,000 in cash. They could use their cash to buy one $50,000 property, or they could use it to put $5,000 down on 10 different properties and finance the remaining $45,000 on each. In the first scenario, the investor only owns one property, and therefore is only getting cash flow from that single property. If the home appreciates in value and they decide to sell, they’re also only getting the payout from the single property. In the second scenario, however, the investor is receiving cash flow from not one, but TEN, properties, as well as appreciation from all ten units. This is leveraging - making the bank’s money work for you while you enjoy the financial benefits.

This isn’t the only advantage that comes with financing, though. Other perks include:

• If you are charging enough rent, the mortgage is essentially being paid off by renters
• Tax breaks such as mortgage interest deduction
• No risk of the property being foreclosed on

If you do have enough cash to purchase a property, you’ve got a choice to make, because the argument for all-cash purchases is also pretty strong. Here’s what cash has to offer:

Perhaps the biggest advantage that comes with paying cash for a property is that you own it free and clear. You’re not beholden to a bank, credit union, or anyone else, and you’re not paying any interest on the property. With a mortgage, you’re responsible for what typically amounts to tens of thousands of dollars in interest payments - that’s a lot of dough being paid to your lender!

Other benefits to buying all-cash include:

• Vacancies don’t hurt as much
• All your revenue is profit; it’s not going toward a mortgage
• Purchase process is faster and smoother

When it comes to paying cash or using financing, there’s no right or wrong way to do it. You must consider which option is best for your unique situation, just remember that BOTH choices come with clear benefits.