The Pros and Cons of Paying Cash for Properties
You hear about it a lot, investors paying cash for properties. Is this a good idea? Well, the long answer is a bit loaded, but hte short answer is: it depends. Let’s look at the pros and cons of paying cash for properties.
When you pay cash, you can jump through a lot of hoops that you otherwise wouldn’t be able to. You can close quickly, put up very strong offers, not have to pay interest rates or closing costs and have the peace of mind of knowing you paid for the property free and clear.
Closing quickly, no closing costs, escrow fees, underwriting fees, mortgage payments etc, that all sounds great, doesn’t it? So what are the downsides to paying cash?
Unless you are uber wealthy and your bank account is loaded, you will lose a lot of liquidity paying cash for a property. This means that you won’t have that once you spend that money, you won’t have the cash to purchase another. If you are trying to grow your portfolio this could be a major setback.
Now if you are thinking that you’ll just take out a HELOC and use that cash when you need to, sure that is an option. However, with a HELOC you’ll then have those closing costs to deal with and the rates with a home equity line of credit are usually much higher than a traditional mortgage.
Another reason to finance your property is to take advantage of the tax deductions. When you buy a property and finance it, you are able to use the interest payments of your mortgage and offset them against your taxes at the end of the year.
So what do I do?
While neither choice is right or wrong, in my situation I choose to finance most of my properties and I’ll tell you why.
First, I should say that I do own one of my investment properties free and clear. We did pay cash for that, and we did this for several reasons. One is so that I would have the peace of mind knowing that if the entire world fell into chaos I could always have something that couldn’t be taken away. The second reason is because my strategy was to be a full time real estate investor even when I had my W2 job. Knowing how the underwriting process works, I know that I need to have a favorable amount of DTI (debt to income ratio). By paying cash for this investment property I was able to improve my DTI when the banks look at me for financing.
For every other property I own I have taken out financing. Why would I do this? Simple, money is cheap. All of my mortgages are between 3% and 4.125% interest rate. That is nothing. I literally have an investment account that pays me 9%. My returns off my investment properties are well into the double digits. So, by leveraging the debt I’m able to grow my portfolio at a much faster pace than if I saved up and paid cash for everything.
With that said, at some point I do want to pay off the loans that I have, but not until my growth has reached a 10 or 20x multiple of where I’m at right now. And why would I do that if money is so cheap and I can grow my net worth so quickly? Certainly peace of mind is a big part of that. Also, there is no gaurantee that money will always be as cheap as it is now. In the 80’s, interest rates were in the teens. At that point finding or making deals, becomes much harder. But, while money is cheap, I’ll continue to leverage and scale up!