Buying investment property with cash is always a good idea. However, in the US housing market 2020, there is a new dynamic that makes buying a rental property with cash a no-brainer. With the ongoing coronavirus health emergency still very much underway in America, cash is valuable to investors. Mortgage contingencies are always a concern for sellers. In the current housing market, that contingency is downright scary and could be a deal-killer.
Buying an investment property with cash or with a mortgage both have their positives and negatives. In this guide, we will combine information on Mashvisor’s real estate investment tools, my personal observations as a buyer who buys investment property with cash, and a bit of research into the unstable economic situation. Our goal in this story is to highlight why buying a rental property with cash in 2020 makes good sense. Please be assured that we understand not all investors have the luxury of buying investment property with cash. But many do. And you may also have that choice one day if not in 2020.
Why Paying Cash Makes Sense for Some Investors
We at Mashvisor recognize that investors often use borrowed money to purchase properties. The general idea of some stories we publish is “buy with no money down.” This can be a smart way to break into the real estate business in normal times. However, many investors buy investment property with cash specifically because they need an investment that fits a certain set of priorities.
These investors have a balanced portfolio that is cash-heavy. They want a non-stock, non-bond, non-equities based investment that yields reliable cash flow. For such investors, buying a house with cash can be a wise choice. It is also a choice that comes with hard work, but folks who buy investment property with cash already know all about hard work.
The biggest upside to buying investment property with cash is a very high operating profit margin. At least when compared to a rental property that is mortgaged heavily. In some regions of the country, cash on cash return is leaner than in others. To make a meaningful profit, the rental property needs to be free of a mortgage and interest costs. Sure, interest can reduce taxable income. But if that income is lean to begin with, it isn’t much help.
Remember to use Mashvisor’s cash on cash return calculator to estimate the impact of your financing on your potential return on investment. Sign up now for a 7-day free trial to try it out.
Advantages to Cash in Past Market Disruptions
After the market disruption in 2007-2009, many distressed properties were available for sale. Buying investment property with cash offered investors two benefits. First, it simplified and enabled auction, foreclosure, and short-sale purchases. Banks don’t like to deal with financing in many distressed property sales. They simply will not deal with it in auctions. Those sales are cash on the spot only. During this past period, I used cash to leverage a deep discount on two properties. Both were unoccupied, bank-involved sales. My lower than asking cash offer was not the highest bid in either transaction. Buying investment property with cash carries weight at such times. Cash buyers tend to walk away with the property.
Second, cash enabled investors with no mortgage contingency requirement to obtain listed real estate properties at a discount. After all, in those uncertain times, few investors had cash to spare. Their 401K and personal stock portfolios had dropped in value by as much as half. And to make matters worse, their own personal properties and investment properties had suffered a steep loss in value. Thus, a home equity loan or line of credit was less powerful as a tool as it would have been in normal times.
Why a Cash Transaction Is So Powerful in 2020
The real estate market disruption of 2020 has just begun. We are really only in the second of what could easily be a six to eighteen-month financial downturn. It has only been a few weeks since social distancing mandates and forced business closures began. But the market reacted immediately. There is little inventory. The Wall Street Journal reports listings have already dropped by 27% compared to last year at this time. Sellers are already discounting. Real estate agents are already adapting.
As we move forward in this “new normal,” sellers are frightened. They are afraid of trying to sell a home in which open houses are now banned in many locations. They are afraid that buyers and agents who tour the property may be COVID-19 positive. They are afraid that if they enter into a real estate transaction, it will fall apart. A job loss by the buyer, or a mortgage contingency that cannot be fulfilled, could kill the deal after the house was off the market for a month or more.
These are fears I am facing myself. I have a property ready to list. It was going to be listed for sale on April 1st. However, in my area, listings have all but stopped. There is just a trickle flow of homes coming to market here and there. Those that do list are being placed under agreement quickly. That does not mean they are actually “sold.” Who knows if the inspections, appraisal, mortgage approval, and closing will be possible? Those who are buying rental property with cash will have an advantage.
Buying Rental Property Without a Mortgage – Buyer Leverage
Buying investment property with cash also has real value for the buyer. Purchasing a rental property involves many steps. The first is to evaluate the cash on cash return of the property. Mashvisor has the best tool in the business for doing that step.
Next, a buyer needs to make an offer. At this step, an honest buyer will reveal if the offer will require financing. If it does, the buyer has some real work to do. An application package a foot thick is waiting. That then heads to a mortgage broker or lender for consideration. They then have a long list of work to do including reference checks. Those references may well be working from home while juggling at-home children. To say that the financial approval waters are muddied is an understatement. A buyer will be left wondering what the outcome will be of an investment property they have spent time and money evaluating. Should they pay for inspections and appraisals, or not?
Purchasing a rental property with cash negates all of this process. All the buyer needs to do is provide the seller with a bank statement showing the funds are available. That can be done in half a day by any financial institution by phone.
How to Get Money for a Cash Purchase
Assuming you already have the funds in your various accounts, the answer is obvious. But what if you only have some of the money you need? Let’s say you have 80% of a $250,000 purchase price. Where will the remaining $50K come from? There are many common answers.
Refinancing is a classic answer. One simply pulls some cash out of an existing property via a cash-out refinancing. Next, borrowing from one’s own individual retirement account or 401K is a common method to obtain cash. A personal loan from a private party is an option. Finally, a personal loan to oneself from credit card advances.
Buying a rental property with cash in 2020 will have many advantages. If you have the means to do so, a cash purchase should be a serious consideration. For help finding new listings and getting access to a cash on cash return calculator and other tools, please check out Mashvisor. You can get started today by clicking here.