Buying an Investment Property: Cash or Mortgage?

To buy an investment property with cash or to buy with mortgage? That is the question.

Probably the most common source of debate you can find in real estate investing is whether paying cash or using mortgage is the best way for buying an investment property. There may be no wrong or right answer. Some real estate investors have more success with mortgage, while others prefer paying only in cash. Still, there are pros and cons of both methods that need to be said loud and clear.

Related: Financing a Rental Property: What’s the Best Way?

Why You Should Be Buying an Investment Property with Mortgage

• Easy for Beginners

Buying an investment property with mortgage is much easier than paying fully in cash. The fact is that the vast majority of real estate investors don’t have enough in cash to pay for a rental property. Is it more practical to pay $300,000, the average price of a real estate property, upfront or through partial monthly payments? Buying an investment property with mortgage is easier, especially for beginning investors. By leveraging a loan from a bank, an income property is slowly paid for in several years, interest included.

• Potential for Better Cash Flow and Higher Returns

One of the advantages of buying an investment property using leverage (mortgage) is a better possibility to receive higher returns and cash flow. By paying for a property in cash, the cash on cash return flow of the rental property is the same as its cap rate. That’s because more money is paid in the investment. When you put less in an investment through mortgage, the CoC return can differ, which can generate higher cash flow. By the way, you can always calculate cash flow, cash on cash return, cap rate, and more through Mashvisor’s investment property calculator.

• Tax Deductions

Here’s another reason why buying an investment property with mortgage is a great idea. Tax deductions are a blessing to real estate investors. Mortgage interest is a common taxable expense, so make sure to take advantage of it when using mortgage!

Why You Shouldn’t Be Buying an Investment Property with Mortgage

• Interest Payments

Sure, mortgage interest is tax deductible, but it can also severely impact your cash flow. This will depend on your rental income. If your rental income is the same as the monthly mortgage payment, then you are quite literally earning nothing! Interest rates have been relatively low as of late, so it’s likely that your rental income will exceed the mortgage payments. Still, a mortgage’s interest can go against you if your rental property is not making much.

• Risk of Foreclosure

By buying an investment property with a mortgage, a real estate investor is exposed to the risk of foreclosure. This will happen if the investor begins to fail to make the monthly mortgage payments. Then, the lender will try to recover the amount on the loan from the investor. In contrast, buying an investment property in cash allows a real estate investor full ownership of the income property. To avoid foreclosure, be sure to pay the monthly mortgage payments on time.

• Not so Easy to Obtain

While saving up for a mortgage payment and a down payment is easier than buying a rental property with only cash, it is still not that easy. To qualify for a loan, an investor needs a good credit score, reserves for mortgage payments, and other requirements. It is possible to qualify for a loan with little money or bad credit, but it’s still easier to do so with conventional standards. But even then, it takes time to accumulate the proper requirements.

Related: Paying Off Investment Property Mortgage: Pros, Cons, Tips

Why You Should Be Buying an Investment Property with Cash

• More Control over Property

Buying an investment property with cash allows you to have more control over your rental property. You aren’t tied down with monthly mortgage payments or interest. That way almost all rental income is profit, except for other expenses related to the investment property, like management and property taxes. Also, there’s no risk of foreclosure. It should feel good owning a rental property without the constant headaches of mortgage payments.

With no interest, all gains in appreciation are tied with the real estate property. That way, if the investment property appreciates greatly, it can be sold and the investor can make instant income.

Related: Is It OK to Invest in Real Estate Just for Appreciation?

• Quicker Purchase

Yes, buying an investment property with only cash is a much harder purchase than to do so with mortgage. However, this is a much quicker purchase. The closing can take place right after a home inspection. Buying an investment property with mortgage, on the other hand, takes time. First, you have to find a lender, preferably a direct lender. Then, you must qualify for the loan. And so on and so forth. If you want to purchase a property quickly with little questions asked, buying with cash could work.

• Vacancies Don’t Hurt as Much

Vacancies really bother real estate investors. When an income property is vacant, it is wasting money with no tenants inside. Vacancies hurt less when a real estate property is bought with cash. That’s because mortgage payments are nonexistent, so if a property is vacant, you don’t lose as much.

Why You Shouldn’t Be Buying an Investment Property with Cash

• No Mortgage Interest Tax Deduction

Using cash to buy a property means no mortgage and no mortgage interest. Because of that, real estate investors can’t deduct interest in their tax forms. Having that tax deductible is very advantageous, and not having it by buying with cash is definitely a downside.

• Less Assets

Buying an investment property with only cash means you will have less assets. By spending a lot of money on one property, you can’t diversify your investment portfolio with various real estate properties. Instead, by using that same amount to buy the one property, why not use it over several properties with mortgage? That way you can diversify your portfolio, earn more rental income, and have more tax deductible expenses.

• More Risk

Buying an investment property with cash produces more risk. A lot of your capital is placed in only one investment property. If that property depreciates, your investment will suffer mightily. Instead, it is safer to buy an investment property using mortgage.

If you are ready to search for and buy a property, whether with cash or mortgage, head over to Mashvisor and start your trial!