Of all the heated debates in the field of real estate investing, none seem to be as polarizing as the “buying property with cash versus with mortgage” argument. We’ve discussed the argument in favor of a mortgage for financing investment properties before. Today, we’ll explore the reverse – when buying property with cash is a good idea.
Related: Buy a Rental Property Using Cash or Mortgage?
What Is Buying an Investment Property with Cash?
Before we make the case for buying property with cash, we need to properly define the statement. Buying investment properties with cash refers to purchasing properties without the use of financing, such as a bank mortgage, hard money lenders, or private money lenders. The buyer, or real estate investor, in this case, must provide proof of funds before the purchase. Since no mortgage is attached to the purchase, mortgage payments, interest payments, and other associated fees are not necessary.
When Is Buying Property with Cash a Good Idea?
Financing investment properties with a mortgage is the go-to for many real estate investors, especially new ones. This, however, does not mean buying property with cash is utterly useless. Generally speaking, there are four instances when buying property with cash is favorable to buying with a mortgage:
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When You Can Afford It Without Detriment to Your Finances
This scenario is the most general of the four, but it is still worth highlighting. Real estate investors should NOT purchase income properties with cash if it puts them at financial risk. The best real estate investments, whether funded through cash or mortgage, are obviously meant to enhance, not worsen, the finances of real estate investors. If a real estate investor wants to buy a property with cash and can afford to do so, then it is not necessary to take out a mortgage.
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When You Want to Be More Attractive in a Competitive Seller’s Market
Buying property with cash is an excellent option when trying to win over a seller. This is true for virtually every type of seller and in every type of market. However, buying property with cash is best utilized in a competitive seller’s market.
Related: Is It a Buyer’s Market or Seller’s Market?
A seller’s market is a real estate market with certain conditions that favor selling properties over buying them. This gives sellers the advantage in a transaction and makes purchasing properties more difficult for buyers. If a real estate investor decides to use cash for financing rental properties, he/she will have the upper hand over investors using mortgages. Sellers prefer buyers using cash, since the buyer’s financing cannot be declined, which is a possibility when trying to secure a mortgage. As previously mentioned, a real estate investor using cash for financing must have that amount readily available, further pleasing sellers.
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When You are Looking to Obtain a Property Quickly
Buying a rental property can be a lengthy process. This is especially true when a real estate investor is using a mortgage for financing investment properties. Securing a mortgage requires multiple background checks, credit checks, and various forms of documentation. This is disadvantageous for a real estate investor interested in quickly buying an investment property or buying a second property on a second mortgage. Buying property with cash, on the other hand, is a very fast process. Lenders are not involved, so the time needed to secure a loan is not an issue. Investors purchasing with cash are also typically not legally required to have an appraisal on the property, thus saving more time for a quick deal.
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When You Want Full Ownership and Control Faster
Real estate investors will have full ownership and control over their investment properties whether they use mortgages or cash. The difference, however, is that once an investor completes a purchase with cash, he/she obtains full ownership of the property. This is a clear advantage for real estate investors, especially home buyers and owners, who want total control and ownership over their properties.
What Are the Benefits of Buying Property with Cash?
Some of the best real estate investments funded with cash come with more benefits than the four previously mentioned situations. Some of these include:
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No Mortgage Associated Costs
Since a mortgage is not involved, the costs associated with it are also not involved when financing investment properties with cash. As a result, mortgage payments, interest payments, mortgage origination fees, appraisal costs, and more are not a burden on the cash-paying investor.
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Faster Closing
As a part of standing out as a buyer and having faster deals, real estate investors buying property with cash also have faster closings. Closings are typically delayed due to inspections and mortgage payments, but these issues do not exist when paying with cash.
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Credit is Not as Important
Credit is a vital aspect of buying property with a mortgage, but it is not as important when using cash. As previously stated, no mortgage is needed when buying with cash. This helps buyers who may not have the best credit situation but can purchase properties using cash.
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Rental Income is Used as Profit
Perhaps the biggest benefit of buying property with cash is that the investor is not shackled to debt. As a result, rental income is used as profit and for other necessary rental expenses. This makes buying an income property with cash one of the most efficient ways of making money in real estate.
Related: 5 Real Estate Investing Mistakes That Kill Your Profits
Settling the Debate
So, what should real estate investors use when buying properties: cash or mortgage? The answer will depend on the investor’s finances and which situation is more favorable. Need help making up your mind? Let Mashvisor help! By using our investment property analysis and real estate market analysis, you can find out which financing option is more profitable for you. To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here. To learn more about buying property with cash, how to make money in real estate, and more real estate investing topics, visit the Mashvisor blog.
