Finding the answer to whether you should finance or pay cash for an investment property can lead to a lot of sleepless nights. The most successful real estate moguls still struggle with the answer to this question. When deciding how to purchase an investment property, closely comparing the advantages and disadvantages of each method will help put the answer into perspective for you. Investment decisions can only be made by you and it is helpful when you know how to make them.
Financing Real Estate Investments
It is not a mystery that interest is charged anytime that you finance a purchase. It does not matter if you use a credit card, bank loan, credit union or private loan for financing. All of these methods are charged an interest rate that is determined partially by your ability to repay the loaned funds. A timetable of payments will be established and may also include taxes and insurance into the monthly payments. Most forms of financing are extended over many years and the accrued interest expands the original amount of the loan. Financing is useful if you do not have the cash on hand to purchase an investment property.
Paying Cash for Real Estate Investments
Cash payments are not tied to any type of interest or lender. Cash is useful as a direct payment to avoid financing fees and related charges. Investors can free up cash in bank accounts, certificates of deposit, bonds, treasury notes, sale of personal items or from cash donations. Retirement account funds can also be used to invest in real estate properties. Accounts like a 401(k), self-directed 401(k), Roth IRA and traditional IRA can be used to fund a purchase or investment. A cash distribution from these funds might bring forth a 10 percent penalty if an investor is under the age of 59½.
Financing or Cash: Making the Best Decision
Your personal financial situation will likely determine what method you use to purchase a real estate investment property. Withdrawing cash from your bank account, securities or retirement account may deplete your entire account. Your monthly rental fees or quick sale of the property will used to recoup your investment. Financing your purchase will require a monthly loan payment plus interest spread out over many years. If you are in a position to use cash, it offers the easiest method to purchase investment properties.