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Should You Finance or Pay Cash?
Florida investors aren’t strangers to paying cash for rental homes, but before you join them, it’s a good idea to ask yourself whether it’s a good strategy for you. No monthly principal and interest payments are the obvious reasons most people associate with using cash. Others see tying up a lot of cash in a home as undesirable.
Should You Finance or Pay Cash for Rental Property?
Both financing and paying cash has its benefits:
Pros of Paying Cash
- It’s faster. When you eliminate the need to bring a lender into the process, the sales process moves ahead quickly. There are no forms to fill out, no waiting period for loan approval, and no callbacks to supply additional information. It may take six weeks to get through loan approval to closing. When you’re buying with cash, you can conceivably close within a few days.
- No inspections. No one will insist that you get a home inspection, have an appraisal, or check the title. Unless you know the property’s history thoroughly, however, it’s wise to hire licensed professionals to execute these for you. Not knowing what’s behind the walls or if the title is cloudy could end up costing you a lot down the road. An appraiser will give you a pricing baseline.If you’re buying a turnkey property, it’s probably safe to skip these three components of due diligence, since property management companies take care of these details. If you’re buying it without their expertise, protect yourself by including the inspection and appraisal before you make a final decision.
- You don’t pay many fees. When you pay cash, you won’t pay fees for mortgage applications, any loan origination fees, or other fees, and the seller will usually settle for a lower price for a guaranteed, fast closing.
Pros for Financing: Are Mortgages Your Friend?
- Other People’s Money. The first rule of real estate investment is to use other people’s money (OPM). It rings true in every kind of venture associated with real estate, and the private investor is no different. Financing land and buildings allows investors to leverage their money. Instead of tying up a lot of money in a single property, using leverage lets you spread your capital over more properties, which leads to increased monthly income.
- Tax benefits. The U.S. tax laws promote home ownership and real property investments by making the interest you pay on the loan each year fully deductible. (See also A Real Estate Investor’s Guide to Taxes)
- Borrowing advantages. It’s one of the few types of investments where you can borrow money upfront to acquire an asset with growth potential. Even though mortgages for investment properties require 20 percent down, it’s still the easiest way to leverage money to build an active or passive income stream.Interest rates for mortgages are also lower than other types of leveraged investments. A mortgage is also much safer financially than buying in the stock market on the margin, whose rates are higher and the loans subject to margin calls when the market falls.
- Liquidity. Mortgages keep investors more liquid. While real estate builds wealth, it’s not a quick asset to sell. It can take weeks and months to sell a property, leaving you cash strapped if a significant portion of your wealth is tied up in single property, even if the property is rented.
See also Little Known Ways to Fund Investment Properties
The Bottom Line
Unless you need a fast closing or are in a bidding war, it’s probably better to seek out a mortgage to finance a property instead of paying cash. Using OPM to get started provides leverage, which has long been the respected way forward for real estate investors, large and small. Ultimately, however, each investor has different preferences, so there’s no right answer for you. Get in touch with your turnkey property management company and other finance and real estate professionals to help you sort out what would work best for your individual situation.
JWB has more than 10 years experience managing turnkey rental property investments. We have a consistent approach that delivers steady cash flow from our clients investment properties. Curious what your cash flow could be from one of our rental properties? Try our cash flow calculator or contact us to learn more.