When it comes to financing a rental property, there are a TON of options (which we'll discuss more in the future). But, a couple common methods (and the two that I personally weighed when deciding to invest) were CASH vs. MORTGAGE. Now, if you can't afford to purchase a property in all cash, then that makes your decision a little easier, but if you can...that adds to an interesting decision. Here are my advantages and disadvantages of buying a property all Cash vs. getting a Mortgage.
Advantages of Cash
-No Interest Payments: one of the most obvious advantages of buying in all cash, is that you won't pay any interest. Yup, with no mortgage, you're not paying interest.
-Negotiating Power: Sellers often prefer an all-cash offer, and this can be a huge advantage when looking to close a deal. If your competition needs financing, you'll most likely have the upper hand and can potentially get a property for less than their offer.
-Peace of Mind: Not having to worry about monthly mortgage payments or a vacancy was one of the biggest reasons I went for the all cash strategy.
-Not Having To Deal with a Bank or Mortgage Broker: You don't have to worry about a bad credit score and you don't have have to worry about having the necessary income to qualify for a loan. You also won't have to pay lender fees, lender's title insurance, underwriting fees, etc. which saves you money!
-Faster Closing Process/Quicker to Rent: Not having to deal with financing, means you take out a time consuming piece of acquiring a property. You can generally get the property available to rent quicker and start bringing in cash flow faster.
Disadvantages of Cash
-Cash Poor: buying a house all cash dramatically eats into your savings. You could be very cash poor right after a purchase, which can be very risky depending on your overall financial situation.
-Poor Diversification: if you're just starting off and only have 1 or 2 properties all paid in cash, your money is not diversified. If one property is destroyed and not properly covered by insurance, you'd take a huge hit.
-Cash Out: real estate isn't always quick and easy to sell. It also costs money to sell (ie getting a realtor). If you need money quick, selling your property will take time, and might put you in a desperate situation.
Advantages of a Mortgage
-Write Offs: you can write-off mortgage interest as long as you itemize deductions and they exceed the standard deduction.
-Mortgage Rates: mortgage rates are very cheap compared to just about every other loan out there. And as of this writing, you can probably get something between 3%-5% right now.
-Scale Faster: without a large chunk of your money locked up in a property if you pay all cash, you can distribute funds elsewhere (into additional properties...or completely outside of real estate).
-The Power of Inflation: inflation should make your monthly payments "cheaper." For Example: a $1,000 monthly mortgage 20 years ago (1997) now has an equivalent buying power of almost $1,500 in 2017.
-Less Risk: having a mortgage means you have more liquidity and less risk. If a housing crash hits and your house value plummets, at least you don't have "all your eggs in one basket."
Disadvantages of a Mortgage
-All That Interest: on a $200,000 loan set at 4.5%, the total amount in interest due over 30 years is close to $165,000. Not cool, right?
-Mortgage Insurance: if your down payment is small (like with an FHA loan), you'll be subject to paying mortgage insurance premiums.
-Qualifying for a Loan: plain and simple...not everyone qualifies for a mortgage and it can be a challenge for some. If you don't have a full time job with consistent income, that could throw a wrinkle in everything. Ultimately, the lender will dig through your personal and financial life to determine your investing fate.
So what's it going to be? Cash or Mortgage?
Weigh your options, think about the pros and cons, and decide what's best for your investing future. Share your strategies in the comments section below!